By Paul Rickard

Treasurer Scott Morrison was right when he said that the Tuesday’s budget is the biggest shake-up to super system in 10 years. And the big winner will be property, as middle income Australians invest monies that would otherwise have made their way into the super system into the family home, investment property and farms. Non income producing assets such as collectables (art, rare coins, stamps etc) might also get a boost.

10 years ago, Perter Costello turned the super system on its head by changing it from a system that had no limits on contributions but restricted what could be taken out of it through measures like a reasonable benefits limit, to the current system which has capped contributions, but no tax impediments to taking money out. Scomo has gone one step further by slashing what can be put into the system, and reducing the tax benefits of keeping money in there. 

Super was never a vehicle for the rich. Until Tuesday night, super was an attractive proposition for the well-off. Now, super is really for middle income earners. And whenever tax incentives or disincentives change, behaviours change. The well-off or soon to be well-off will look at investments outside the super system, with property, including negatively geared property, an obvious beneficiary.

Another important change is that the transition to retirement pension has been effectively killed from1 July 2017. The tax benefits are gone, which will come as a shock to many well-off and not-so well off over 55’ers. 

Here is a summary of the changes, the good and the bad, and what actions you can take.  

The good changes

And there were some good changes. Firstly, the work test has gone, meaning that those aged from 65 to 74 can make super contributions, regardless of their employment status. Subject to the caps, a retiree can contribute to super until age 75. The ability to make spouse contributions will also be extended to age 74.

All individuals under age 75 will also be able to claim a tax deduction for personal super contributions, regardless of employment status. This is currently restricted to self-employed individuals such as sole traders who earn less than 10% of their total income from employment sources. Of course, these contributions count as part of the concessional contribution cap, which has been lowered to $25,000 (see below).

For low income earners, the Government will “maintain” the Low Income Superannuation Tax Offset, which means that their superannuation contributions will be effectively taxed at 0%. Via a rebate, an amount of up to $500 is refunded to the super fund for a person whose income is $37,000 or less. 

Low income spouses (and their partners) will also benefit through the expansion of the almost forgotten low income spouse tax offset. The offset of up to $540 is payable to the person making the contribution if they contribute $3,000 to their partner’s super account and their partner earns less than $10,800. From 1/7/17, this threshold of $10,800 has been increased to $37,000.

Finally, the government will allow catch up concessional contributions. This means that individuals can make additional concessional contributions if they haven’t used the cap in previous years. They will measure this over the last 5 consecutive years (starting from 1 July 2017), so potentially an individual returning to the workforce after a career break could make catch up concessional contributions of $125,000.

All these changes apply from 1 July, 2017.

The bad

Impacting all superannuants, the government has slashed the concessional contributions cap to just $25,000. Concessional contributions are of course the employer’s 9.5%, any amount you salary sacrifice, and any amount you claim a personal tax deduction for. Currently the cap is $30,000 if under 50, and $35,000 if aged 50 or over.

The change doesn’t apply until 1 July 2017, so you have the remainder of this financial year and next financial year to maximise your contributions.

An even more important change is the new lifetime limit on non-concessional (or after tax) contributions of $500,000. To apply from 7.30pm on budget night, this is the change that will have most impact on the well off. They simply won’t be able to get large sums into super, so they will look to invest and grow their wealth outside super, most directly into property.

While the change is not retrospective (ie if someone has already accumulated more than $500,000 in non-concessional contributions they will be allowed to keep it in super), the measurement period will commence from 1 July 2007. That’s not a typo - the Government will look back 9 years to count your non-concessional contributions.

The government says that it will index the cap to average weekly earnings and that if you exceed the cap, you will be subject to penalty tax if the contributions are not withdrawn. With this lifetime cap in place, super strategies like the re-contribution strategy are probably over for most people.

A $1.6 million lifetime ‘transfer cap balance’ will be introduced for superannuation pensions. This will limit the amount that a person can use to start a super pension and take advantage of the 0% tax rate that applies to the investment earnings of assets supporting the payment of this pension. You will still be able to have more than S1.6 million in super, but any amount in excess of $1.6 million will need to be held in an accumulation account, where investment earnings are taxed at 15%.

Individuals in pension phase with balances over $1.6 million will be required to reduce the aggregate amount below $1.6 million before 1 July 2017, either by withdrawing the funds, or rolling back into an accumulation account.   

Over 55ers who have a transition to retirement pension may look to unwind these pensions. From 1 July 2017, the earnings on the assets supporting the payment of the pension will be taxed at 15%, rather than the current 0%. Unless you need to access your super early, this effectively nullifies the main reason for starting a transition to retirement pension.

And as had been widely telegraphed, the threshold for Division 293 tax has been lowered from $300,000 to $250,000. This means that higher income earners will effectively pay tax at 30% on their concessional super contributions. One point to note here is that the definition of income is not just your taxable income, but also includes reportable fringe benefits, reportable employer super contributions such as salary sacrifice and net investment losses (such as from negatively gearing a property). 

Finally, the anti-detriment payment will be abolished. With the exception of the immediate lifetime cap on non-concessional contributions, all changes commence on 1 July 2017.

What can you do about the changes?  

The first point to note that these changes require legislation by the Parliament.  While it is likely that both sides will support the thrust of the package, don’t rule out some amendments, particularly as the super industry lobby will mount a campaign to soften some of the transition impacts.

The second point is that you can’t really do that much. Obviously, you have the remainder of this financial year and 2016/17 to contribute up to the concessional cap. And as the lifetime caps on non-concessional contributions and balances transferred to the pension phase will be administered on a ‘per person basis’, the medium term strategy is to split or even up your super balance with your spouse. This can be done over time by splitting concessional contributions (ask your super fund how to do this), and in the case of non-concessional contributions, watching the cap and making them in the name of the partner with the greatest capacity.