Wow, what a budget. This is the most significant budget of the last decade as it relates to superannuation.
The following is an outline of the main changes and more importantly what those changes will mean.
Negative Gearing
This isn’t exactly a superannuation related issue (although it is one of the main strategies that Australians use to build up assets for retirement) but this budget is important in what it DIDN’T change.
Negative gearing was left alone, and rightly so. We at least now have another cycle of certainty around the subject until the next time we are whipped into a frenzy about whether negative gearing should be abolished.
CGT Discount
Something else that DIDN’T change, is the 50% discount on capital gains tax. And rightly so again. Investors take more risks to generate capital gains than they do generating income. Recognizing that differential in our taxation is correct.
There is a clear difference between the current government and Labor on these two issues. The current government, through its actions, has said it believes that both negative gearing and the CGT discount are appropriate in their current form.
While Labor are going to the election arguing that negative gearing should only apply to new properties and the CGT discount should be reduced to 25%. On this matter there is now a clear difference between the two parties.
$500,000 Lifetime Cap on Non-Concessional Contributions (NCCs)
Anyone who has put more than $500k NCCs since July 2007, cannot put anymore in once Scott Morrison’s lips started moving on Tuesday night.
If you have put $200k since 2007, then you have $300k cap left.
This brings to an end $180k per annum and also brings to an end the “Bring Forward Rule” that allowed $540k in one year.
This change will pretty much put an end to the Recontribution Strategy as NCCs will be too valuable to “waste” on recontribution.
The $500,000 number is wrong. The intent is to limit the amount of money into super, so that “the rich” don’t abuse the system. I agree with the spirit of that sentiment. But we have now gone from a situation where you could do $180k per annum for decades ($5.4m assuming 30 years), which I am happy to concede is an extreme, to $500k which absolutely is the other extreme.
The error of this number is confirmed later in the budget when the amount available to start a pension is capped at $1.6m. This is the government agreeing that someone could need $1.6m for decades in retirement while at the same time capping the NCCs to $500k. Do they really think that people are going to put $1.1m of concessional contributions in $25k lots?
The government needs to realise that generating investment returns consistently is hard work and that along the journey people lose money, markets crash, products fail etc. Where is the buffer for people to make mistakes or be hit by “black swans”.
$500k is a bad number and bad policy.
It should be closer to a lifetime cap of $1.5m – $2m.
$1.6m Pension Cap
In 2007 the “Reasonable Benefits Limit – RBL” was $1.3m. This new cap is the return of RBLs under a new name.
It’s not a bad number as a couple can still have $3.2m in tax free pension mode. This is enough for a comfortable retirement for most people.
People over the cap will need to roll back excess amounts into accumulation mode (from July 2017).
Reduction of Concessional Contribution Cap to $25,000
It is currently $30k/$35k depending on your age.
$25k is too low!
In your 20-30s most people will not come close to this, but in your 50-60s you want to catch up hard. There is not enough recognition of that dynamic in the changes.
This change comes in from 2018FY, so you can still take advantage of the more generous cap in this and next FY.
Catch-up Concessional Contributions (CCs)
If your super balance is under $500k and you have unused CC cap then you can accrue on a rolling 5 year period.
This is an excellent change to the rules! It helps people out of the workforce that cannot take advantage of the current CC caps and rules.
It means a parent can take a few years off to look after the kids and then have significant cap capacity when they come back to work.
This will also turn out to be a very effective capital gains tax management tool.
Div 293 Tax threshold reduction
The threshold for this extra tax will reduce from $300k to $250k.
I guess it could have been worse as there was talk to dropping the threshold to $180k.
It is worth reminding everyone that even though the tax on CCs will rise to 30% at these income levels, that is still better than 49% marginal tax rate. So there is ample reason to maximize your CCs, while at the same time writing to your local member to remind them that earning an income of $250k doesn’t mean you are “rich”.
Tax Deductions for Personal Super Contributions
This is a major improvement to the system!
Everyone should be able to put their money into super and claim a deduction and not need to rely of complex salary sacrifice arrangements.
It levels the playing field between employed and self-employed people.
Well done Scott!
Remove Work test 65-74
Another good move.
The work test will be removed for over 65s to 74s.
There was never a good reason for the ageism inherent in the current rules. It’s just a shame we need to wait until July 2017 for this to come into effect.
With all of that said, it is important to have good advice on how to make sure that you are structured well and have the right strategy in place for your circumstances.
In light of the budget it would be important to speak to your adviser, in the absence of that we at Spring would be happy to help you.
