Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 155

Budget shocks limit large super balances

I'm shocked by the number and severity of changes to the superannuation rules announced in the 2016 Federal Budget. The next generation of people saving for retirement will not be able to build the high super balances achieved in the last decade, and some of the changes are retrospective. Alternatives such as negative gearing, the tax-free family home, family trusts and investment (insurance) bonds will now receive more support, so it is impossible to know how much the budget will save.

Although there were 10 amendments, they have been covered extensively in the media (and we include links to three summaries in the Sponsor Noticeboard on our website), and this article focusses on the three new caps.

I realise having large amounts in super is a good problem, so let’s get that one out of the way. I have taken advantage of the generous levels, and while I always doubted they would be sustained for new money, I did not expect retrospective treatment. People who have used the rules as intended by the government of the day have now been told they must unwind their financial plans and take the money out of their pension accounts. Wait a minute … it was as recently as 2014/2015 when the non-concessional annual cap was increased from $150,000 to $180,000. Pre-retirees in their 50s who planned to build their super balances after their mortgage, school fees and other expenses had gone will be severely constrained.

What finally drove the current limits to become politically unacceptable was the dramatic deterioration in the budget deficit, and the need to find revenue somewhere. In 2014, the forecast for this financial year was a deficit of about $10 billion, but it has risen to $37 billion. We are heading for even larger deficits that nobody expected when the previous limits were set, and something has to give. Large superannuation balances, with the benefits skewed to the ‘rich’, have become an easy target.

Warren Bird has been in financial markets for over 30 years and he writes regularly for Cuffelinks. His comments on the changes probably echo the sentiments of many who enjoyed the high limits:

“A part of me acknowledges that the system Peter Costello introduced was ‘too generous’, and that in the long run it has turned out to be too expensive for the nation to afford … And lower income people have had to deal with this uncertainty for years as government payments have chopped and changed from Budget to Budget. So those who have more than $1.6 million in pension phase should not complain too loudly lest they sound like they’re simply being greedy.

But it is nonetheless an indictment on our political process that uncertainty is continually being heightened, rather than governments helping to create an environment in which sound plans can be made and rewarded.”

$1.6 million cap on the amount that can be held in a pension with earnings tax-free

For the last decade, superannuation policy encouraged large balances and self-reliance for those who could afford extra contributions and were willing to forego other expenditures (for example, buying an extra-large, tax-free family mansion) for super contributions. There was the $1 million one-off Peter Costello injection, the annual limit on non-concessional contributions (NCC) of $180,000, a $540,000 ‘bring-forward’ rule to make it easier to manage a windfall, and the concessional contribution cap was as high as $100,000 in 2008/2009. Successive governments exhorted the public to save for retirement, to avoid becoming a future burden on society by drawing age pension benefits. Planners warned that with an ageing population, nobody should expect the spiralling cost of health care to be met by the public purse long into the future. The self-funded retiree label became a badge of honour, and government policy wanted it that way.

Many retirees are highly risk-averse, and leave large balances in cash and term deposits. They cannot face the prospect of capital destruction when the money might have to last another 40 years. With the cash rate at 1.75%, a decent capital-secure interest rate might be 2.5%. On $1.6 million, that is $40,000 per year. It’s not much even if the retiree owns their own home.

The main disappointment is the retrospective treatment of this amendment and others. Thousands of hours of financial advice to clients about pumping as much money as possible into superannuation to take advantage of tax-free pensions are now compromised. Retirees with more than $1.6 million will need to transfer the excess, and some Transition to Retirement plans will be unwound due to a new tax treatment.

One look at the financial planning reports issued the day after the Budget shows the windfall for the advice industry. Within hours, planners were finding ways to manage the impact of the changes, such as realising capital gains on assets prior to the 1 July 2017 start date. Far from simplifying the system, the new rules make it even more complex, and nobody around retirement age should go through the next 12 months without some expert, highly-qualified financial advice.

And what about the compliance issues required to determine the fund balance at a particular date? Retirees will need to estimate how much to take out of the pension account a few days before 30 June (to allow for settlement or processing of transfers on share transactions). Many assets are not traded daily, such as real estate, and unlisted bonds have wide valuation spreads. The retiree may be hit with a penalty if the market rallies on say 29 and 30 June 2017 and the balance goes over the $1.6 million cap. The new rule states: "Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount."

There is also no detail on whether taxable or non-taxable amounts can be allocated between pension and accumulation accounts to ensure the best outcomes.

