On the evening of Tuesday 3rd of May 2016, myself and many of my peers, and no doubt a good portion of the interested SMSF trustee population, let out a gasps of shock and horror as the Federal Treasurer announced that the Government was intending to introduce a lifetime cap of $500,000 on non-concessional contributions. Not long after that initial reaction, things got seemingly even worse when we discovered in reading the detail that contributions made as far back as 1 July 2007 would be included in this life time limit. The Government however claimed and argued that this was not retrospective legislation. Many, including myself disagreed. If actions undertaken 9 years ago have implications for new laws to be introduced today, how could it not be!
Myself and my colleagues at Virtu, love settling in for a bit of Budget night viewing once a year and this year the Government certainly delivered and had us on the edge of our seats! The group dialogue we had going that night amongst ourselves will certainly go down in the office history books!
There were quite a few of the proposals which had impacts on superannuation and while a small number are positive in nature, the majority were negative. The Government clearly set out to make some serious cuts to the Superannuation sector.
Key negative proposals included: the imposition of a cap on the balance an individual can have in pension phase (and enjoy a tax free status) of $1.6 million, the reduction of the concessional contribution cap (tax deductible contributions) to $25,000 however the most controversial was the $500,000 non-concessional contributions cap, which is the focal point of this article.
Over the course of the next few months all the major associations and organisations mounted campaigns to lobby to the Government to voice the many concerns that have been raised with the proposals. As a Committee Member of the Queensland Chapter of the SMSF Association I have been involved in seeking feedback from SMSF professionals to collate a listing of unintended consequences identified to assist with the Association’s submissions and consultation to the Government.
The announcements came as quite as slap in the face to the many superannuation investors who had over the years diligently been making contributions to super (both compulsory and voluntary) with a view to achieving self-sufficiency and freedom in retirement, with what they thought was an understanding of a tax free retirement.
They had utilised the concessions available to them and had done so after seemingly being encouraged to do so. Knowing also that they wouldn't likely be entitled to an age pension but this seemed fair and reasonable given the tax free retirement that they assumed they would enjoy.
And what about the individuals who aren't yet at that peak period prior to retirement but who anticipated being able to make large voluntary contributions to super as they got closer to that time. Asset sales, inheritances and simply having greater cash flow once the house was paid off and the kids had left home may well have been the trigger point for strategies planned.
With one foul swoop the Government shook up the plans of so many Australians.
Objection to the rules also came from the other sides of politics. The Labor party did not make official comment for quite some time but recently issued their policy statement and made it clear that while they support a number of the proposals they did not support the "retrospectivity" of the proposed lifetime cap on non-concessional contributions.
Despite the significant public backlash, the Government was giving indications that it would be standing firm on these proposals and only very limited circumstances would be granted a carve out from the new rules (for example contracts entered into pre 3 May which required contributions to be made to settle and personal injury payments were also to receive an exemption).
Then, last Thursday 15 September, the news broke that the Government had been in discussions within the party room to achieve a compromise that was hoped to ensure full back-bench support as well as passage through the senate, and the lifetime cap was tipped to have been scrapped. This followed with the official press release by the Treasurer confirming that the Government was no longer proceeding with the $500K lifetime cap. Indeed, quite a backflip after all the talk that the Government would not change its mind.
The government proposes to now introduce measures to reduce the current cap of $180,000 per annum to $100,000 per annum. The mechanism for the bring forward of 3 years of contributions will remain in place, however restrictions will be introduced to prevent individuals from contributing non-concessional contributions if they have superannuation balances in excess of $1.6 million.
A direct quote from the Press Release states that
"This ensures that we focus the entitlement for after tax contributions to those Australians who have an aspiration to maximise their superannuation balances and reach the transfer balance cap in the retirement phase, where a zero tax on earnings applies.
These measures mean that with their annual concessional contributions, Australians will be able to contribute $125,000 each year and, if taking advantage of the non-concessional ‘bring forward’, up to $325,000 in any one year until such time as they reach $1.6 million"
So this does bring some hope to the individuals who were intending to boost their superannuation balances with voluntary contributions as they approach retirement. This will still be an option, albeit on a lesser scale.
This change in direction certainly does go a long way towards fixing some of the big issues and the major concern of retrospective impact is no longer but there still are some issues to address.
For instance, a casualty of making this change in policy is that Individuals aged 65 and over will need to continue to meet a work test in order to contribute to super. The government had intended to remove the work test for individuals aged 65 to 74, to streamline the rules to mirror those for persons aged under 65, but this proposal will be scrapped in order to fund the new watered down non-concessional contributions cap policy.
So, what does this mean for now?
The current $180,000 cap still stands together with existing bring forward rule for those under 65 will continue through to 30 June 2017.
The new limits, if passed, will take effect 1 July 2017.
There are of course phasing in rules and calculations to be done if a person has only partly utilised a bring forward amount as at 30 June 2107. Also, further limitations will be imposed when an individual is approaching the $1.6M cap.
When the draft legislation comes out and these proposals progress we will spend some time examining them and will provide further insights.
The Government thinks only a very small portion of the population will be impacted, around 1%. We will see. There are many that think the numbers on this are wrong and then there are the future impacts if the thresholds do not index upwards as fast as superannuation accounts grow - effects in future years will be greater.
For right now at least, retirement planning actions more than likely can be recommenced. We have been in a state of somewhat limbo for the past 4 months or so. Hesitation, caution and in some instances opportunities may have even been lost in this period of uncertainty. Decisions have been made on the basis of Law that was supposed to be effective immediately but for which no draft legislation was ever made available and now it turns out that won’t actually become Law. It doesn't seem totally fair.
We now look to seeing the detail on how some of the phasing in rules will work. There will be some complexity as it is tied in with the operation of the $1.6 million pension cap balance – and there are concerns with how that cap will be administered, particularly when individuals have more than one superannuation fund.
Until we've seen the greater detail, right now we are scoring this change in policy a 5 out of 10. A step in the right direction but plenty of room for improvement.