Increased Contributions Tax for High Income Earners
As part of the 2012 Federal Budget, the Federal Government announced there would be increased contributions tax from 15% to 30% for individuals earning over $300,000 per annum.
Although legislation is yet to be passed, it has been proposed the measure is to take effect from the 1st of July 2012, along with other measures, to level the concessional benefit of superannuation contributions to different income levels.
UPDATE (5th April 2013) – The government is yet to pass the legislation required to enact this policy. Once further updates are available we will update this page.
The impact of this measure for individuals earning over $300,000 is increased contributions tax for high income earners collected by the superannuation fund when a concessional contribution is made. The increased contributions tax is applied to any contribution where contributions tax would apply and includes mandatory employer contributions, salary sacrifice and self-employed contributions.
For those who are still invested in ‘Defined Benefit Schemes’ the increased contributions tax applied is based on the ‘notional employer contributions.’
The definition of income that defines if an individual is liable for the increased contributions tax is wider than simple earnings and aligns closely to the definition of ‘adjusted taxable income.’ For the purposes of the increased superannuation contributions, the definition of ‘income’ includes;
- Taxable income and any adjusted fringe benefits
- Concessional superannuation Contributions (i.e. salary sacrifice)
- Target Foreign Income and net investment losses
- Tax free ‘government’ benefits
The total income applied for this benefit is reduced by any child support payable.
Where any concessional contributions are being made to superannuation (for example salary sacrificed contributions) and the value of the extra contributions causes the individual to exceed the $300,000 threshold, the government has stated that the increased contributions tax would apply only to the amount over $300,000. An example is if a person earning $290,000 has concessional contributions of $25,000 then the higher tax will be applied to $15,000 of the overall contribution amount.
A major issue of this scheme is the impact is has on individuals who do not normally earn income in excess of $300,000. Capital Gains are included in the definition of taxable income meaning persons that sell assets that subsequently result in the tax payers total income going over the high income threshold, may be subjected to the higher rate of tax on their superannuation contributions in the year that they sell the underlying asset. As such this measure may actually disadvantage some tax payers, especially those closer to retirement that start selling assets in preparation to leave the workforce.
The result of the increased in the tax rates applied will see up to an extra $3,750 being deducted from concessional contributions, which for a $25,000 contribution, will see the maximum contributions tax applied being $7,500.
Of note, the increased tax on superannuation contributions is not applied to fund earnings and ongoing fund earnings will be continue to be taxed at 15%.
It is not yet known how the tax will be collected by superannuation funds and it is not known how superannuation funds will track the ongoing income of its members to determine who to take the additional tax from. Currently superannuation funds do not normally track the income of their members, let alone the wider definition of income required under this measure. A major criticism of this scheme is that superannuation funds will be required to change their reporting and record keeping systems to track on an annual basis the incomes of their members (including no doubt when their members receive irregular taxable income) to determine who to deduct the increased taxation from. Increased measures on superannuation funds unfortunately mean increased costs which it is anticipated would be applied to all members, increasing the administration costs for all members.
The result of the changes in contributions tax for high income earners require contribution, tax and retirement planning strategies to be reviewed to ensure that the full benefits of contributions are derived.
Primoris Financial can assist individuals review their contribution strategies to ensure they receive the full value of available benefits. Looking to review your superannuation? Request Superannuation Advice here
UPDATE (5th April 2013) – The government has announced another measure regarding taxation of retirement income streams where earnings of the assets exceed $100,000. We do not have the full information at this stage, however contact us via chat, email or phone with any specific questions.