Caps on concessional and non-concessional contributions 

The NCC door was slammed shut as Scott Morrison stood up at 7:30pm on Tuesday night. Anyone who had placed $500,000 or more into NCCs since 2007 cannot make additional contributions. The potential for error here is considerable when all the NCCs over nine years need to be identified.

This is probably the tightest of the new caps in practice. The previous $540,000 every three years allowed people who had poor balances in super to catch up and plan a decent super balance in their retirement years. The expectation of placing over $1 million in super in just over three years was attractive (OK, and generous). But this one-off limit of $500,000 now can only be supplemented at $25,000 a year. It will take many years plus some good performance to reach the $1.6 million cap for new savers.

The annual caps and the ‘bring forward’ rule are no longer necessary. In the past, financial planners produced tables like the following, showing their clients how to maximise contributions by waiting until just before they turned 65 to make the final ‘bring forward’ contribution of $540,000. Oops, not such a happy 65th birthday now it is impossible on 1 March 2017.

GH-table-1

GH-table-1

It’s also worth remembering that high income earners have already paid almost 50% in tax on earnings to establish these NCC savings.

OK, it could have been worse

Many people will say this article reflects the disappointment of people who took advantage of rules that should never have been so generous, and the result is not something to whinge about.

In addition, while the balance over $1.6 million must be taken out of the tax-free environment, it can remain in an accumulation account taxed at only 15%. Arguably, a decent result for someone who might otherwise pay 47% or 49% on earnings outside super.

There is also no change to imputation credits or capital gain concessions, creating the ability to reduce the effective tax rate, even in the accumulation fund.

While annoying and disappointing, the evidence that the outcome for people with large pension balances is not terrible is the fact that the best option is probably to leave the excess (over $1.6 million) in an accumulation account. Moving out of super takes earnings into the personal tax domain, where the tax-free threshold is $18,200, after which the marginal tax rates start at 21% (including 2% Medicare levy). At $37,001, the tax rate rises quickly to 34.5%.

What is the answer to the question: what would I have done differently versus putting money into super in the last decade if I had known these amendments would be introduced in 2016/2017?

The answer is complicated by the knowledge that property prices in Sydney and Melbourne in particular have done so well in the last three years. The money over $1.6 million may have been better placed in a tax-free, expensive family home, or used to negatively gear other property (or shares with the right timing).

But the more likely response is that more people would have used the ‘bring forward’ rule last week to put MORE into super, protected in the 15% tax environment. At least until the rules change again.

(The results of our survey into reader attitudes to superannuation changes before the Budget are linked here).

Graham Hand is Editor of Cuffelinks. This is general information and does not address any individual's specific circumstances. 

110 Comments
Justin
May 19, 2016

The 1.6M cap was deemed reasonable on the assumption you would get about a 5% return on your money. Not very likely going forward in this new low return world when for instance Australian Government 10 year bond rates are about 2.2%!! There is a big difference in income from 5% to about 2.2%, oh only about $44,800 p.a.

Laine
May 18, 2016

The $25,000 concessional cap is taxed at 15%, so you are actually only contributing $21,250 each year, with $3,750 of your contribution going to the ATO.

I did a quick calculation to see if you can ever reach $1.6m with concessional contributions and it is possible

If you contribute $25k at the beginning of each year, earn 5% on your super and pay tax on the earnings and contribution at the end of each year you would reach the $1.6m in 34 years. At 4% it would take 38 years. At 7% you could do it in less than 30 years. This is not adjusted for inflation.

So possible but not easy.

The $500k cap on non-concessional seems very low, $1m or $1.5m would give people more flexibility to reach the $1.6m target.

The proposal by the Labor party to tax pension mode earnings above $75k at 15% would seem much simpler to apply than the proposal by the Liberals to limit the transfer amount. Many of the problems highlighted in the comments would then not be problems.

Dennis Barton
May 18, 2016

Spot on Chris. But the higher principle is retrospective law is bad law (be it tax, civil or criminal).

The Cap is retrospective and so is anti detriment. The cap should have applied at $540k from a budget night and, despite the complications, anti detriment could have been phased out.

I am not sure, Vince, that there was any retrospectivity in 2007. Stupidity maybe, in permanent spending of temporary windfalls. History will not just Costello and Howard as kindly as we currently do. The man to admire is WA Treasurer Eric Ripper who resisted the pressure to spend what would not last.

