It’s a case of “back to the future” in superannuation. The Federal Government’s move to cap amounts in pension accounts begins the reversal of Peter Costello’s 2007 reforms. Remember those reforms, the then Treasurer boasted how he removed the tax on pension payments and simplified the retirement income system?
After a decade of what, in retrospect, was an ill-conceived system of completely tax-free pensions, it’s now a case of “goodbye simplicity/hello expensive regulations.” And just when most people had forgotten all about that dreaded former system of Reasonable Benefit Limits, they’re back under another guise.
And the cost to the industry of closing the alleged rorting of tax-free pensions will be probably at least a couple of hundred million dollars in costs for a new, complex regulatory system covering all super funds.
The government claims only a low number (perhaps 4%) of SMSFs are affected, yet it has reached for the sledge hammer rather than the nut cracker. The number might be low for now but, once the new system is operating, the balances subject to 15% tax (or whatever any future rate might emerge) will rise. Meantime, the revisited limits and reversal of the 2007 reforms will cover the $2 trillion-plus of super savings and 14 million fund members – and not just the limited number of “rich” $1.6 million-plus SMSF account holders.
After the initial May Budget proposals ran into criticism, the government announced amendments in September, mainly after consultations with worried Coalition backbenchers. The government generously allowed the industry a whole nine days to read, digest and comment on more than 70 pages of new, complex legislation plus supporting material. Now it is preparing to legislate it – with a one-seat majority House of Representatives and a fractious Senate.
The new regime is supposed to be up and running by July 1, 2017 leaving less than eight months to get the legislation passed, new computer systems designed and running and the industry prepared for the new, complex system.
The super industry estimates it needs a 12- to 18-month lead-in: remember design of the detailed system will depend on the eventual legislation (whenever it is passed). It will require the ATO to gear up to handle this work with less than a year’s lead-in time.
What could possibly go wrong?
Clearly, the government thinks the revenue benefits from its measures will offset any potential drawbacks. The biggest impacts, according to Grattan Institute estimates by 2019-20 are $750 million of taxes on balances above $1.6 million, $230 million on transition to retirement pensions and $250 million from the lifetime cap on contributions (by going back and counting those from 2007).
It will mean the ATO will again have to track everyone’s pension fund balances – both all the tax-free, sub-$1.6 million pension funds and the other accumulation accounts in the 15% tax regime – plus everyone’s unused caps.
Many in the industry believe the measures – and thus the complexities – have been framed more with any eye on capturing tax revenue, rather than merely closing off benefits for those with large pension accounts. But complaints may be muted because much of the industry had earlier been locked in behind the cries for equity in super concessions.
Still some complaints about retrospectivity will continue. The new rules apply to super fund balances that have been accumulated under past, existing laws from 2007 – with no grandfathering provisions.
SMSF members will need to get set to grapple with new terms like indexed transfer balance caps (the limit to what can be transferred into pension phase) and the transfer balance account (how much someone has used of his/her transfer balance cap).
Under the system, members of SMSFs or their advisors/administrators will now need to monitor their own individual caps. They also will have to master a complex method of indexing the limits, which will be based not on wages but on the Consumer Price Index (which is conveniently flat at present).
In short, super fund members will have to get used to a whole new, complex world of pain.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
