High Income Earners … Well hello Superannuation Surcharge May 10, 2013

Howdy All, 

The Government for all its mismanagement is at it again declaring that high income earners will again be subject to a surcharge rate of tax on superannuation contributions. 

While I am all for an equitable tax structure, I am becoming increasingly annoyed by the actions of this Government. Rather than focusing on a class war, they should instead stop spending money on gimmicks which ultimately will amount to nothing more than increased waste. 

Fortunately this will all be resolved by September of this year but in the interim we have to put up with idiotic ideas as the one which is being proposed for high income earners. 

Listed below is an extract of what we understand will apply once the legislation is enacted. 

In this alert, we explore the more complex aspects of the Government’s draft legislation to reduce the tax concessions that individuals with annual income above $300,000 receive on their concessional contributions.

The application of the new tax to defined benefit arrangements, departing temporary residents and to scenarios involving excess and potentially excess contributions are summarised below.
 

Review

An individual will have a liability for Division 293 tax for an income year if in a given financial year their income for surcharge purposes, less their reportable super contributions plus their low tax contributions, exceed $300,000.

It is worth recalling three definitions which are fundamental to understanding the calculation process:

• Low tax contributions include employer contributions to accumulation interests, personal contributions where a tax deduction is claimed, contributions to a defined benefit interest (valued by an actuary), salary packaged contributions to constitutionally protected funds and amounts allocated by the trustee (as prescribed in income tax regulations for the purposes of determining concessional contributions).
• Income for surcharge purposes (as defined in ITAA 97) includes taxable income, reportable super contributions, reportable fringe benefits and total net investment losses.
• Reportable super contributions are reportable employer super contributions (generally employer contributions other than award or SG) and personal contributions for which the individual claims a tax deduction.
   

Impact issues

Taxable income is a major component in the calculation of ‘income’ for surcharge purposes. Remember that lump sum payments are included in an individual’s taxable income, even though they may be subject to a prescribed rate of tax, rather than the individual’s marginal rate. Such payments include:

• the taxable component of lump-sum death benefits paid to non-dependants for tax purposes (for example, an adult child)
• employment termination payments
• payments of unused annual and long service leave
• a capital gain on the sale of property.

Receiving payments of this type may result in a breach of the $300,000 threshold and thus trigger Division 293 tax on the recipient’s low tax contributions for that year.

Treatment of excess and potentially excess concessional contributions

Excess concessional contributions can be refunded and potentially excess concessional contributions can be disregarded or allocated to another year using the Commissioner’s discretion. These variations impact the inclusion or exclusion of these contributions in the calculation of low tax contributions and the $300,000 threshold.

The following table, based on the table provided in the Explanatory Memorandum issued with the draft legislation, summarises the treatment of excess and potentially excess concessional contributions for the purposes of Division 293 tax.

Treatment of excess and potentially excess concessional contributions

Scenario	Include in low tax contributions?	Include in $300,000 threshold?
Excess concessional contributions subject to excess concessional contribution tax.	No. These amounts are already subject to tax at the highest individual marginal tax rate.*	No.
Excess concessional contributions that are disregarded (once-off refund of excess concessional contributions under $10,000)	No. These amounts are included in the individual’s assessable income and subject to tax at the individual’s marginal rate.	Yes. These amounts form part of normal assessable income within the definition of income for surcharge purposes.
Concessional contributions which would be excessive but for the application of the Commissioner’s discretion to disregard them	Yes. These are low tax contributions because they are not excess contributions.	Yes. Because these amounts are low tax contributions, they are included in the calculation of the $300,000 threshold.
Concessional contributions which would be excessive in the year in which they are made, but for the application of the Commissioner’s discretion to allocate them to another year	Yes. These are low tax contributions in the year that they are made. These are low tax contributions because they are not excess contributions. They are not low tax contributions in the year to which they are allocated.	Yes. Because these amounts are low tax contributions, they are included in the calculation of the $300,000 threshold in the year in which they are made. They are not included in the calculations of the $300,000 threshold in the year to which they are allocated.

