By Paul Rickard

With the 2016 Budget less than eight weeks away - possibly only seven weeks if the latest rumours out of Canberra prove to be correct - now is the time to think about your super and take preparatory actions. Given that the Turnbull government’s tax reform initiatives have come to precious little so far, and the general consensus amongst most of the lobby groups that the super concessions are too generous, it is almost certain that they will tinker again with the super system.

What is not clear is whether the Turnbull Government will honour the Abbott (and Liberal Party’s) 2013 election pledge to make “no unexpected detrimental changes” to superannuation prior to the next election. Superannuation changes usually take effect at the start of the financial year on 1 July, and with the election rumoured to be held on July 2, it could be that any changes don’t apply until the 17/18 financial year.

However, as the pledge seems to have had zero coverage in the media, I think you need to plan for these changes applying for the 16/17 financial year. And what are the changes?

Based on an assessment of the political damage, ease of implementation/administration and revenue raised, here is my list of the possible changes. They are listed in descending order (ie most likely first), with the actions you may want to take to prepare for them.

1. Lower contribution caps

The rumour mill says this is the most likely change. It is also the easiest, and probably has little immediate political impact because most people don’t know what the caps are.

The suggestion is that the current concessional contribution cap of $30,000 (or $35,000 for those aged 50 or over) will be lowered to $20,000 ($25,000 for those aged 50 or over). Concessional contributions are of course your employer’s compulsory 9.5% plus any salary sacrifice contributions, or if self-employed, any contributions you claim a tax deduction for.

There is not much you can do about this, except to see whether you can contribute up to the higher maximum this financial year. If you salary sacrifice, you may need to review your arrangements early in 16/17 to comply with the lower cap.

Changes to the non-concessional cap could be of material concern to people who have monies outside the super system. Typically, the non concessional cap (for personal after-tax contributions) has been set at six times the general concessional cap and is currently $180,000.

If this is maintained, and the concessional cap falls to $20,000, then the non-concessional cap will fall to $120,000.  Under the 3 year rule which allows persons under 65 to effectively make 3 years’ of non-concessional contributions in one go, the amount that could be put into super would fall from $540,000 to $360,000. 

Clearly, if you are considering making a big one-off contribution to super, then subject to any transaction costs or capital gains tax impacts, you should consider doing this before 30 June, and to be really safe, probably before the budget.

2. Same tax concession on contributions 

An idea that gained a lot of traction but seems to have faded recently is to give everyone the same incentive to make super contributions - effectively a 15% tax benefit.  The existing flat tax of 15% on super contributions, which is deducted by the fund from employer and salary sacrifice contributions, would be replaced by having super contributions taxed at an individual’s marginal tax rate, less a 15% discount. For example, a person paying tax at the marginal rate of 39% (37% plus 2% Medicare) would pay tax on their super contributions at 24%. This change would increase the tax on contributions for many Australians, but would arguably make the system more equitable.

Whether the 15% tax discount operates as a refundable tax offset, potentially paid to the super fund or to the individual, or whether the employer reduces the tax rate by 15% on the super contribution, is not yet clear.

If the latter, this will require the employer to make two sets of tax calculations for each employee - one for the wages, and a second for the super contribution. How small business will like this! One thing the government will not be keen to see is any reduction in workers’ take home pay, so a refundable tax offset to the employee seems unlikely.

The  hundreds of thousands of middle income Australians making additional contributions to super via salary sacrifice will either need to increase their salary sacrifice amount to make the same net contribution into super (and take home less cash), or accept lower retirement savings. Retribution at the ballot box is not out of the question.

Politically, this change now looks unlikely. An easier option for the Government, but not quite as equitable, is to lower the Division 293 tax threshold to $180,000.

An initiative of the Rudd Government, Division 293 tax effectively raises the tax on super contributions to 30%. Currently, it only applies to those with adjusted taxable incomes of $300,000 - lowering it to $180,000 would see most taxpayers enjoy a tax benefit of around 20% when making sacrifice contributions into super.   


As the following table shows, persons earning more than $300,000 get a tax benefit of 19.0% by making extra contributions into super. However, persons earning between $180,000 and $300,000 currently get a tax benefit of 34.0%. 


* With Low Income Superannuation Contribution

What can you do about these potential changes? Very little, apart from taking the opportunity to make those salary sacrifice contributions while you can.

3. No more transition to retirement pensions

An initiative of the Howard government to allow people to access a portion of their retirement savings while at the same time winding back on their work commitments, this is now for most transition to retirement pensioners a tax arbitrage. If you are over 56, you can still work full time and access a transition to retirement pension (TTRP).

Financial planners will say to anyone over 60 who is working that they are mad if they haven’t commenced a TTRP, and if they are between 56 and 60, it will make sense in about 90% of cases to commence one.

The good news is that the Government won’t abolish TTRPs retrospectively, it will only be prospective. The question is the start date - from 1 July 17, 1 July 16, or 7.30pm on budget night?

If you are 56 or over and working and haven’t commenced a TTRP, see your accountant or financial planner now. To be on the safe side, I would get one in place before budget night.

4. Higher preservation age

The preservation age (the age at which you can access your super) is for most Australians 60 years old. It is out of sync with the pension age, which is going up to 67 years. Increasing it to 62 years would maintain a 5 year gap.

A pretty costless strategy for the Government. Unfortunately, if you are impacted, nothing you can do about it.

5. Tax the investment earnings of large super balances 

This is current policy from the ALP, so there is always the chance the Government could seek to pick this up. Under the plan, the investment earnings of assets supporting the payment of a super pension would be taxed above a threshold. Currently taxed at 0%, Labor would apply a tax rate of 15% on each dollar of income over $75,000.

The ALP says that this tax would impact around 60,000 account holders with superannuation balances of $1.5 million or more. The $1.5 million comes from assuming investment earnings at a pretty conservative rate of just 5.0% pa. 

As I have discussed before, that this tax is almost impossible to administer and is unlikely to ever see the light of day. 

And it is pretty easy to get around or minimize. The most obvious strategy is to split your super with your spouse to even up the balances.  After age 60, you can make a lump sum withdrawal without paying any tax, and then using the “bring forward” rule, make a one-off non concessional contribution of up to $540,000 into your spouse’s super account. Concessional contributions can also be split on an ongoing basis, meaning that you can commence a spouse splitting strategy much earlier.

Retirees will also look to take advantage of the tax free threshold of $18,200 and invest funds outside of super, and potentially, open multiple super accounts. Bottom line - it won’t be that hard to minimize the impact of this tax.

6. A positive change - lower the pension factors


Finally, and this would be a positive change for some retirees, there is a chance that the Government may reduce the pension factors. At age 65, you are required to withdraw at least 5% of your super balance as a pension. At age 95, this has increased to 14%.  A number of seniors’ groups have been arguing that with interest rates so low, these factors are too high. My guess is that the Government will commit to having a look at this, but isn’t ready to announce the change yet.