Chris Craggs
May 18, 2016

The superannuation system was broken (too tax effective) and we all knew it. Rather than work with the government to create a fair retirement solution we took the tax benefits. Rather than cry poor over good policy why don't we spend our creative time thinking of other ways to improve super. I think it rich that people are crying poor over a policy that allow you and your spouse to put $3.2 million into super and pay no tax, have $1m outside super and pay no tax (high tax free threshold), have an unlimited amount invested into their principle residence and pay no tax, and then have the rest of their investments only paying 15% tax.

Ramani
May 17, 2016

Hey Non-Dastyari Sam

In your example of 11 May, the member cannot start another income stream with $1.4 mil, but can access the accumulation account any time as a lump sum (not pension).

No need for anyone to start pensions at all, though from a tax sense it makes sense, particularly when there is no requirement for any benefit from a pension account to be periodic, level or any other sum. Just call it a pension, and it is.

If this does not prove what a complex web we have woven, nothing would.

Warren Bird
May 16, 2016

100 comments! Some sort of record, I presume.

Graham Hand
May 17, 2016

Yes, Warren. First time into three digits. A subject many people feel passionate about. G

paul simpson
May 12, 2016

sam - as the $1.6M is withdrawn I assume you can start another pension with cash in the accum a/c
eg in your example once the1.6 is withdrawn then the 1.4 accum a/c can be used to commence another pension.
(or in smaller increments)

Sam
May 12, 2016

Thanks Paul. Do you have a reference for that interpretation?

To my eye this Budget factsheet:

http://www.budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/02-SFS-Retirement_transfer_balance_cap.pdf

reads like the $1.6m pension, once started, is a lifetime pension limit/cap, other than for indexation. Market fluctuations do not count. Really hoping to be shown where I'm wrong, hence my request for your source. Many thanks.

Re Tired
May 12, 2016

The people least affected by the announced changes to Super are those with other financial demands. For many their focus is, quite understandably, on paying off a mortgage and normal living expenses. Most saving into superannuation happens later in life when more disposable income is available. Under these changes the chance of reaching $1.6M will be beyond most people because the combination of caps and disposable income isn't linear and won't conveniently coincide.

As government and corporates have sought to move the liability for pensions to the individual through accumulation superannuation arrangements, the ability of an individual to fund their own retirement needs to be matched by their ability to do so. Yet again a short term solution is being chased without any testing of the long term outcome.

If fairness is the intention of these changes why target just one area of tax concessions?

SMSF Trustee
May 12, 2016

Wouldn't surprise me if the intention is to force you to pay full rate of tax on withdrawing from super.

Reader Survey
May 12, 2016

Set timed changes so planned savings can happen for 50 -60 year olds to transition to pension. Taxes need to be paid on high wages, must agree on this amount, everyone needs to be united where these taxes are used. Choice might help to placate tax payers, encourage savings, with more education for the young, make it simple with no fees on Super savings for the under 25's or part timers. A higher participation is needed for savings and encourage donations to education or nursing in exchange for a tax cut used in a family unit. Think outside the square!

Sam
May 11, 2016

Have not seen/heard any comment about the following scenario: Lets take an existing retiree in the luxurious position of having a $3 milllion pension balance. Come 1 July 2017 $1.6m stays in pension, $1.4m goes back to accumulation. Let's say lifetime NCC cap of $500k is exhausted. Can a second pension be started with the $1.4m albeit with earnings taxed at 15% (in effect, quite similar to ALP's proposals)? If not, how are the accumulation funds EVER going to be accessed for retirement purposes?? Would one have to wait for each 100k CPI indexation of the pension cap to transition a bit more out of acculation to pension? That could take over 50 years! Or are all these nasty details yet to be worked out and will need to wait till after the election? Thanks in advance for any enlightenment. Sam (not Dastyari!).

paul simpson
May 11, 2016

Have cocontributions gone as well??

if I have gone over my $500K cap can I make an excess NCC of $1k and elect to keep it in the fund.
Then I pay excess tax on it (at marginal rates or 46% ???)
my marginal rate is 0%

will I get the CoContribution of $500 on an excess NCC?

Reader Survey
May 11, 2016

The cap of $25k is too low particularly for those later in their working lives with children off their hands, low/no mortgage who can contribute a greater % of their income to super, it doesn't allow them the scope to 'catch-up' for years of no contributions except SG (which isn't enough).

