The federal budget this year took many by surprise with a number of foundational changes to the superannuation system. It pulls back on much of the generosity in the 2006 budget. However, with statistics showing 96% of Australians will be unaffected, what is the real situation?
Although on paper today this may be true, it does not take into account the cost going forward, with plans now no longer able to be carried out and many of the proposed changes not offering “grandfathering”.
In the past we have seen grandfathering of policies, which has created a sense of fairness in the system – peace of mind for Australians in knowing super decisions taken were not going to be impacted in the future. This is now out the window.
So what are the three key areas where your super will be hit?
Lifetime non-concessional cap
The budget proposes a lifetime cap on non-concessional (post-tax) contributions of $500,000. However, this applies not just from today: there will be a mirror in place, taking in these contributions all the way back to July 1, 2007.
This is a significant reduction and will change many plans for those heading into retirement, particularly those who planned on selling an investment property or perhaps downsizing their home to make a large contribution to super.
The news here, however, is not all bad, as you will now be able to make these types of contribution all the way to the age of 75. Currently over the age of 65 you need to meet a work test to be eligible.
Reduction in the concessional cap
The concessional cap (pre-tax), currently $30,000 for those under the age of 50 and $35,000 for those over 50, will be reduced to $25,000 from July 1, 2017.
However, here there is some opportunity, particularly for women and those with irregular incomes. For the first time everyone will be able to make personal deductible contributions, not just salary sacrifice through employers. This provides added flexibility if you have a year with significantly higher tax and cash available to put into super.
In addition, the proposal suggests if your super balance is less than $500,000 any unused limit can be carried forward for up to five years, starting on July 1, 2017. So there is a real chance to play catch-up and reduce capital gains tax paid outside super, as well as many other opportunities.
The game is up for transition to retirement pensions
For those with, or planning to set up, a TTR, it is time to go back to the drawing board. The tax benefits currently received on the earnings will be taken away from July 1, 2017. This will have a significant impact that could cost even small TTR holders thousands of dollars in extra tax.
There is a clear message in these changes. The government is focused on giving Australians with super balances under $500,000 the flexibility to make extra contributions, particularly concessional contributions. It is also clearly saying balances over $1.6 million should no longer enjoy the same tax benefits as they do today.
However, it is not time to hit the panic button. Superannuation remains an exceptionally generous tax vehicle, and one that all Australians should utilise to the maximum – even if now the maximum has been reduced.