2016 Federal Budget
The 2016 Federal Budget contained a raft of changes to superannuation. I am very disappointed and frustrated with some of the changes. However, after taking a step back and putting the changes into context, I think most Australians should view these changes as a positive.
Broad support from both sides of politics
The proposed changes are broadly supported by both sides of politics (even the Greens). This is critical. There is no point having both sides of politics (and the Greens who could easily end up with the balance of power if it is a close election) with vastly different views on superannuation. That would be a recipe for endless changes and it would sap confidence in the system. At this stage Labor’s proposals appear to be a little less heavy handed compared to the changes proposed by Scott Morrison. But we haven’t seen all of their election promises at this stage. The immediate reaction from the Shadow Treasurer Chris Bowen last Tuesday following the Budget was to broadly support the Coalitions superannuation changes.
Key benefits of superannuation unchanged
The key benefits of superannuation are:
- A low tax environment for workers to build savings;
- Significant tax concessions on super contributions; and
- Tax-free income in retirement.
These critical elements are unchanged with one exception: the tax free status in retirement will be limited to balances up to $1.6M. For those who achieve a higher balance, the amount over the cap will be placed in a different account (called an accumulation account) and the investment income will be taxed at 15%. The impact of this policy is broadly similar to the Labor Party’s plan to charge a tax of 15% on any income above a threshold of $75,000 within a pension account.
The System will be sustainable
In recent times, there has been increasing concern from some sectors of the community regarding the scale of tax concessions for very large super and pension balances. In particular, Treasury (ie. a Governent department in Canberra which advises the Government and guides most policy decisions) have been increasingly talking about tax-free pensions as a cost to the community. This is something that resonated with Labor and the Greens and it seemed inevitable that changes would be made to the system at some point. Indeed Bill Shorten, as the then Federal Treasurer in 2013, proposed a tax on Account-Based Pensions (ie. pensions created with super money), for any income over $100,000 pa. The proposal fell flat when they realised the ATO wasn’t collecting the necessary information from super funds to facilitate collection of the tax and they were voted out of office later that year. Since that time, the Labor Party and the Greens have continued to voice concerns about large super and pension balances with various proposals put forward to limit or tax higher balance accounts. It seemed inevitable that something would have to change and it was looming as a potential ‘class warfare’-style election issue. The changes put forward by Scott Morrison should end this debate, at least for the foreseeable future.
No change to Preservation Age
The number one concern I hear from younger clients relates to the date they can access their super. This date is known as the Preservation Age. The changes put forward in last Tuesday’s Federal Budget were the most radical changes since John Howard’s ‘Simpler Super’ changes 10 years ago. But importantly, there were no changes to the Preservation Age. For several years now, both sides of politics have been quick to dismiss any potential changes to the Preservation Age. It would be a vote killer and they know it.
From time to time, various lobby groups propose a delay in accessing superannuation with various timeframes put forward, typically age 62, 67 or even age 70. These proposals often find their way into the media and it strikes fear into the hearts of younger Australians, particularly those who sacrifice part of their salary into super. In my view, it would be a disaster to push back the Preservation Age, especially for those who have made extra contributions. It would undermine confidence in the system and the benefit to the Government’s bottom line, wouldn’t be felt for several years at best.
At this point, it is worth reflecting on the last time the Government tinkered with the Preservation Age. The date was 13 May 1997. It was Peter Costello’s second Budget (out of 12) and he announced the Preservation Age would increase from age 55 to 60. The changes would be gradually phased in from 2015 to 2025. As a result, anyone over the age of 37 at the time was unaffected. Only those aged 32 or younger would feel the full impact. It was an issue handled with great sensitivity. This was a time when compulsory superannuation was less than 5 years old and the Superannuation Guarantee (ie. the percentage paid by employers), was just 6%. Superannuation balances were tiny by today’s standards and few people understood the system. For these reasons, the Howard government was able to pass the legislation with few objections. Fast forward to 2016 and the landscape has changed considerably. Today, Australian workers are far more engaged with their superannuation. Balances are substantially higher than they were in 1997 and for many young workers with large mortgages, superannuation is probably the only meaningful savings they will accrue in their lifetime. It would take a very brave Government (perhaps a foolish one) to tinker with the preservation rules today.
