New superannuation rules for high income earners

As Benjamin Franklin once said "nothing is certain except death and taxes." In the May 2012 budget the Federal Government announced higher superannuation taxes for those earning more than $300,000 p.a.

From 1st July 2012, if you earn more than $300,000 p.a. you will pay 30% tax on pre-tax contributions made into superannuation instead of the present 15% tax. Pre tax contributions are also known as concessional contributions and include employer contributions, salary sacrifice contributions and personal deductible contributions.

At this stage it is not known how a superannuation fund will administer this additional tax without knowing the member's personal income level. It is more likely that the tax office will need to administer the process after a person lodges their tax return and confirms their income.

According to the Government this new measure is going to hit approximately 128,000 high income earners across Australia. They have also indicated the definition of 'income' for the purpose of measuring the $300,000 threshold will include taxable income plus concessional superannuation contributions. Where the latter component pushes the individual above the $300,000 threshold they have indicated only the excess above $300,000 will be taxed at 30%.

On reflection it appears this could be an administration nightmare. There does not seem to be any logical way that a super fund will be able to determine whether to charge 15% or 30% on contributions until after the end of the financial year. As the definition of 'income' includes 'taxable income', no super fund will know this (or the individual) until that person completes their tax return.

The definition of 'income' also includes net investment losses which cannot be determined until after the end of any financial year. It would appear the only plausible way for this new tax to be administered would be for the tax office to apply some form of charge to the individual after they have lodged their tax return if it is determined they have exceeded the $300,000 income level for the year.

It is hard to see this additional tax being deducted at any level through their super fund if it can only be calculated once a year after completing a tax return. More likely, it will become an additional tax levied personally on the individual with perhaps the option to have the tax deducted through their nominated fund and will probably operate in a similar fashion to the super surcharge before that was abolished in 2005.

Either way It would seem we have been down this road before. The cost of administering an additional tax on a select few (around 1% of the work force) will soon be seen as inefficient and like the super surcharge, will be abolished by a future government as a cost cutting method.

If you are one of those within the 128,000 earning over $300,000 this additional tax will seem like an unfair impost on your ability to earn or make an income that only 1% of Australians can achieve and an additional obstacle for building a retirement nest egg.

30% concessional tax applied to superannuation contributions will still be less than your 46.5% top marginal tax rate so this should still not deter you from looking to superannuation as an option to reduce personal tax. Let's not forget either that the most anyone can contribute to super from 1st July 2012 as a concessional contribution will be $25,000 p.a. before attracting additional tax.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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