As people interested in their savings, I’m sure you have already heard that the Government has changed some of their super policies. They have received some good press. The Government has done well on selling the message but I’m not sure this good press is justified given some of the detail that I will mention here.
There are three main changes the government has announced:
1. The controversial lifetime $500,000 non-concessional contribution cap is gone. We’re now back to the future with a $100,000 NCC-cap that will allow most people to apply a three year in advance rule. This new threshold will apply from 1 July 2017.
Understanding how the three year in advance rule works is quite important. To get some understanding of how it works, please see articles that I previously wrote for the Switzer Super Report in September 2011 (here [1] and here [2]). Those aged at least 65 but under 75 should pay particular attention as to how this annual and three year contribution cap applies to them.
There are some important points to note:
- The current annual NCC-cap is $180,000 and the three year in advance amount is $540,000. This $180,000 cap and its three year bring forward rule apply until 30 June 2017. Those who have the money available and are able to do so should probably consider taking advantage of this cap before it ceases. If you lack the resources to fund this contribution out of your own resources, you should consider borrowing money so you can make these contributions, however I would exercise caution and take advice from your accountant or financial adviser about this before acting.
- Complex transitional rules apply (I will explain in a subsequent article how the government says this will work) if you have made use of the three year bring forward rule before July 2017 and that three year period hasn’t finished before July ’17.
- If your super balances are above $1.6 million then you won’t be allowed to contribute any more non-concessional contributions into super. Your balance will be based on the previous financial year. I see this as a very dangerous rule for SMSF trustees because often they don’t know the value of their super fund balances until well into the financial year and in many cases not long before the year is about to finish. Although this cap system looks the same as the $1.6 million pension cap (for example, it is the same amount and will also be indexed by CPI and in the same way), I think in reality it will be a very different beast.
- How does this new $1.6 million cap and the three year bring forward rule interact? The Government has said, “Individuals with balances close to $1.6 million will only be able to bring forward the annual cap amount for the number of years that would take their balance to $1.6 million.” I can see this idea causing all manner of problems – in reality it’s these issues that take hours for SMSF accountants, advisers, administrators and the Tax Office to solve.
- How often will the $100,000 amount be indexed? It’ll be indexed at the same time as the $25,000 concessional contribution cap and by movements in average weekly earnings.
Based on past experience, if this new policy is implemented as announced, I can see it leading to Administrative Appeals Tribunal and probably Federal Court or even higher level cases. Prima facie it will last two or three years at best before it is amended to remove some of the “unintended consequences”. Hopefully the Government would be keen to avoid this outcome before it is implemented.
2. The five year unused concessional cap will now have a commencement date of 1 July 2018.
What is the rule? If your super account balance is below $500,000, then you will be allowed to contribute up to five years of unused concessional cap in one year and not face penalties. The five year in advance rule will be a rolling five years, which means that each year that your super account balance is below $500,000, you will be given a new five year concessional contribution cap amount.
The delay in starting this rules is probably a good thing because this policy is not without its practical complexities, so there is additional time to iron out these issues, such as:
- correcting the improper application of the carry forward amount
- how indexation of the concessional contribution cap will impact individuals
- and a whole host of other issues including valuation of assets
During the Rudd/Gillard years, the then government issued a discussion paper on a similar policy idea. That paper showed that implementing this type of policy would be extremely difficult and costly for the ATO and super funds to administer.
Based on all these points, I wouldn’t be surprised if this policy, at some point, is quietly dumped. In any case, before starting it has to survive through another two Federal budgets and other processes.
3. Investors aged at least 65 but under 75 will only be able to contribute if they satisfy a silly work test.
The Government had proposed getting rid of this rule but have had a change of heart. Other than creating unnecessary costs for super funds and taxpayers, I’m not entirely sure what is achieved by retaining this rule. Hopefully in time we will see it removed.
Those in the age bracket who are able to contribute will be eligible to claim their personal contributions as a tax deduction without satisfying a work test. In addition the five year bring forward rule mentioned above will also be available.
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.