Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 10

Questions remain on pension taxation implementation

 

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:

  1. 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?
  2. 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?
  3. 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?
  4. 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?
  5. 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?
  6. 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?
  7. 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.
  8. 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.

 

 

 

2 Comments
peter mair
April 12, 2013

While I did not get a response to the following suggestion put to some super writers, there was subsequently some comment in the fairfax media to the effect that the relevant calculation of earnings would be the 'deeming rate' applied to the total assets in one's pension funds -- and thus the need for $2 million to be liable (at a rate of 5%pa).



DUMMY PASS ABOUT THE ESTIMATE OF 16,000

Media coverage is now pointing up the prospect, probably this year, of many super pension funds earning more than $100,000 and being liable for tax on the excess.

Lest we forget the losses and poor performance of recent years, one might expect a push for an averaging provision to apply on the basis of a 3 or 5 year moving average.

Peter Mair

Pavel
April 12, 2013

Mr Venkatramani's posed questions both highlight the slapped together nature of these 'reforms' and effectively demonstrate why, I believe, these won't come into being.

There are approx. 15 parliamentary sittings days available before the writs are issued for the Sept 14 general election and the current parliament moves into caretaker mode, during which no new legislation is effectively dealt with.

I cant see the government solve the issues Mr V raises, nor the plethora of other ones I can think of as well, and have legislation drafted, EMs written, etc. Just not going to happen.

So, the government's 'reforms' simply revert to being pre-announced elements of its re-election platform. IF (a HUGE if) labor is re-elected, then it will take ages to sort the devil in the detail. if (most likely) the Coalition take the reins, I'd wager its 'reforms' will be quite different.

So, don't loose too much sleep over the detail, it's tomorrow fish n chip wrappings!

 

Leave a Comment:

     

RELATED ARTICLES

Minister Jane Hume on SMSFs and superannuation reform

Watch your SMSF’s annual return this year

Latest SMSF updates from the ATO

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Welcome to Firstlinks Edition 424 with weekend update

Wet streets cause rain. The Gell-Mann Amnesia Effect is a name created by writer Michael Crichton after he realised that everything he read or heard in the media was wrong when he had direct personal knowledge or expertise on the subject. He surmised that everything else is probably wrong as well, and financial markets are no exception.

  • 9 September 2021

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.