Super reforms come at a cost

The Australian

27 August 2016

by Debra Cleveland

Treasurer Scott Morrison is already grappling with backbenchers opposed to the $500,000 as they believe it's retrospective.

With Parliament resuming next week, the battle lines over the Turnbull government’s proposed budget changes to superannuation are drawn. An offer from the Labor party – to accept the $500,000 lifetime cap on non-concessional (after-tax) contributions in return for other compromises – has been rejected, leaving Treasurer Scott Morrison to face two other fronts.

He’s already grappling with backbenchers opposed to the $500,000 cap as they say it’s retrospective (applying from July 1, 2007). And while the Greens will support a backdated $500,000 cap, they won’t back the higher $750,000 Morrison brought to the table as a compromise this month.

At stake are $6 billion in budget savings and $3 billion in new initiatives.

Morrison said in February key drivers of potential super reforms were stability and certainty, “especially in the retirement phase”. This week he added: “I stand by everything I said for the simple reason that the retirement phase remains tax-free. The retirement phase account, which under our proposal [will have] a transfer balance cap, will mean that 99 per cent of people who have balances less than $1.6 million will remain absolutely in exactly the same situation.”

There is deep anger among many retirees and savers who feel their plans have been scuppered even though they were following the rules.

Labor said this week it would accept the $500,000 lifetime cap on condition it was prospective (applying from budget night). Its solution to lost revenue was a suggestion to increase the pool of high earners paying 30 per cent (rather than 15 per cent) super contributions tax. It proposed the higher tax kick in for those earning $200,000 a year, not $250,000. It also wanted to ditch other measures including being able to contribute to super to age 75 without the work test, tax deductions for personal contributions and catch-up concessional (pre-tax) contributions.

No matter how the super deal is sliced and diced, the bottom line is that there will be fewer tax concessions and lower limits on how much savers can contribute to super.

Advisers say Australians have become far less confident in super as a savings vehicle thanks to constant political tinkering (on both sides of Parliament). Will Hamilton, CEO of Hamilton Wealth Management, says: “It has undermined confidence in the system.” Colin Lewis, senior manager strategic advice at Perpetual Private, agrees: “Constant changes have perpetuated the uncertainty of the super system.”

Deep anger

But both say super remains the most tax-effective investment vehicle around – even after the changes.

Labor said this week it would accept the $500,000 lifetime cap on condition it was prospective (applying from budget night).

There is, however, deep anger among many retirees and savers in the middle of complex super strategies who feel their plans have been scuppered even though they were following the rules.

Retiree Paul McCarthy says: “It should be forcefully rammed home, by all concerned with fairness, good policy and good politics, that only by making the $500,000 cap prospective will everyone be treated equally. Because individual after-tax contributions to super of up to $540,000 have been permissible, and because retirees over 60 have been able to freely withdraw unlimited lump sums and then contribute again, there will be many who have exceeded either of these proposed contribution caps while nevertheless still having total current balances well below them!

“So inherent unfairness arises from the retrospective counting of past contributions and the consequent blocking of investors’ future contributions, not from the size of any cap that the government chooses.”

Fellow retiree and retired actuary Nathan Potaznik adds: “The absence of grandfathering provisions is grossly unfair. It also stands in stark contrast to when the former Parliamentary Super scheme was closed to new members in 2004, with the then existing members continuing with the same benefits. It seems that grandfathering is just fine for parliamentarians but not for ordinary citizens.”

The key message to savers is to make the most of what you can do, and start early. The proposed concessional (pre-tax) contribution cap of $25,000 a year is lower than the current $30,000 for those under 50 and $35,000 for those 50 and over. The cap is indexed to wages growth, in $5000 increments. And the plan is that if you don’t make the full $25,000 contribution each year, you can “catch up” in later years.

Remember that the $1.6 million cap on the amount in pension phase where earnings are tax-free is per person. A couple could have $3.2 million in pension phase and pay no tax on earnings.

As Hamilton says: “Everyone’s focusing on being taxed on anything above $1.6 million in pension phase. But the tax is on the earnings on the excess, not the excess itself.” So if a couple had a combined $3.3 million in pension phase, they would face tax (a maximum 15 per cent) on earnings generated by the excess $100,000. They wouldn’t actually pay tax on the $100,000 itself. Lewis points out that thanks to franking credits, earnings tax is often more like 9 per cent, not 15 per cent.

The lifetime cap (whatever the final figure is) will curtail the ability of older Australians to make big top-up contributions to super. Putting more into super later once mortgage and school fee expenses decrease has been the traditional pattern. This will have to change, advisers say.