Super reforms have unintended consequences

The Australian

27 September 2016

Tony Negline Wealth Columnist

Despite some very good work the government’s recent changes to super look like they will bring a string of unintended consequences.

In fact I believe they contain significant landmines that will be expensive for super funds and investors to deal with.

If they proceed as announced they will lead to a string of court cases, because people will have made innocent mistakes and no doubt they will seek redress, as they will almost certainly find themselves facing penalty charges.

The $500,000 lifetime cap is gone and the annual cap and its three-year-in-advance rule have been returned, but with lower limits. The new annual lifetime cap from July next year will be $100,000 and the three-year bring-forward will be $300,000. (Yes, the government has given ground and should be congratulated for doing this).

The old annual cap of $180,000 will now apply until June 30, and if eligible, you can contribute $540,000 before that date.

A range of three-year bring-forward transitional rules will apply in other situations. If a three-year period commenced in 2015-16 then $460,000 can be contributed in 2016, 2017 and 2018 financial years before tax penalties will apply. If the three-year period commences in the 2017 financial year then $380,000 can be contributed in the 2017, 2018 and 2019 financial years.These new rules are really complex, so getting some advice might be essential

l. But anyone who has the financial resources available now and is allowed by the super rules should seriously consider taking advantage of the $180,000 annual cap or its equivalent transitional three-year amount before these opportunities are gone.

Pity the people in the following category — they were aged under 65 but had contributed more than $500,000 in non-concessional contributions between July 2007 and the May budget; they held off making any additional contributions because of the government’s original policy even though they would have liked to put more after-tax money into super. Now they’re aged over 65 — or soon will be — and can make more super contributions under the government’s revised rules, but must also now satisfy a work test that will now remain in place.

How do they solve this problem if they can’t satisfy this work test?

The number of people impacted here will be small, but does that mean they don’t deserve some fairness? The government has adopted an extreme utilitarian approach. That is, let’s whack a few people so the majority can benefit.

This latest compromise by the Turnbull government contains a new element: you will be allowed to make non-concessional contributions if your total super balances are less than $1.6 million. When your balance is close to $1.6m then you can only contribute money so that you don’t exceed this new cap. The $1.6m amount will be indexed by consumer price inflation.

This step sounds simple and just seems to be an extension of the maximum amount you can initially put into a super pension. I can assure you that in practice this is something very different and will be very complex.

The super balance will be determined on June 30 each year for the next financial year. But many super investors do not know their super balance for many months after the end of the financial year, which means they will have to wait some time before being eligible to contribute. In 2011 the Gillard government tried to put in place a similar system but gave up after it became too difficult to implement.

Overall, I see these new contribution rules as very complex. The annual contribution cap system is very unwieldy and should be replaced with a lifetime cap system that is an appropriate amount and has appropriate transitional arrangements.