* This tax treatment may change as a result of the Government’s announcements on 5 April 2013 that it would reform the treatment of excess concessional contributions.

Defined benefit arrangements

Low tax contributions for people with defined benefit arrangements will consist of:

• low tax contributed amounts made to non-defined benefit interests
• less excess concessional contributions
• plus defined benefit contributions in respect of defined benefit interests (calculated using a method to be set out in regulations).

The defined benefit contributions calculated using the prescribed methodology will not necessarily be the same as ‘notional taxed contributions’ which are used for determining an individual’s concessional contributions for excess contributions tax purposes. Certain notional taxed contributions which are above the dollar amount of the relevant concessional contributions cap are deemed to be within the cap due to grandfathering arrangements. There will be no grandfathering of defined benefit contributions for the purposes of calculating a person’s low tax contributions.

Where Division 293 tax applies to low tax contributions attributable to a defined benefit arrangement, the ATO will make a deferred payment determination and a debt account will be maintained by the ATO until the first benefit is paid from that defined benefit interest, when payment of the accrued amount will be required. The ATO will issue a release authority to enable payment to be made from the superannuation fund.

Alternatively, the Division 293 tax may be paid by the individual from other sources, as it arises. The ATO will also issue a release authority at the time the Division 293 tax arises so that where the individual also has an interest in a non-defined benefit superannuation fund, they may use the release authority to make voluntary payments to reduce the tax.

The Explanatory Memorandum provides a series of examples of how to calculate low tax contributions where contributions to a defined benefit interest are involved.

Special rules – Contributions to constitutionally protected funds

Low tax contributions in respect of certain state higher level office holders (to be defined in regulations) are calculated in the same manner as described for contributions to accumulation style funds and defined benefit contributions, except that where those contributions (defined benefit or otherwise) are made to a constitutionally protected fund, only salary sacrificed amounts are counted as low tax contributions.

However, all low tax contributed amounts (whether resulting from salary sacrifice arrangements or not), including defined benefit contributions are included in the calculation to determine whether the $300,000 threshold is breached.

Special rules – Commonwealth justices and judges

Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968 are not included as low tax contributions and therefore not subject to Division 293 tax. These special rules only apply to justices and judges who have a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968.

You should note however, that a calculation of low tax contributions will still be made, based on these defined benefit contributions, and will be included in the calculation to determine whether the $300,000 threshold is breached. This will be relevant if other low tax contributions have been made to a superannuation fund in respect of these individuals.

Special rules – summary

Contributions	Include in low tax contributions?	Include in $300,000 threshold?
Contributions to constitutionally protected funds for state higher level office holders	No. Not included as low tax contributions and therefore not subject to Division 293 tax, unless part of a salary package arrangement.	Yes. All low tax contributed amounts, including defined benefit contributions are included in the calculation to determine whether the $300,000 threshold is breached.
Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968	No. Not included as low tax contributions and there not subject to Division 293 tax.	Yes. These defined benefit contributions will be included as low tax contributions in the calculation to determine whether the $300,000 threshold has been breached. Division 293 tax may be payable on other low tax contributions.

Temporary residents departing Australia

Individuals who receive a departing Australia superannuation payments (DASP) will be entitled to a refund of Division 293 tax they have paid. This is because any concessional tax treatment of their superannuation contributions is removed by the final withholding tax which applies to DASPs.
 

Conclusion

The closing date for submissions on this draft legislation is Wednesday 8 May 2013, allowing only a week for the industry to review and comment.

As we have seen, the implementation of this measure requires some complex calculations to determine whether a liability for the new Division 293 tax will arise and taxpayers who would not generally be considered to be very high income earners may be caught by the new rules.

We will as a matter of course be reviewing all affected individuals and we will be in touch with possible solutions in due course. 

Bidding you all a wonderful weekend ahead ….. Go Bombers 

Luke Eres CFP SSA 

 

 

The Federal Budget …. An act of stupidity of the highest order May 14, 2012

Howdy All,

I trust that today’s post finds you well.

Attached is a budget summary as prepared by our office. Unfortunately what we witnessed last Tuesday was a desperate attempt by a bad Government to buy votes. So much for governing with a vision.

