Governments have been threatening to change the superannuation system for a number of years now. Labor took changes to an election and lost the election. Now the Liberals have announced some sweeping changes to the way superannuation works. Some of these changes were expected, some were very much unexpected and depending on who you are and your situation you might have won a little, or lost a lot.
So what changed? Here’s a very, very brief overview:
- There is a lifetime non-concessional contribution cap of $500,000 per person, backdated to July 1, 2007
- From July 2017 there is going to be a pension account size limit of $1.6m
- A reduction in the concessional contribution cap to $25,000
- Everyone can make tax-deductible personal contributions
- Your unused concessional contributions will carry forward for 5 years.
- Work test abolished for spouse contributions and income threshold raised to $37,000.
- Div-293 tax threshold decreased from $300,000 to $250,000
- No more anti-detriment payments
- Remove the tax exemption on TTR pension earnings
All sounds a bit foreign and confusing? Well, for most of us superannuation is foreign and tricky to understand at the best of time. Add in 9 significant changes, one with immediate effect and 8 that start from July 1 next year and you’ve got good reason to be confused.
Why so many changes?
Well, let’s backpedal for a second and ask what super is for. Super is simply an investment structure that trades off massive tax-efficiency for restricted access. You get to contribute and earn money with a (mostly) flat rate of 15%, in exchange for saving the money until retirement. The tax concessions cost the government now and should save the government form paying out an Age Pension later.
If the goal of superannuation is to save for retirement, why make it so much more complicated and more difficult? Simply, the government has deemed that too many people are using superannuation to save far more than they need for retirement. With too much money in the superannuation system the government is missing out on tax revenue and they want to fix it. The sweeping changes are designed to limit the overall size of the tax concessions on offer.
For many people this will be a game-changing budget. The ways we’ve used superannuation in the past may not be effective any more and alternative investments may be needed.
What does it mean for you?
Surprise surprise, it means different things for different people. High income earners may need to reconsider their superannuation contributions. People who are salary sacrificing will need to check how close they are to the contribution cap and whether salary sacrifice is even worth doing any more. Spouse contributions that were not any advantage, now might have become worthwhile. Whether you contribute to your own fund or your partner’s fund may become a crucial decision. Investments outside superannuation and possibly investment bonds may become very attractive. Timing the sale of assets will become much more important.
To discuss your situation and how these changes impact you (everyone is impacted, no one gets to dodge these ones) please give us a call on 9382 8201, or email email@example.com – we’d love to help.