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On Superannuation in the 2016 Budget


Superannuation and government – a recipe for disaster!

Treasurer Scott Morrison delivered the Federal Budget on Tuesday night.  After many months of speculation, the detail (such as it is) finally came to light.  And how short-sighted the document turned out to be – especially for those with superannuation.

Having worked in and around superannuation since 1991, I have witnessed so many changes and it is little wonder that the average punter tends to tune out when the word “superannuation” is used.  It is therefore not surprising they really don’t seem to care and become easy prey for financial planners and industry superannuation funds.

train overboard

The changes being proposed by the Turnbull government in the budget can be summarised as follows (note that I’m not covering all of them here – just the major ones that will impact our clients).

I preface all this by stating that the policy platform relating to superannuation is somewhat confusing – the government wants people to provide for their retirement so that there will be less strain put on the welfare system when they retire.  Fantastic!

Why then do they limit the amounts that people can put into superannuation?  This flies against any and all forms of logic.  If you want to create a welfare replacement vehicle, encourage people to use it – don’t restrict them.

Over the past 20 plus years, we have seen limits – some very generous, others less so.  Passing strange it is that superannuation limits tend to reflect the underlying state of the budget!  When things are going pretty well, the limits are up, when things tighten up, so do the amounts people can contribute.

So here goes:

$500,000 Lifetime Limit on “private contributions” (in the legislation, these are called “Non-concessional contributions”)

The idea has always been that there were opportunities for people to add to their superannuation accounts during the year using tax-paid/after-tax money that they might have saved up.  This can also include amounts withdrawn and re-contributed to the fund when it is in pension phase.  Prior to Tuesday this week, people could deposit $180,000 per year into their fund or, elect to “bring forward” a couple of years contributions and put $540,000 into their fund.  This works really well for people who haven’t been able to build big balances in the superannuation system as they were running businesses, bringing up families and generally contributing to the wealth of the nation.  Now, the government, in their wisdom, is placing a “cap” on the amount they can contribute in this way.

The net effect of this is to restrict the ability of people to put money into their superannuation accounts for their retirement.

Remember when it was possible (some years ago) to put $1,000,000 into superannuation?  Lots of people took that opportunity up.

Now, if you’re one of the lucky ones who have made contributions of this type since 2007 and are currently over the new $500,000 limit, good for you.  It just means that you won’t be able to make any more.  If you’re not at the new $500,000 limit yet, well, you can make additional contributions to get you there – but PLEASE don’t go over the limit or you will get stung with Penalty Tax.

One interesting note – the budget papers make reference to the fact that the date of 1 July 2007 was chosen as this is the date from which the Tax Office has “reliable contributions records”.

I am not sure whether backdating a limit commencement start time is valid Constitutionally.  Watch this space!

Limiting the Size of your Pension Fund

The government refers to this as a “Transfer Balance Cap” – what they really should call it is “You can’t have a pension bigger than this”.

What it means is that, from 1 July 2017, you will be able to transfer a maximum of $1.6 million into your retirement account.  Subsequent earnings on the amount transferred will not be subject to tax.

I don’t know about you, but I have found that where you segregate assets, it becomes difficult to “un-segregate” them.  Let’s say you have a fund with $2m in it. You transfer $1.6m of shares into the new “Maximum Pension Fund” box.  The share market tanks – all of a sudden, you have well less than $1.6m in that account.  Can you top it up?

Conversely, you transfer $1.6m into your “Maximum Pension Fund” box and the shares appreciate markedly so that the balance in that “box” is now well over $1.6m.  Do you have to transfer funds out?

Or, riddle me this one – your single asset in your superannuation fund is a building worth $2m.  Do we have to transfer 80% of that building into the “Maximum Pension Fund” box?

Apparently the government is going to “consult” on how this will all be implemented.  Good luck with that.  This has all the hallmarks of an absolute mess and will result in uncertainty for the superannuation industry for years.

I find it somewhat galling that the government will be effectively trying to legislate how much you can save in your pension fund to access the tax-free earnings.  Many people have saved and worked hard over decades to give them a retirement that they can enjoy.  To come in and take this away from them is unfair – especially for those who are already in pension phase and who have planned their lives and activities around what they thought was some level of certainty.

Contribution Limits

As mentioned above, the government keeps telling everyone to put more money into superannuation.  Then they place a limit on how much you can contribute before you run into penal tax rates.

If you have a look at the levels of allowable (read “deductible”) superannuation contributions over the past years, you will see it is a dog’s breakfast.  Starting (for the under 50 year olds) at $50,000 in 2008/9, it has reduced to $25,000 from 2009/10 then increased to $30,000 from 2014/15 and it reverts to $25,000 from 2017/18.  It’s a bigger mess for those aged over 60!

If the government wants people to contribute to superannuation to fund their retirement, set a limit and stick to it.  For younger people with a plan to put money aside, it becomes impossible for them to budget to achieve this.

I will point out there are some positive proposals in the budget with regard to superannuation, however, the issues highlighted above are so short-sighted and ill-thought-through that the government is making the superannuation system even more unwieldy than it was previously.

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