RetireCare – Federal Budget Summary

Bidding you all a great day ahead

With thanks

Luke Eres CFP SSA

Cost of living pressures …… are we delusional May 3, 2012

Today I post an article written by Bernard Keane who is a regular contributor on the Crickey Website.

Whilst I can’t say that I totally agree that costs pressures are not real he does raise some valid points and yes it would be great to finally have an honest politician speak the truth.

Given the train wreck we have at both ends of the political spectrum, I won’t hold my breath, enjoy.

While some in the media insist on pandering to Australians’ vast first world problems conviction that the cost of living is relentlessly rising, it was good to see the new report from the National Centre for Social and Economic Modelling yesterday about disposable income receiving significant coverage.

The NATSEM report showed that Australians’ incomes have significantly outstripped prices since 1984, with disposable incomes rising on average 20% ahead of inflation over the period. The report also showed that the gains were spread across all incomes groups, although the highest income groups had benefited more in the last decade compared to earlier.

It confirmed earlier evidence that, far from facing massive cost of living pressures, Australians have done very well from our extended period of economic growth — the Herald-Sun (commendably for a tabloid) last year found average households were $23 a day better off than five years ago.

If even the tabloid media are prepared to look seriously at exactly how much substance there is to claims about “cost of living” pressures, how about politicians?
On that front, there was a revealing moment last week after the ABS revealed a remarkably low CPI figure, so low it had some pundits suggesting the economy was tanking. Joe Hockey immediately produced a press release claiming the data showed essential household items were outstripping average incomes. Not to be outdone, Wayne Swan declared that the government knew that families were still doing it tough.

Actually, no, the evidence is they’re not doing it tough at all. Strong growth in incomes for the last thirty years and even through a financial and economic crisis is not “doing it tough”. The only households that are doing it tough are those in the bottom quintile of incomes, who spend a much bigger proportion of their income on necessities than the rest of us. But even they have enjoyed nearly 20% growth in real income over the last 30 years.

If you’re not in that income group and you think you’re “doing it tough”, it’s because you don’t know how to live within your means, not because politicians have failed you, or the economy is difficult. Even when it comes to identified issues like electricity prices, they are only playing catch up to the real levels they were at in the early 1980s. And in any event, the evidence shows that if you want lower electricity prices, you should privatise your generators. But voters dislike privatisation, as Anna Bligh can tell you.

No politician is willing to tell the truth, to make the obvious point that Australians are richer than ever before and should be grateful that economic reform paved the way for such a big rise in incomes, rather than whingeing about not being able to afford the wealthy lifestyles they want. Such a politician would be instantly declared “out of touch”. The last politician who tried that was John Howard, not long before he lost his own seat. His example has been heeded by everyone he left behind in parliament.

But here’s where it gets more interesting. Australia has entered a period of low inflation. We’re now saving more than ever before. We’re spending more on services, meaning retailers have to endlessly discount products. We’re shopping online and buying clothing, footwear and books, in fact all sorts of products, offshore, often for half the price we can get them here — a competitive shock that is making its way through supply chains across the country. The Australian dollar is putting downward pressure on everything from fuel prices to household goods. Electronic manufacturers are in a deflationary spiral due to overcapacity.
Traditional retailers are tearing their hair out. Even housing affordability is improving.

Politicians are continuing to live in the pre-GFC world of high demand, high income growth and high interest rates, where they fell over themselves to pander to voters’ delusion that they were under the hammer financially. But occasionally a pollie lets the mask slip a bit and we realise they know perfectly well what’s going on — like when Joe Hockey commendably challenged the “age of entitlement”. They must know what’s going on, because they can see the evidence in the lower tax revenue growth the government keeps having to deal with — David Uren of The Australian asked a good question of Wayne Swan last week when he wanted to know how much the low inflation result would curb revenue growth (Swan deflected the question to Budget Night).

The world has changed. The politicians know it, even if they won’t admit it. Even sections of the media know it. At some point a brave politician has to come forward and tell voters the truth.

Bidding you all a wonderful day

Luke Eres CFP SSA