Ross Stephens
May 10, 2016

I think the answer to Jeff's question is Yes, subject to more details on the $1.6 mill cap. Anyone with a transition to retirement pension should be able to commute it back to accumulation, and then turn on a real 0% rate pension when they satisfy a normal condition of release. So no retrospectivity here I don't think.
The only retrospectivity may be the $500k non concessional cap, and potential implications for contracts for acquisitions made be SFs before budget night, the settlement of which were premised on new contributions to be made prior to settlement. Hopefully the Government will listen to these limited concerns and make some special transitional rules for them.

SMSF Trustee
May 10, 2016

Another comment for Gen Y

To have saved up this much in super, you have to have paid a heck of a lot of tax along the way. Most of it would have come from non-concessional contributions, on which you paid tax beforehand. I know I've paid more tax to get my $1.6 mn plus into pension phase than most Australians will ever get close to.

People on both sides of this debate are at risk of just making it personal and exaggerating the facts.

Chris
June 02, 2016

Not necessarily, if you worked and paid for it out of your salary, maybe.

But, if you were self-employed and / or invested wisely (e.g. were a property developer) and chucked your profits from that into super, then not necessarily, due to the favourable tax concessions from that.

Graham Hand
May 10, 2016

Hi Gen Y, fair comment. And I expect during your life time, as the budget deficit continues to blow out, a wide range of 'benefits' which you are now enjoying (not only in super but others such as the exemption treatment of the family home) will also be removed and generations after you will say that Gen Yers should stop their sour grapes, they had it good for so long. I plan to examine the issue of retrospectivity in an article this week.

Chris
June 02, 2016

Graham,

Whether or not Gen-Y had it 'good for so long', is irrelevant when it really matters, which is when you come to get your hands on your OWN money.

The exemption treatment of the family home will be removed, you can guarantee it. The goalposts will change, and not for the better (that's the whole idea of 'grandfathering' something)...they rarely change to being something good or better than what was there.

That's when it matters - when you come to get your own money out (which, the Government should realize, is OURS), not during (when you can't get access to it)

Gen Y
May 10, 2016

Graham, your comments stink of typical boomer sour grapes. You have been blessed with the greatest legal tax dodge in history (complete tax free status of your money + removing company tax from the system through franking rebates), now are complaining that only $1.6m can remain tax free ($3.2m if you're married and have evened up super balances). To top it off the remaining components are taxed not at the top tax rate, but the rate of 15%.

Costello's policy was poor, and was spending a short term commodities boom on buying votes. We're paying for this now. We should have wound back to the pre 2007 rules, but that would be political suicide. The new rules will affect only the top couple of percent. What seems to be forgotten is there's nothing stopping you saving money outside of super and creating an income stream from it, but that would mean you might pay tax like the rest of us... the boomers can't have that.

Trevor
June 02, 2016

Gen Y , if Graham is a 'boomer' then he is entitled to his 'boomer' opinion and to whatever superannuation he has managed to 'squirrel away' out of the taxman's reach as long as he played within the rules .
NO TAX has been avoided. The 'so called concessional superannuation' has had 15% tax paid on it to put it there in the first place. Now the government wants to have another crack at getting 15% more tax on it. That is called 'double taxation' and that is why 'franking credits' were introduced , to stop double taxation ( on the company and then again in the hands of the taxpayer ). Any money that the 'boomer' has in superannuation is NOT some government largesse.........it consists of his taxed contribution & his own FORE-GONE WAGES ( paid by his employer...the so called super guarantee ) , all put aside for many years out of his reach { and not able to be utilised to generate further income or pay off debt or utilise by having the pleasure of more spending money} UNTIL he is / was old enough to retire ! IT IS HIS MONEY .....NOT THE GOVERNMENT'S.
He should be free to use it as he sees fit. That he has chosen to PROVIDE HIS OWN PENSION is something that you should be grateful for.........otherwise YOU would be paying more taxation to help fund his government pension , then you WOULD have something legitimate to moan about !.
That he was able to make such provision is admirable considering the economy of the time when interest rates hit 18% or more and which he would have had to pay as he would have been a 'borrower' then .......not the almost negligible interest rates of today..
Inflation soon reduced any SAVINGS to almost nothing , so it was no easy task to accumulate the necessary funds to retire as a self-funded person.
AND now the Government wants to have another BITE AT THE CHERRY !
Doesn't seem fair or equitable to me.

