What the Superannuation changes mean for you
by Sally Rose 16 Sept 2016 Australian Financial Review
A rush on super contributions is tipped after financially responsible savers were granted a last chance to stash up to $540,000 from after-tax earnings before the end of the financial year.
Financial advisers have welcomed the news that a slated $500,000 lifetime cap on non-concessional (after-tax) super contributions will be dumped.
The plan, which was introduced effective immediately and backdated to 2007, was the most controversial component of a sweeping package of changes to the super tax rules outlined in the federal budget.
Treasurer Scott Morrison revealed a revised plan on Thursday that leaves the pre-budget rules in place till June 30, 2017.
This financial year, financially responsible savers can now take advantage of the outgoing $180,000 annual cap on after-tax contributions.
An existing provision for three years-worth of contributions to be rolled forward means those with unused caps have a last chance to stash up to up to $540,000 from after tax income into super before June 30.
“I think we can definitely expect to see a rush on contributions now as everyone in a position to get the maximum allowed under the old rules into super does so,” financial adviser Ian Gillies said.
Downsizers who were caught out on budget night halfway through the process of selling a property, or other large asset, with plans to use the windfall to top up their super will be among those to get the most immediate relief from the government’s compromise on its super changes, designed to garner enough support to pass the reform package through Parliament.
A big reprieve
“A couple of my clients were genuinely caught out on budget night, having just sold an investment property but not completed the transaction or transferred the money into their super,” financial adviser Nerida Cole said.
“Those people have been really stressed and this latest change comes as a big reprieve for them.”
Other groups tipped to benefit from the government’s backdown on the $500,000 cap are professional women returning to the workforce after a career break, and younger workers keen to bolster their retirement savings.
“The new arrangements will be much better for the many women who take time out from their career to raise children but then find themselves willing and able to save more in super once they return to work,” adviser Kate McCallum said.
The latest changes will also provide greater flexibility for people who want to put some of the proceeds from an inheritance or divorce settlement into their super, she said.
Ms Cole said couples, where one partner has a lot more in super than the other, should look at evening up their balances before June 30.
A key criticism of the $500,000 lifetime cap on non-concessional contributions levelled by Labor and some Liberal Party backbenchers was that it was retrospective..
In a compromise that was approved by the party room on Thursday, the unpopular cap was dumped and replaced by a mechanism to allow people to make concessional and non-concessional contributions till they hit the new retirement balance cap of $1.6 million.
New look changes
Non-concessional contributions will now be capped at $100,000 per year, until people’s total account balance hits $1.6 million. People aged under 65 will still be allowed to bring forward three years worth of non-concessional contributions. [It was also announced that the “work” test will remain for those contributing to super between ages 65 to 74]
Workers with more than $1.6 million in super, although restricted from making any further after-tax contributions, will still be allowed to keep making pre-tax contributions up to the relevant annual cap. However the amount they can transfer out of the accumulation to pension phase, where earnings are tax free, remains set at $1.6 million.
Another valid criticism of the now dumped $500,000 lifetime cap on non-concessional super contributions had been that it would have made it virtually impossible for younger workers, with the exception of the very highest income earners, to ever reach the $1.6 million pension balance cap.
Most people with $1.6 million in super are older savers who boosted their balances in the brief window when former Treasurer Peter Costello allowed up to $1 million in after-tax earnings to be stashed into super per year.
“With the latest amendments the super changes are much better than what was announced in the budget,” adviser Andrew Yee said.
“It will be more feasible for people still in the workforce to strive to reach the $1.6 million balance cap and should help confidence in the system.”
Mandatory employer payments into super and voluntary top-ups made via salary sacrifice are called concessional contributions because they are taxed at a flat rate of 15 per cent, representing a discount for most workers. Non-concessional contributions are those made from earnings that have already been taxed at the applicable marginal income tax rate.
[Note: Article edited to remove socialist press gallery spin]
Most happy to welcome backdown over $500,000 lifetime cap
The government’s backdown on the sharpest end of proposed superannuation reforms will be widely welcomed among investors, especially the dumping of an ill-considered $500,000 lifetime superannuation “cap” but it will affect different demographics in very different ways.
Most savers do not get a chance to make significant superannuation contributions until they reach early middle age, at which time family expenses can decline and earnings can reach a peak.
Here’s how the changes might affect key age groups:
• For those in their 40s, it means pre-tax (concessional) salary sacrifice possibilities are now extremely limited. As a result, the focus will need to be on getting after tax (non-concessional) contributions into super.
Alternatively, investors in their 40s will look afresh outside super at the tax breaks offered by negative gearing, especially for residential housing investments. Other tax shelters such as long-term tax protected investment bonds that typically pay out after 10 years will also be on the agenda;
• For those in their 50s, lower non-concessional (post-tax) limits means that those who may “come into money” — through such items as business sales, bonuses or inheritance — will have to make their contributions more carefully staged over several years;
• For those nearing retirement, the changes are most important. Long-term plans of selling assets to put into super will most likely have to be accelerated — alternative tax shelters, especially family trusts, will now be actively examined by this group. Investors in this age range may also be keen to split assets inside different super accounts or to split assets “inside and outside’’ super so that a wider range of tax allowances can be exploited.
Put simply, the new rules — likely now to be passed through parliament for implementation on July 1, 2017 — mean the maximum anyone can contribute to super each year on a non-concessional (after-tax) basis is $100,000 up to a maximum of $1.6 million. That’s the individual pension funding limit, which is also now reset to become effective on July 1, 2017 (not 2007 as originally announced in the May budget).
The degree of compromise is significant but also rational, on the basis the original changes — announced without consultation — were clearly unpalatable even inside key sections of the Liberal Party. At worst, under the now scrapped budget plans, the lifetime maximum contributions of $500,000 were to be less than individuals had been able to put in on a non-concessional basis over any three-year period.
Separately, the government intends to go ahead with its plan to introduce a new maximum for concessional contributions (pre-tax) at $25,000 — it is currently $30,000 for under 50s and $35,000 for over 50s.
If Scott Morrison gets his amended plans through, he will still have achieved a number of very significant changes to the wealth management system in Australia:
• First, non-concessional contributions which had clearly been used for building small fortunes inside super by a minority of wealthy investors will be trimmed back sharply — from a current maximum of $180,000 a year to $100,000. Importantly, a “three-year” [bring forward] rule remains in place where up to three years’ worth of non-concessional contributions can be made inside a single financial year.
• Second, the Treasurer will achieve a breakthrough in getting pension income taxed [only up to age 65 & still working], even if it is only at the highest levels. The $1.6m cap on pension fund earnings means wealthy investors are likely to divert amounts above that level into tax-protected vehicles such as family trusts .
• Third, the level of concessional (pre-tax) superannuation benefits, which are regularly criticised as inequitable, gets trimmed significantly. Of course, someone has to pay for the adjustments and there will be some backlash in days to come as women and older workers realise they must fund the changes. The Treasurer has pushed out by one year (to July 1, 2018) the start date for a five-year carry forward scheme for concessional (pre-tax) super where workers with irregular working patterns can “catch up” on contributions. Women have more irregular work patterns than men.
Original article here