Post Budget 2006
The 2006 Budget heralded significant changes to the operation of the superannuation system. The headline change was that all benefits, regardless of their size, would be tax-free when received after age 60.
However, in order to retain control of the amount of money in the system, the Liberal Government needed to change the control mechanism, from one applying to benefits to one applying to contributions. RBLs were abolished with immediate effect, but contribution caps were introduced.
Non-concessional (undeducted) Contributions (NCCs) were subject to a one-off limit of $1 million per person between May 10, 2006, and June 30, 2007. From July 1, 2007, these contributions have been subject to an annual cap of $150,000 per person, but with a two-year bring-forward provision for people under age 65.
This means that people under age 65 can contribute up to $450,000 in a particular financial year, but are then precluded from making further such contributions in the following two financial years.
Concessional (taxable) contributions (CCs) were subject to the old age-based limits for 2006–07, but from July 1, 2007, were subject to an annual cap of $50,000 per person. A transitional cap of $100,000 was to apply for five years for individuals aged 50 and over. After that five year period, the transitional cap was to revert to $50,000, so that everyone was subject to the same annual cap throughout their lifetime.
With effect from 1 July 2009, the Labor Government halved the CC caps to $25,000 (under age 50) and $50,000 (aged 50 and over). Again, the $50,000 transitional cap was to revert to $25,000 from 1 July 2012.
Excess contributions
In order to deter people from breaching the contribution caps, penalty rates of tax apply to any excess contributions. Excess CCs are taxed at an additional rate of 31.5 per cent. With the contribution having already been taxed at 15 per cent in the superannuation fund, the overall tax rate is 46.5 per cent, equal to the highest marginal tax rate (MTR). In addition, excess CCs carry over and are also counted against the NCC cap.
Excess NCCs are taxed at a rate of 46.5 per cent.
If the carry-over of an excess CC also causes someone to breach the NCC cap, the excess contributions may be subject to tax at a rate of up to 93 per cent.
Assessments of any excess contributions tax are levied on the individual concerned. Excess CC tax may be paid by the individual personally, or the individual may request the superannuation fund to pay the tax. Excess NCC tax must be paid by the superannuation fund.
Changes to Contribution Caps
On 7 September 2010, the Labor party was re-elected as a minority Government where the Independents hold the balance of power, so it is difficult to speculate as to how Labor’s Henry Review recommendations will play out, many of which were intended to take effect from July 1, 2012. Nevertheless, they are worth exploring, in terms of further change which may affect the superannuation system.
In May 2010, the Labor Government announced that the concessional cap for those aged 50 and over will remain indefinitely at $50,000 per person per annum, but only for those individuals with superannuation account balances of less than $500,000 (Note 2).
At this stage, it is not clear how the $500,000 account balance threshold will operate.
The CC cap will, therefore, be $25,000 per person per annum for all people under age 50, and all those aged 50 and over with superannuation account balances of $500,000 or more.
The CC caps will be indexed and the NCC cap is expressed as six times the concessional cap that applies to those under age 50.
The Labor Government also announced that it would: • rebate the contributions tax paid on SG contributions for low income earners from July 1, 2012. The rebate will be up to $500 and apply to workers with incomes below $37,000. In effect, 9 per cent x $37,000 = $3330 x 15 per cent = $500; and • increase the age limit for SG contributions from 70 to 75, with effect from July 1, 2013.
Co-Contributions
In 2003-04, the Liberal Government introduced the co-contribution for low income earners. In that year, the Government matched eligible personal contributions up to a maximum co-contribution of $1000.
From 2004-05 to 2008-09, the Government increased the matching rate from 100 per cent to 150 per cent, with a maximum co-contribution of $1500. An additional one-off payment in 2005–06 doubled the co-contribution for eligible people.
In the 2009 Budget, the Labor Government announced that the matching rate had been permanently reduced to 100 per cent, with a maximum co-contribution of $1000, for 2009-10 and subsequent years.
The maximum co-contribution is available to people earning up to the legislated threshold. This threshold has been indexed over time to $31,920 for 2009-10, and the co-contribution phases out for incomes above that level.
Again in the 2009 Budget, the Labor Government announced that the income threshold for eligibility would not be indexed for the next two years, freezing more people out of the system or reducing their entitlement. As can be seen, many changes have been made over time to the rules in respect of getting money into the superannuation system. Significant changes, some positive but many negative, have even been made in the last two or three years, despite the introduction of ‘Better Super’ in 2007.