Reader Survey
May 10, 2016

Not everyone who utilises concessional contributions is a high income earner. There are lower income earners who want the ability to save for retirement in a tax-advantaged manner, plus there are many lower income earners who are getting close to retirement, have no debt or children at home and want to save once again, in a tax advantaged manner. Other lower income earners may have an asset left to them through the death of a family member or have sold an investment asset who want a facility to reduce CGT

Survey Reply
May 10, 2016

I benefited from the $30,000 limit while I was working. I knew I was going to be retrenched from Qantas (maintenance engineer- left June 2012) and salary sacrificed to the hilt right up to when I left. I then remained 3 + years unemployed and had to draw on my super. My age now? 61. Ask me sometime what it was like like looking for work as a late 50s yo, and 'overqualified'.

Reader Survey
May 10, 2016

i would prefer if they changed the tax system on super completely. Ie it is an automatic tax of 25% maybe and then if you are below certain thresholds the government gives put a rebate of 10 or 5% based upon your income from your lodged income tax return.

Barry French
May 09, 2016

Interesting thread. As someone working in the Arts it has frequently been impossible to make personal Concessional Contribs (10% rule) and so my base Super level is fairly low. As I am approaching 60 I have ramped up my NCC component with the intention to downsize my home and buy a smaller unit leaving around $700k in Super. This retrospective change effectively caps my ability to cover even a modest pension and ensures I have to invest outside of Super. I can see other benefits for the freelancer - the ability to contribute up to age 75 is a welcome change.

The biggest issue though is that people have lost faith in the Superannuation system. I don't know if that was intentional but it is disappointing.

I am firmly of the belief that Superannuation rules should be handed to a Superannuation Commissioner charged with ensuring a bi-partisan strategy for the evolution of Super into a well regulated system to provide our citizens with an adequate retirement. As such they can make changes to be ratified by the parliament of the day, but they should be evolutionary and long term. Politicians should be required to follow the same rules so they understand the impact of the changes.

SMSF Trustee
May 10, 2016

You've nailed it Barry. With a $500k lifetime cap on Non-concessional, how is anyone ever going to get the other $1.1 million to reach the pension cap. This is a lot tougher policy than it first seems.

Sam Naidu
May 09, 2016

One would have thought that such a major change should have come about as a result of proper tax reform process after extensive consultation and not as a budgetary process!

Jeff Roser
May 09, 2016

My greatest worry about the proposed changes are the perception of the retrospective nature of the changes. Clearly it can be argued the changes are not retrospective in the true sense and only close down a number of tax loop holes for the well off within society.

The thought that super maybe neutralised as a political issue in my view will never occur so long as Governments see it as a relatively untapped source of future income that they can tinker with.

We have all said constant change leads to loss of confidence and from my discussions with friends that is the message i am receiving. People are saying if they get away with small retrospective changes this time whats will happen next time.

Sam's opening statement is not far off the mark.
Question
Can those affected by the changes to "transition to early retirement" revisit their original decision based of the changes being brought in, without any penalty should they decide to alter their decision?

Alex Dunnin
May 09, 2016

Good thread. Govt being attacked from the Right will be music to its ears. Add to budget changes, pension eligibility changes, MySuper, FOFA etc and super has been rebuilt in past 4 years. Maybe it will soon be neutralised as a political issue....maybe

Ramani
May 09, 2016

It has become clear that the unsustainable tax burden on the average citizen from gaming the existing system (where a young worker on $60k pays about 35% tax, while grand dad taking $200k pays zilch, passing on a taxfree bequest to his kids) must be addressed, and now.

Those who decry changes forget the features they wish to retain were changes too: RBLs replaced with contribution limits, post 60 benefits taxfree, TTR legal rort where people could pour money in and out of super / non-super to improve after tax outcomes. And they never cried foul then.

Salary sacrifice still remains a rort. The Government is now allowing non-rorters to access the contribution benefits too.

Be thankful the Government did not go the Ken Henry way, tax all super with a flat rate capped subsidy.

What would you have done, if you had to reprieve the budget pressures?

Alun Stevens
May 09, 2016

Lots of comment about retrospectivity which I just don't follow. This is simply a prospective tax change. Only $1.6m of assets is now eligible for tax free earnings. The rest get 15%. This tax change only applies after 1/7/2017. No one is proposing collecting taxes in respect of periods before July 2017.

Rather than a complex system of imposing a marginal tax system to super funds. The mechanism chosen is a simple one of using the taxable and untaxed product structures. Money in one is tax free. In the other it pays super tax.

Dennis Barton
May 09, 2016

$1.6 million invested in franked shares gives a tax free income of ~120% of AWOTE. I think that's enough government subsidy to keep people off the OAP.

The retrospectivity is the key change. One used to be able to say to clients don't fear superannuation change because it is mostly prospective. Hence the complexity. This will only increase the fear of government meddling in super.

