The 1 July changes to Australia’s superannuation laws will transform super from being a safe harbour for accumulated wealth to a more limited retirement savings fund for the masses – and its critics say many more people will feel a negative impact than the government claims.
By Lachlan Colquhoun
Time is counting down to the 1 July 2017 changes to specific caps within Australia’s superannuation system, and the incentives to make big lump sum payments before the deadline are having an impact.
According to figures from the Australian Prudential Regulation Authority (APRA), Australians made voluntary contributions of A$4.616 billion to their funds in the December 2016 quarter, compared with A$4.437 billion in the December 2015 quarter, as the total national retirement pool lifted to a record A$2.2 trillion. APRA says there was a 7.4 per cent increase in total superannuation assets over the 12 months to December 2016.
Those figures will be six months old by 1 July, and while there is anecdotal evidence of a wave of big lump sums going into super balances, the true picture won’t emerge until the APRA data is released later this year.
Main 1 July changes
What is clear is that reductions in both the concessional and non-concessional contributions caps are ensuring that 1 July 2017 is a significant milestone in Australian superannuation history.
In pure numbers, the concessional contributions cap will reduce to A$25,000 per year, from the current A$35,000 for those aged over 49 and A$30,000 for all others. The non-concessional cap will move down to A$100,000, from A$180,000.
Concessional contributions to super are those you make before your income is taxed, such as employer contributions and salary sacrifice contributions. Non-concessional contributions are also known as after-tax contributions, and these are contributions made from a person’s after-tax income or non-taxed income. No tax is deducted from these contributions.
“The new message is that superannuation should simply and narrowly be about retirement savings. It is not about exploitation for intergenerational wealth creation and/or tax minimisation anymore.” Paul Drum, CPA Australia
Under the changes the three-year bring-forward rule for non-concessional contributions continues, albeit at a significantly reduced level. This allows people aged under 65 to make a lump sum non-concessional contribution equal to three years of contributions. This presents one last opportunity to contribute larger amounts before the limit drops on 1 July.
This will be welcome news, for example, for individuals who are currently cashed up with a windfall from a property sale or an inheritance. They have a one-off chance to put A$540,000 into their super by 1 July, or A$1.08 million for couples. APRA’s figures for the June 2017 quarter should make interesting reading.
Super’s purpose redefined
Beyond any final flood of lump sums before the deadline, the government’s superannuation changes signal a major philosophical shift in its approach to super, particularly when the contributions cap is considered alongside the lifetime A$1.6 million cap on pension balances.
Paul Drum, the head of policy at CPA Australia, says the new message is that superannuation should simply and narrowly be about retirement savings. It is not about exploitation for intergenerational wealth creation and/or tax minimisation anymore.
In as much as superannuation enjoys taxation benefits, these are now limited by the personal contribution and lifetime balance caps. More affluent people, particularly those with self-managed superannuation funds (SMSFs), who may have viewed super as a personal funds management vehicle, will need to think outside of the super regime for additional wealth creation.
This message, says Drum, is the downside of the changes because they have removed any incentive for saving beyond the minimum.
Professional Development: Pensions – the $1.6m transfer balance cap: this recorded webinar focuses on the Government’s changes to the pension rules coming into effect on 1 July 2017.
While A$1.6 million in a pension fund balance might sound like a lot, at the current modest levels of return this might deliver about A$60,000 per year, depending on how it is invested. Drum’s view is that as a maximum possible amount, it is not significantly higher than the A$23,000 received by single pensioners, or the A$35,000 for couples.
“We had some generous changes made 10 years ago, which removed taxes on benefits for people over 60,” says Drum.
“It was good for those people who hadn’t had a full working life under the superannuation guarantee, but it also created some great opportunities for high income earners to take advantage of the rules.
“Now we are going to the other extreme of shutting down the system considerably, through introducing new minimums.”
Drum says that large balances that date from the last “million-dollar opportunity” created under former treasurer Peter Costello are now “washing out of the system”. He predicts that under the new regime caps, it will be considerably harder for people to accumulate large balances.
Disputing the numbers
Much of the government’ rhetoric in selling the superannuation changes has been that they impact only a small percentage of affluent Australians. In the 2016 budget, the message was that the changes would impact only 4 per cent of people in the super system, but Drum disputes this, saying: “It really is going to affect a lot more people than the government has claimed.”
One area where the changes have been met with some confusion, and increasing consternation, is in the estate and succession planning segment of the wealth management industry.
James Whiley, a special counsel at law firm Hall & Wilcox, says he has been busy explaining the changes to his clients, the majority of whom have SMSFs with personal balances of more than A$1.6 million.
In estate planning, the changes mean that where the death benefit exceeds A$1.6 million, the excess must be cashed out as a lump sum. This will have a particular impact on people who wish to retain benefits within superannuation through reverting to or paying a pension to their dependants once they inherit the estate.
“It really is going to affect a lot more people than the government has claimed.” Paul Drum, CPA Australia
“Another issue we are finding is in cases where people are in second marriages but wish to make provision for children from their first marriage,” says Whiley.
In many cases, he says, people have structured their estate to provide a pension for their children from their superannuation, with the spouse also having access to the balance.
In cases where the superannuation account balance exceeds A$1.6 million, some adjustments need to be made, and the possibility is that the fund will no longer have enough to sustain the pensions and the spouse’s standard of living.
Property more attractive
Drum’s concern is that the changes are more about plugging revenue holes than continuing to build a sustainable system which can provide adequately for the retirement lifestyles of the bulk of Australians. This, he says, is a false economy because it will only result in bigger demands on public finances decades down the track.
For people with super balances of about A$1 million, the incentive to build their super is being eroded. The alternative is to find other investment vehicles which deliver better returns and are more attractive than super.
“Overlay these changes with uncertainty about more tinkering in future and super becomes less attractive,” Drum says.
“People find property attractive and we are already seeing the heat in segments of the residential property market. If people turn from super, then it would follow that even more people will turn to residential property as an alternative investment class.”
More property investors could be an unintended side effect of the government’s changes, but with housing affordability a hot topic the government risks solving one problem and exacerbating another.
Although Drum detects “a lot of negativity about super” at the moment, he sees merit in some of the changes.
As part of a series of arrangements designed to make superannuation more flexible for people with different work patterns across their lives, after 1 July all super contributions with the new caps will be eligible for tax deductions.
This is good news, for example, for people who salary sacrifice and is a long overdue reform for the self-employed, who have been discriminated against by having to pay tax on contributions if they also have part-time work as employees.
While the government is levelling the playing field with some of the changes, it is putting a new ceiling on superannuation. How that plays out is an issue for future governments, and future generations.
Changes at a glance
- Concessional (before tax) contributions annual cap reduced to A$25,000 for all. (It was A$35,000 for those aged over 49, and A$30,000 for others.)
- Non-concessional (after tax) annual cap reduced to A$100,000 from A$180,000.
- A$1.6 million lifetime pension balance cap introduced.
- People aged under 65 will be able to bring forward three years’ worth of non-concessional contributions as a lump sum, until they reach the A$1.6 million pension cap.
- Any unused concessional contribution cap can be carried forward over a rolling five-year period after 1 July 2018 (only available to individuals with a super balance of less than A$500,000).
- People with incomes greater than A$250,000 will pay 30 per cent tax on concessional contributions (up from 15 per cent). This previously applied to incomes greater than A$300,000.