By Paul Rickard

Some proposals really seem to get people fired up, and if the number of calls, emails and enquiries I am seeing is any guide, the proposed package of changes to the superannuation system is in this category. Maybe it is of the view that some of the changes are retrospective, or that the Government is changing the rules after people saved and invested in good faith, but the anger out there is palpable.  

If you are not up to speed with the extent of the changes, you can read my analysis here.  

But for those that are seething, there is no need to panic. These changes have a long way to run. Firstly, they need to be legislated. At the earliest, it is unlikely that legislation will be presented before August, and if the ALP elects to oppose parts of the package and shunts it to a Senate Committee, it could take several months. Also, the Government will need to consult with industry and others about a number of the transitional provisions, and enacting these by regulation, or otherwise, will also take several months. My guess is that you won’t see all the detail until just shy of Christmas.

And that’s not to say that the package won’t change. Bill Shorten has said that he will oppose some of the “retrospective” parts, and with a federal election underway, there have to be some very nervous government MPs hearing the feedback. 

Are the changes retrospective?

There is no doubt that the proposed pension transfer balance cap of $1.6m is retrospective, as the Government has said that people with pension phase balances over $1.6m will have to reduce these by 1 July 2017, either by moving the money back into an accumulation account, or by taking it out of the super system. It is this part that makes it retrospective.

If the noise is loud enough, this looks like an easy give-up for the Government (not the balance transfer cap, but the action required by those with a current excess). However, be wary about giving the ALP your vote to protest about this - their policy might impact retirees more (see below).

The lifetime cap on personal after tax contributions (non-concessional contributions) of $500,000 is also viewed by some as retrospective. Because the ATO has access to super fund records going back to 1 July 2007, it is proposed to measure an individual’s non-concessional contributions from this date. If they are over $500,000, they won’t be required to withdraw them from the super system - they just won’t be able to put any more in.

The cap applies from Budget night, giving no time for anyone to adjust their plans. Some argue that the change is retrospective because it goes back to 2007.

While I don’t support this view, I can see that a lot of people have been disadvantaged by the change. Basically, the cap is just too low. Under the old cap, you could make non-concessional contributions of $180,000 per year, or $540,000 over a three year period. This meant, for example, that a small business owner or farmer exiting their business at age 55 could potentially get $1.8m into super over a 10 year period. Under the new rules, it is just $500,000 over a lifetime. 

$500,000 is just way, way too small. That’s where the argument should be.

The other change that people should be screaming about is the reduction in the concessional cap to just $25,000. While there is no retrospectivity with this (it comes in on 1 July 2017), this is the dumbest change of them all. $25,000 is not enough!

Tell coalition MPs that the package is unfair

Ultimately, both houses of parliament will have to pass changes to the law. Assuming that the Turnbull Government gets re-elected, the power to stop and amend this legislation will lie with some coalition Senators. With the Greens likely to support the Government, it will need more than just the crossbench and the ALP to carry the day. If you think this package is unfair, I would be targeting Liberal and National Party senators in your state.

And the Coalition party room shouldn’t be forgotten. Due to the very short time between the budget and the calling of the election, local MPs haven’t had much of a chance to provide input to the Treasurer, and with an election underway, they will be under orders to keep silent publicly. But they will be all ears to your feedback for the next 7 and a bit weeks. Write, email, phone, plaster their Facebook pages with comments, phone talkback radio, etc.

Super actions to take now

Although the fate of the legislation won’t be known for some months, there are some super actions you should take now. Firstly, continue making contributions up to the present concessional cap, $30,000 if aged 49 or younger this year, or $35,000 if aged 50 or older this year. You have about 6 weeks remaining. And you can do this again next financial year.

In the medium term, consider actions to split or even out your super balance with your spouse. You can legitimately split concessional contributions (you make an election to your super fund after the financial year), or if making a non-concessional contribution, consider making the contribution in the name of the spouse with the lowest balance.

For those impacted by the $1.6m cap and who run an SMSF, you may want to consider implementing segregated asset accounts. There is no general rule here - it really will come down to case-by-case analysis and assumptions about individual asset returns. 

But be careful what you wish for

The ALP’s policy is to tax at 15% income in excess of $75,000 earned on the assets supporting a pension account. I have written before how dumb this policy is, including lots of administrative problems to do with realised and unrealised gains. But in addition to being dumb, it could be a whole lot worse for many retirees than the Coalition’s plan.

Let’s take an example. We will assume the investment return on the pension assets is 7% pa.

Under the Coalition plan, a person with $2 million will transfer $400,000 back into an accumulation account, where earnings will be taxed at 15%. With a 7% return, their accumulation account will earn $28,000 and they will pay $4,200 in tax.

With the ALP plan, retirees will pay tax on the total earnings on the $2 million, less $75,000. At 7%, this is $140,000 less $75,000, or tax on $65,000. At a tax rate of 15%, their tax bill will be $9,750. 

If the investment return is lower, the difference is smaller, and if higher, the ALP’s proposal is quite punitive. Voting for the ALP is not the answer here.