The Government’s recent announcement on changes to superannuation is welcome, as those investing for their long-term security, while facing the inevitable market movements, would like legislative clarity. The changes impose a 15% tax rate on earnings on pension assets above $100,000 per individual per annum. Some grandfathering of capital gains for existing assets has been announced but the details are sketchy.
In implementing this change, a number of questions remain:
- How will the tax be calculated, and by whom? Super funds deduct tax from accumulation accounts, and presumably they will now do the same for accounts in the pension phase. But if a client has more than one fund, how will they be able to calculate the tax? What if one retail fund shows a healthy profit and a second has a loss? Will Australians have to include super fund returns on their tax form, or will the ATO calculate the tax based on data supplied to them?
- Super funds are taxed in their own right, but the proposal shifts the tax reference to individuals. How will the liability of the fund be passed to the pensioner? In the case of SMSFs, most assets are not segregated, so the fund holds the assets as a total amount and allocates notional balances to the respective individuals in the fund. The assets themselves are not individually allocated, so how can individual tax positions be assessed?
- Where the fund holds accumulation and pension assets on an unsegregated basis, will the current actuarial certification requirement to determine the exempt proportion be extended to each member level rather than at the fund as a whole? Or will a reasonable allocation (say based on actual assets flowing from investment choice, or proportion of total assets time-weighted during the year) apply?
- What exactly should be included in $100,000 earnings? The Media Release says ‘dividends and interest’, but a fund’s taxable income should comprise interest, dividends, taxable distributions from managed investments and realised capital gains reduced by carried forward capital losses. Given the grandfathering, how will the long-term capital gain discount apply?
- The announcements refer to earnings whether or not received by the member. The pensioner must take a minimum amount of his balance (with a maximum as well in respect of transition-to-retirement pensions). Given this has not changed, the cash inflow would be different from, and maybe be less than, the earnings being taxed. Does this mean the pensioner may need to sell other assets to pay the tax?
- Fund earnings usually include significant unrealised capital gains. Tax does not recognise them until realised. How will earnings be taxed if capital gains (realised or unrealised) are excluded? Will a truncated definition of earnings apply under the proposal?
- If unrealised gains are included in earnings to be taxed, a potential legal problem looms. Being unrealised, they could be wiped out through subsequent market movements. In such a case, taxing them would amount to taxing capital, which is beyond ATO power.
- Given that earnings could fluctuate over time, should a measure of smoothing (say a rolling three-year average) apply?
In my view, announcing the change to taxation of pension earnings without greater detail has created uncertainty for trustees and their advisers, not to mention ATO resourcing. And if the affected taxpayers are estimated at some 16,000, it seems like a disproportionate burden for relatively little gain.
In simplifying the complex Excess Contribution Tax regime, for which the Government deserves praise, it is ironic that an apparently simple measure has been announced that in reality carries a lot of administrative and definitional complexity. The Government will need to work with the superannuation industry to spell out the detail.
Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds among others.