Reintroduction of tax on pension assets

•    Tax on income generated from pension assets will be re-introduced from 1 July 2014 – this tax had been previously removed in July 2007

•    Tax will be at the normal super fund tax rate of 15%

•    A zero rate of tax will apply to the first $100,000 of pension income derived by the fund

•    The $100,000 zero rate is per pensioner member per year

•    The $100,000 threshold will be indexed (but only increased in increments of $10,000)

•    Special rules will apply for fund assets acquired before 5 April 2013 (“pre-5 April assets”) and for assets acquired in the period 5 April 2013 to 1 July 2014 (“transitional assets”)

•    For a pre-5 April asset the capital gain (but not other income generated by the asset) arising on a disposal before 1 July 2024 will be tax free if the asset is then on the “pension side” of the fund

•    For a transitional asset the trustee can choose to have the portion (which accrued before 1 July 2014) of any capital gain as being tax free if the asset was on the pension side of the fund when the capital gain was derived.  The portion of the capital gain which accrued on or after 1 July 2014 will be subject to tax

Comments

•    The zero rate $100,000 threshold is a global threshold – it does not apply separately to each super fund and does not apply separately to each super interest

•    It is not known whether the $100,000 threshold will be pro-rated where the member has only been in pension phase for part of the year

•    The interaction between losses, exempt income and the $100,000 threshold will be interesting

•    While the Government has suggested that only super investors with pension interests of $2m or more will be affected – this is unlikely to be the case

•    Any fund which has direct property investments or which obtains significant franking credits will be affected

•    A realisation of a direct property investment in a financial year will most likely force the super member to exceed the $100,000 threshold and, therefore, the realised capital gain will be taxed at 10% (assuming the 1/3 CGT discount applies and the super fund tax rate of 15% applies)

•    How this change interacts with the previously announced policy change, that income and capital gains incurred after the death of a super member in order to pay out a death benefit will not be taxable, is not known and was not raised in the press releases

•    This tax will present the ATO with particular implementation problems similar to those which in respect of the former super surcharge.  As it is only possible to determine whether the $100,000 threshold has been exceeded (and the amount of the excess) – at the member level – the ATO will have to determine each super member’s total super earnings and then determine which super fund will be allocated with the tax – presumably many months after the funds have lodged their tax returns

•    While the announcements refer to the special rules applying to assets which have been “purchased”, it is highly likely that the special rules will apply to assets which have been acquired by the fund as in-specie contributions

•    The special rules only relate to capital gains – investment income generated from assets subject to the special rules will be taxable whether or not the asset is on the pension side of the fund

•    The changes apply to all complying super funds – eg SMSFs, retail funds, master funds and industry funds

•    While not mentioned in the relevant press releases, the changes will also have to apply to pooled superannuation trusts, approved deposit funds and the complying superannuation business of life insurance companies

•    While not directly covered in the relevant press releases, it seems unlikely that the special rules will only apply if the asset is held on the pension side of the fund on and from 5 April 2013 or from the date of acquisition

•    Consequently, real estate held in a fund on 5 April 2013 will be covered by the special rules whether or not the real estate is on the pension side of the fund on 5 April 2013 – so long as when the disposal of the real estate occurs, the real estate is then held on the pension side of the fund (and the disposal occurs before 1 July 2024)

 

Implications

•    Funds which already have direct property assets (ie pre-5 April 2013 assets) will have until 1 July 2024 to choose to generate a tax free capital gains by disposing of the property before that date

•    Funds which acquire direct property assets in the transitional period before 1 July 2014 will have until 1 July 2014 to choose to generate tax free capital gains by disposing of the property before 1 July 2014.  A disposal of such property after 30 June 2014 will mean that any capital gain will only be exempt to the extent it relates to the period before 1 July 2014

•    This change may be beneficial for limited recourse borrowing transactions in pension phase – as the interest on the loan will now presumably be deductible

•    Further, this change may be beneficial as capital losses on assets held on the pension side of the fund will presumably not be worthless.