What does the superannuation landscape look like now?
With all the proposed changes recently announced in the Commonwealth Budget, it is difficult to not just understand the detail behind the superannuation proposals but, more importantly, also assess the implications of those changes on executives’ existing or proposed remuneration arrangements.
What follows is a brief summary of the current superannuation law, recently proposed changes and an analysis of their likely implications from the perspective of the broader executive remuneration framework. This is not intended to be professional advice. Given the governance surrounding superannuation, we recommend independent advice be obtained.
1. Superannuation Guarantee Charge (minimum employer contributions)
Current law (specifically, the Superannuation Guarantee legislation) mandates the payment of a minimum of 9% of an executive’s ‘ordinary time earnings’ (broadly, their salary) into a complying superannuation fund. This rate will increase to 9.25% for the 2013-14 income year, 9.5% for the following year and then by 0.5% each subsequent year up to 12% for the 2019-20 income year.
Employers are only obliged to pay the above minimum contributions for the part of the executive’s earnings up to the ‘maximum super contributions base’ ($45,750 per quarter or $183,000 annually for the 2012-13 income year and indexed to average weekly ordinary time earnings (AWOTE) thereafter).
2. Concessional Contributions
Concessional contributions (including minimum employer contributions and any salary-sacrificed contributions) made to a complying superannuation fund are taxed at the rate of 15% within the fund. There is currently an annual $25,000 cap on such contributions for those aged below 50 and a $50,000 cap for those aged 50 and over. The caps are indexed in line with AWOTE, in increments of $5,000 (rounded down).
Concessional contributions made in excess of the relevant caps will attract an additional excess concessional contributions tax of 31.5% (resulting in an effective tax rate of 46.5%). Any excess contributions will count towards the executive’s non-concessional contributions cap (refer below).
- That concessional contributions be taxed at 30% for executives with annual incomes greater than $300,000. ‘Income’ will include concessional contributions (that is, superannuation guarantee contributions and any salary sacrificed contributions) but also notional employer contributions of executives who are members of defined benefit funds.
- That the annual concessional contributions cap for executives aged 50 and over (with superannuation balances below $500,000) be reduced to $25,000 for the 2012/13 and 2013/14 income years. The cap is expected to increase to $30,000 for those aged under 50 and $55,000 for those aged 50 and over (through indexation) for the 2014/15 income year.
3. Non-concessional contributions
Non-concessional contributions (in essence, contributions to the superannuation fund from after-tax income that is not separately taxed within the fund) are subject to an annual cap of $150,000. This cap is set at 6 times the concessional contributions cap. Executives under the age of 65 may avail themselves of a ‘bring-forward’ option under which they are able to make non-concessional contributions of up to three times this annual cap (ie $450,000) over a three-year period.
Contributions made in excess of the relevant cap above will incur an additional excess non-concessional contributions tax of 46.5%. This could result in the executive paying 93% tax on such contributions.
We have summarised in the table below the applicable tax rates for the SGC contribution components at various income levels for the 2012/13 income year. We have also extrapolated this analysis across the 2013/14 and 2014/15 income years (given the increased SGC rates that would be applicable)
For each income year, we have shaded in the relevant table the threshold income level over which additional tax would be payable by the executive on additional superannuation contributions. In particular, contributions in excess of this income threshold will be taxed at 46.5% and be included in the executive’s non-concessional contributions.
Given the top marginal rate of tax that would be applicable in this respect, we suggest affected executives consider the possibility of restructuring their remuneration arrangement such that additional income is paid outside superannuation.
It may be prudent to consider payment of additional salary rather than making superannuation contributions in excess of the concessional contributions cap. The former would result in a maximum 46.5% tax rate (depending on the extent of allowable deductions in any given year) and not subject to the restrictions imposed by the superannuation regime whereas the latter would necessarily result in 46.5% tax being imposed and the contributions being governed by the superannuation legislation.
Further alternatives could involve making employer superannuation contributions up to the maximum contributions base (contributions would total 9% of $183,000 i.e. $16,470), paying additional salary and offering executives the flexibility of salary-sacrificing this additional salary to fully utilise their $25,000 concessional contributions capacity with a salary sacrifice of $8,530 each year.
Employers can also take the opportunity to restructure the overall remuneration framework; potentially enhancing the long term incentive component (issuing options and/or shares) within a structure that may allow for potential deferral of any applicable taxing points.
We would welcome any inquiries and/or a follow up discussion.