David O'Donnell
May 09, 2016

About time! I think even Peter Costello would be surprised that this took so long to tone down. Still very generous and IMO unaffordable - but one has to start somewhere.

Diane O'Sullivan
May 09, 2016

Hi Perplexed,

I totally agree re submarines spree of $58 billion. Why isn't that money used to fix the budget deficit - talk about spending beyond our means. What a joke it has all become.
Disgusted.

Perplexed
May 06, 2016

What a time to be alive.

I'm in my 30s and am really disappointed that submarines seem to be a higher priority than providing people with certainty on which to develop long term plans to self fund retirement.

Lowering of caps will require my generation to start planning earlier instead of relying on dumping funds into super in the last couple of pre-retirement years. However, they do so without any guarantee the series of small steps taken over time to build up retirement funding gradually won't be de-railed at the end of the line....

Kym
May 06, 2016

If you run the numbers of the tax implications if a $5m fund from 1/7/17, the tax difference is c.6%. I wouldn't have thought this is likely to throw people's retirement plans into array?
I based my modelling on a low, after fee return if 4%, clearly franking etc would help drive down tax.
Importantly, what extra return do investors need to compensate? My modelling suggests less than 0.50%pa.
The debate is getting a little hysterical.

Sacha
May 06, 2016

Good article Graham.
Tax incentives (and mandates) should change behaviour. In the case of super, the idea is to increase retirement saving amongst the young, who would not do it otherwise because retirement is so remote.
Might sound harsh, but those in their 50s and 60s (and those in their 70s and 80s) do not need incentives as retirement is imminent (or underway)...and no one wants to be reliant on the pension if they can help it.
Second, the system is intended to involve use of capital to fund retirement, not just earnings/interest.
Third, the system was absolutely not intended to receive and transmit inheritance. People do this anyway!
Costello's changes allowed a significant portion of the capital base of the country to move outside the tax system. It was not sustainable. Everyone in the industry knew it...and I mean everyone.
I am impressed (but as surprised as anyone) that Turnbull and Scomo dealt with the Elephant In The Room.

james
May 06, 2016

If one is in pension phase and has a large balance that will have to revert back to 'accumulation mode' how is the income taxed in the hans of the SMSF member.
The $1.6m is tax free in earnings and tax free to the member when paid as a pension. The balance of say $2m goes back to accumulation phase and its earnings are taxed at 15%..how are those earnings taxed in the hands of the member when taken out as pension?

Liam Shorte
May 07, 2016

Any funds taken out via pension or lump sum after age 60 are still tax free

@SMSFCoach

Randall Kingsley
May 06, 2016

So looking for something positive in what was always going to happen to super, I think the idea to 'set' limits based on asset value rather than income levels generated will make things easier to manage from both Govt and individual positions. And I see the same planning issue as StephenH in that in a duo situation when one partner dies and we move to reversionary pension status, a heck of a lot of people now in retirement could now have a fair financial planning problem unless the now dead partner's $1.6m (plus or minus earnings over time) is allowed to remain in a 'pension' phase.

Sally B
May 06, 2016

Here's a curly one ...
NCC's since 2011 of $550k.
Value of pension balance now only $300k due to loss on sale of Brisbane flood property, GFC and small pension payments.
Pensioner is about to get an inheritance in late 2016.
Is the 60+yo pensioner now prevented from contributing any NCC's ?

I thought the intention was to provide for reasonable private pensions ?

Liam Shorte
May 07, 2016

Sally B

Yes the pensioner will have used up their NCC limit. If large inheritance then can put $25k concessional each year from 2017 until they reach 74

Rob
May 06, 2016

In the last ten years I would have bought a house instead of rent. Note that we could not buy a house as needed a hefty deposit in a rising market. Plan B involved building super balance and taking care of retirement.

Plan B would have provided enough to live comfortably assuming we would own our own home. At nearly 40, looks like we will be renting in retirement but $500k cap will not provide a comfortable retirement.

Plan C is to buy a house and pay it off then rely on the government pension to support our retirement as the failed to implement long term polices.

Final basics is why do the government not calculate the net wealth of a person that considers assets (I.e. Family home, investments) and liabilities and superannuation and bake the tax and assistance on that basis?

Paul
May 06, 2016

Low Cap Rate removal pertains to Transition to Retirement situations only.

