This week, the government handed down a wide range of changes for the super system.
Many of the changes impact higher income earners or those with significant money in super.
All but one of the changes begins on 1 July 2017. This gives you plenty of time to think about how you might adjust your plans based on the new regime.
Before doing anything with your money – inside or outside super – you should wait until a change has been formalised. I have been working with superannuation budget announcements for more than 25 years and have often seen adjustments to policies between their release and the legislation or regulation being made.
Remember an election is around the corner
Don’t be afraid to tell the candidates in your House of Representatives electorate or your State/Territory Senate candidates that you’re unhappy about some particular change that has been proposed. At this time of the electoral cycle year, they are very happy to hear your views.
Get ready to adjust your plans
I would be surprised if most people didn’t need to make some changes to their retirement plans because of these Federal Budget changes.
The super changes in detail
1. Non-Concessional Contributions (NCCs)
The NCC cap has been changed to a lifetime limit. This is a good idea. There are two problems with the announcement – its size ($500,000 – indexed to average wages in $50,000 increments) and the fact that it applies from 3 May 2016 and to all NCCs made since 1 July 2007.
The $500,000 NCC cap is too small, especially given some of the other changes proposed as part of the government’s package.
If you have made more than $500,000 in NCCs before 3 May, then you won’t be allowed to contribute anymore, without facing tax penalties. You will not be required to withdraw these from the super system.
As all NCCs since 1 July 2007 will count towards this new cap, there will be a range of people caught out, especially those who had made, say, $540,000 in NCCs contributions and were planning to make additional amounts in a few years’ time.
2. Maximum pension account balance of $1.6 million
Broadly, there are four categories of people impacted by this change:
a. Those who have pensions with account balances of more than $1.6 million on 1 July 2017. If this is your situation, then you will have four options:
i. keep the excess in your pension and pay penalty tax, including tax on the earnings of those super assets.
ii. return the excess money to the accumulation phase and pay 15% tax on earnings and capital gains.
iii. withdraw the excess from the super system and invest privately or;
iv. withdraw the excess from the super system and, if possible or relevant, contribute some or all of the money in your spouse’s name.
b. Those who have pensions with account balances under $1.6 million on 1 July 2017.
If this is your situation then you won’t have to change anything, however, you will not be allowed to commence pensions with total account balances above $1.6 million from that date onwards. If you go above the cap with any new pensions after June 2017, then you will have the four options mentioned in point a. above.
c. Those yet to commence pensions, who will have more than $1.6 million in your account balance – you will have similar options to point a. above
d. Those who won’t have started a pension before 1 July 2017 and will almost certainly fall under the $1.6 million cap – you will not need to do anything.
The $1.6 million cap will be indexed by average wage increases in $100,000 amounts. However, once you have used your cap, then there is no further scope to access any increases in the cap that occur over time.
After June 2017, if your pension account balance dips below $1.6 million, then you won’t be permitted to add to your pension money.
Similarly, if your account balance goes above $1.6 million, then you won’t need to take money out of your pension.
This is a complex proposal and will be tricky for some people to work through. For example, we don’t know how the government will choose to deal with people who have private and public sector pensions.
I have long advocated splitting super benefits with spouses. This change justifies my views, as a couple will be allowed a total of $3.2 million in super pensions.
3. Concessional contribution cap reduction
This will be reduced to $25,000 for all taxpayers. This is a very negative move, especially as most people make larger super contributions in the final working years before retirement (after children have been raised and educated and the family mortgage has been paid off).
The government has completely ignored the normal lifecycle that most families follow.
As this change doesn’t apply until 1 July 2017, anyone impacted will need to consider making higher contributions for the 2016 and 2017 financial years.
4. Carry forward of concessional contribution cap
A rolling catch up provision for concessional contributions will be permitted over five year periods. Amounts not used over each five-year period will be lost. However, you will only be permitted to access this rule if you have less than $500,000 in super assets.
We don’t know how, when or who will determine if you fall below, at, or above this threshold. We also don’t know when the rolling 5-year periods will begin. I see this as a potentially very complex provision and I can see many investors inadvertently breaching these provisions and facing penalties.
5. Transition to Retirement Pensions (TTR)
Earnings taxable – the earnings and realised capital gains of these pensions, will now be taxed at 15%. This will apply to all TTR pensions even if they commenced sometime ago. In addition, all pension income paid from these pensions will be taxed as pensions and not as lump sums.
6. 30% contribution tax for those earning more than $250,000
Currently, this higher tax applies for those earning more than $300,000. Income for this measure is taxable income, reportable fringe benefits, concessional contributions under your cap and net investment losses.
7. Contribution flexibility for those aged 65 to under 75
The ridiculous work test that currently applies to this age bracket is being removed and contributions will be allowed, regardless of work status. This applies to concessional and non-concessional contributions. This is very good reform and long overdue.
8. Working individuals can claim their personal super contributions as a tax deduction
Currently, only a small band of employees can claim their personal contributions as a tax deduction. This silly rule is, at long last, being removed. Effectively, employees will be able to choose to contribute via salary sacrifice or in their own name and receive the same tax treatment.
9. Spouse tax offset
The income threshold for this small tax offset will be increased to $37,000. Currently, it is $10,800. The tax offset, available when you make contributions for your spouse who earns less than the income threshold, will remain as a maximum of 18% on up to $3,000 of contributions, or $540. No offset will be permitted when spousal income exceeds $40,000.
10. Low income super tax offset
This is currently payable if you have income of $37,000 or less.
The maximum offset that can be paid is $500. This effectively returns the super contribution tax paid for those on modest incomes. This replaces the Low Income Super Contribution that was due to expire on 30 June 2017. Effectively, there is no change, except the name of the benefit will change from “contribution” to “tax offset”.
11. Pension changes
The government will allow deferred annuities and other similar products, however, these will not be permitted in SMSFs. After taking advice from the Australian Government Actuary, the government elected not to make any changes to the minimum drawdown percentages for account-based pensions.
Many people will need to revisit their retirement income plans.
However we have an election, possibly a new responsible minister, a lobbying process and legislative process to travel through before any of these changes are legislated. So I would encourage you not to act with undue haste.
One final note: the above points do not discuss important changes made to defined benefit schemes, including public sector unfunded schemes. There have been some important changes made for these types of super funds and these points are not discussed in this article.
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.
