The government has announced changes to the superannuation system.

This announcement was made in a joint statement issued by the Treasurer, Mr Wayne Swan and Minister for Financial Services and Superannuation, Mr Bill Shorten.

The statement was issued on 5 April 2013.

According to the government, the proposed changes will:

  • cap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15% applying thereafter, and apply the same treatment to defined benefit funds
  • simplify the design and administration of the higher concessional contributions cap
  • reform the treatment of concessional contributions in excess of the annual cap
  • extend the normal deeming rules to superannuation account-based income streams
  • extend concessional tax treatment to deferred lifetime annuities, and
  • further reform the arrangements for lost superannuation. 

Cap on tax exemption on earnings supporting income streams

Under current arrangements, all new earnings (such as dividends and interest) on assets supporting income streams (ie. superannuation pensions and annuities) are tax-free. This is in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15%.

Earnings also include capital gains (see below).

From 1 July 2014, earnings on assets supporting income streams will be tax-free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the concessional rate of 15%. This is the same rate that applies to earnings in the accumulation phase.

The $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.

The government notes that the changes will not affect the tax treatment of withdrawals. Withdrawals will continue to remain tax-free for those aged 60 and over, and face the existing tax rates for those aged under 60.

According to the Media Release, for superannuation assets earning a rate of return of 5%, this reform will only affect individuals with more than $2 million in assets supporting an income stream. It estimated by the government that around 16,000 individuals will be affected by this measure in 2014-15, which represents around 0.4% of Australia’s projected 4.1 million retirees in that year.

Transitional rules for capital gains