GREG DUNN
May 07, 2016

Correct Paul -- still important in planning for retirement -- especially if you need to p/o
a loan while waiting for the sale of a particular asset such as property

Fred
May 06, 2016

These changes took me by complete surprise. I have worked extremely hard to now over $2m in my SMSF and have made firm plans to utilize that amount within a pension stream starting in a few months time when I reach 60. Now those plans are up in smoke.

I'm gobsmacked by these restospective changes and am really scared that more such changes are around the corner. I have lost complete faith and trust in the Superannuation system. Based on the Budget Night proposed changes, I have changed my Superannuation investment strategy. When I turn 60, I'm going to start taking as much money as I can out of my SMSF and invest it outside my SMSF.

I'm ok to pay a little personal tax on earnings with tje security that this money will be mine and the government won't be able to get their hands on it. My medium term strategy will be to continue to draw down large tax free amounts from super over the next several years recognizing that I'll be now be some paying personal tax. My aim is now to close down my SMSF after it reaches ZERO balance as fast as I can bearing in mind the additional tax implications vs the current zero tax on pension balances up to $1.6m.

I realise this approach will involve me paying more tax than I otherwise would if I kept it in a pension account, but I'm happy to pay that premium to get out of Superannuation entirely before a future government work out a way to tell me how to spend it, or worse still confiscate it!

StephenH
May 06, 2016

Has anyone considered how the $1.6M pension limit will interact with reversionary pensions?

Imagine Mum and Dad, each with a $1.6M pension account, reversionary to the other. Dad dies, so Mum picks up a pension from what was Dad's, plus her original own pension. Total $3.2M of assets supporting two pensions.

Has she got to move Dad's $1.6M back into accumulation mode?

Brian
May 06, 2016

I was about to ask a very similar question. I hope someone can give us an answer.

Liam Shorte
May 06, 2016

Stephen & Brian

The detail is not there on how reversionary pensions will be treated yet but here is my current thinking on the matter.

The $1.6m limit is on transfers to a pension, Mum and Dad could both put $1.6m so that meets that rule. When Dad passes away the reversionary election means the pension is not commuted and remains in pension phase payable to the reversionary pensioner (Mum). So it is not a new transfer to pension phase from accumulation phase and as such does not breach the cap.

So my present thinking is that if Dad can hold on until after 1 July 2017 then dies after that, we should have no issue with mum maintaining a balance of $3.2m in pension phase as no transfer to pension limit has been breached.

As i said, the detail is just not there to make a 100% guaranteed call on this at the moment but my reasoning follows the spirit of the rules as proposed by the Treasurer in the Budget documents.

Please seek personal advice once the legislation has been passed and the details released before making any changes based on my comments.

@SMSFCoach

StephenH
May 06, 2016

Thanks Liam, very helpful and I agree with your logic.

Regardless of the tax outcome, I can assure you that "holding on until after 1 July 2017" was always my plan!

Tony
May 06, 2016

This is but one of many issues that will emerge and has not been considered. There has obviously been no consultation with the super industry on these changes as they are next to impossible to introduce equitably.
I thought the days of "from this minute we will make effective..." were long gone and there was a more thoughtful and consultative approach to super by both sides of politics. I have no doubt the retrospective changes will be challenged in the courts and proven unconstitutional.
It is clear that this Government has no super policy at all, they don't believe in the SG, they simply don't understand how important it is to the aspirations of so many Australians. It is the biggest pot on money most will ever see and yet they are treating it with distain.
As Shorten said, any change like this undermines the confidence of everyone in the super system.

Stewart
May 06, 2016

As a financial planner that has many mum and dad clients the issues are wide ranging and hurtful and will set back the retirement planning of many people for ever. Being retrospective Is disgraceful.

While I agree as many others do that there should be a limit to how much we can have in super/pensions tax free. The how to do it is the problem.

The main issue discussed with peers and clients over the last 2 days relates to the NCC lifetime cap which just punishes those looking to retire now or have only been able to release large amounts of capital from other investments.

The fact this one change is from 7.30 on budget night and looks back 9 years is a flat out low act.

On Tuesday morning I had the ability to add $540k into super. No previous limit. Money that has paid tax along the the way.

By 7.31 it was zero. How is that not retrospective. No lifetime limit one day and then a very small lifetime limit the next. I know who to blame for this and it is all of the "think tanks" full of Dr's and Profs who have no concept of the reality of retirement for those that have not had super for their entire working lives.

Who thought of $500k anyway. If the limit for tax free pension is $1.6m. Then why have such a small lifetime NCC Limit.