While I believe the overall system is still intact and Australians should remain confident in superannuation, there were some very disappointing changes. Here is a summary of the key issues which will negatively affect some superannuants:
- Tax-free pensions (ie. a super fund converted to a pension upon retirement) will be capped at $1.6M from 1 July 2017. There was previously no cap. They are proposing to increase this cap over time in line with AWOTE (ie. the growth in average incomes, which is typically higher than CPI). Increases will be in $100,000 increments. This means the cap should rise to $1.7M in 2019/20, to $1.8M in 2021/22 and so on.
- Concessional super contributions (ie. employer contributions, salary sacrifice contributions and self-employed deductible contributions) will be capped at $25,000 from 1 July 2017. The Concessional Contribution Cap is currently $30,000 or $35,000 for those over 50.
- Additional lump sum super contributions, known as non-concessional contributions, will be capped at $500,000. This is a lifetime cap and it takes into account any contributions since 1 July 2007. The change is to be effective from 7.30pm on 3rd May (ie. Budget night). This is the change I hate the most, as it affects some people who have already made big decisions (such as selling property or other assets with the view to adding the money to super). It also severely restricts the ability pre-retirees to juggle their assets to make the best use of the new system. Some people will find their current arrangements work very well under the new regime, but others, with a similar amount of wealth, may be stuck with limited room to move.
- Transition to Retirement pensions (ie superannuation pensions for those between 56 to 64, and still working) will no longer be exempt from income tax inside the fund from 1 July 2017. The tax rate will be 15%, the same as a regular super fund (also known as an accumulation fund). The tax will cease as soon as the superannuant retires or turns 65. Those most affected, are Australians currently between the age of 59 and 63 who are planning to work through to age 65.
- Higher income earners will pay 30% tax on super contributions rather than 15%. This affects those earning $250,000 pa (previously $300,000 pa).
- Anti-detriment Benefits scrapped from 1 July 217. This is a rather complex and relatively unknown benefit which is currently available to beneficiaries of a deceased superannuant. It was a meaningful benefit, particularly when the super benefits were paid to an adult child.
While the most significant changes were reductions of benefits for wealthy individuals, those close to retirement or those transitioning into retirement, there were a handful of positive changes announced in the Budget as well:
- All employees will be able to make a tax deductible contribution into super, whenever they like. This is a great move. At the current time, employees can only make tax deductible contributions into their super via salary sacrifice. From 1 July 2017, it is proposed that all workers will have the same rights as a self-employed person to deposit money into their super and claim a tax deduction whenever they like. NB. The limits previously mentioned apply and you MUST submit the necessary form to instruct the super fund that you intend to claim the deduction before you submit your tax return.
- Those aged between 65 and 75 will be able to make contributions into super, even if they are no longer working.
- Unused Concessional Contributions Caps can be carried forward for up to 5 years. This will benefit those who are temporarily out of the workforce, or those who have incomes which vary from year to year.
- A low income tax offset will apply for those earning less than $37,000, which could see up to $500 of contributions tax rebated back to the super fund.
A note of caution
It is important to note that the superannuation changes proposed in the Federal Budget are only proposals at this stage. The legislation must be drafted, finalised and then passed through both houses of Parliament before it becomes law. With an election now underway, there is considerable doubt about whether the changes will be adopted at all. Even if Malcolm Turnbull wins the election, will he control the Senate? Even if he does, draft legislation is often tweaked and changed following feedback from various lobby groups before the final legislation is presented to Parliament. With this in mind, the next 6 months or so will be very interesting. I will continue to monitor any changes to superannuation and if you have any questions about how the proposed rules affect you please contact us to make an appointment.
This information is general advice only and current as at 10th May 2016. It has been prepared without taking into account the investment objectives, financial situation or needs of any particular person. Therefore before acting on any information you should consider its appropriateness, having regard to your personal objectives, financial situation and needs. You should also obtain a copy of the relevant Product Disclosure Statement before investing in any product. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. However, it should not be considered a comprehensive statement on any matter nor relied upon as such.
Please obtain personal financial advice prior to making any investment decisions.