I am happy to have a limit from a future point in time. But let me use the rules that were in place for this financial year. So bring in a cap of $540k from 1 July 2016. No one is worse off unless your cheque for the NCC of $540k arrived into super on Wednesday.

Simple and allows those that have had plans for years to fulfil them.

I have voted Liberal all my life. But as of today I will vote for the party that has a long term retirement plan for all Australians. That appears to be Labor.

Geoff Burgess
May 06, 2016

You wouldn't consider any increase in income tax rates on returns from shares or property purchased before the increase as retrospective, so why do you consider the increase in tax on future returns on your super as retrospective? Income and capital gains on assets above $1.6m kept in the super system after 1 July 2017 will still receive concessional tax treatment compared with direct ownership. (P.S. I too am adversely affected but regard the change as sensible and fair.)

bigjulie
May 06, 2016

Retrospective Laws - Australian Law Reform Commission:
Traditional Rights and Freedoms
Encroachments by Commonwealth Laws


The common law
7.1
People should generally not be prosecuted for conduct that was not an offence at the time the conduct was committed.
If on Wednesday it is not an offence to go fishing at Bondi Beach, then people will usually expect that a law will not be enacted on Thursday making it an offence to have gone fishing the day before.
But this principle does not only apply to criminal laws.
More generally it might be said that laws should not retrospectively change legal rights and obligations.

The right not to be charged with a retrospective offence is also protected in the
Victorian and ACT human rights statues

https://www.alrc.gov.au/sites/default/files/pdfs/publications/ip46_ch_7._retrospective_laws.pdf

Retrospective changing the goalposts is a breach of contract. We have been shanghaied and suckered by the Robber Barons!



.

Colin Black
May 06, 2016

That the $1.6 million cap on pension account amounts is retrospective is an absolute disgrace. There may be only a small percentage of account-based pension account recipients who are going to suffer as a result, but this is a matter of principle. The long-held practice of allowing those who had organised their finances according to the rules then in force to "grandfather" the funds so allocated has been abandoned. Having done it once, unscrupulous spend-thrift governments will do it again. Who is to say that something similar could not happen with negative gearing - i.e., pay off your loan on your negatively geared property before next June or you will lose the taxation benefits of having a large mortgage. We have moved into banana-republic territory. The frightening thing is that this has occurred under an LNP government. Labour will have a field day when it comes to power again now that the precedent has been set.

Sam
May 06, 2016

Colin, it's worth noting in Bill Shorten's budget reply speech tonight he made quite a big deal of opposing retrospectivity as a general principle and stated clearly that the ALP will oppose these specific retrospective changes to super. I suspect the ALP has a far better understanding of the necessary confidence underpinned by grandfathering in super (and neg gearing was mentioned in this context also) than the LNP. At least Shorten has put this clear committment of the general principle on the public record. I'm bemused by how the general media appear so sanguine about this issue and are really letting the Government off the hook. As you say, it's a disgrace.

Graham Hand
May 06, 2016

Hi Sam, without wanting to be political, Labor has almost the same policy as the new Liberal proposal on this website: http://www.alp.org.au/fairer_super_plan. It has the same retrospective feature on almost the same amount. Read the website and you'll see many comments like: "The tax-free status of all superannuation earnings is disproportionally beneficial to high income earners and is unsustainable."

The Labor policy is: "The proposed measure would reduce the tax-free concession available to people with annual superannuation incomes from earnings of more than $75,000. From 1 July 2017, future earnings on assets supporting income streams will be tax-free up to $75,000 a year for each individual. Earnings above the $75,000 threshold will attract the same concessional rate of 15 per cent that applies to earnings in the accumulation phase. This measure will affect approximately 60,000 superannuation account holders with superannuation balances in excess of $1.5 million."

I don't see how Labor has a better understanding of the confidence provided by grandfathering. There is no 'clear commitment' about retrospectivity from Shorten. Tell me I'm missing something.

Sam
May 06, 2016

Hi Graham. Just a few points to clarify (and yes, let's not have a political bunfight).

(i) There is common ground between the 2 parties, and daresay the industry itself, that the current limit free system is indeed "disproportionally beneficial to high income earners and is unsustainable".

(ii) Both parties even broadly agree with the level at which tax free status of super pension earnings should cut out. The difference is that Labor's proposals kick in from 1/7/2017 and, very importantly I think, would not require existing pension balances to be reduced or limited going forward. You just have to be aware there will be a 15% tax on earnings in excess of $75,000 from that future date. I regard that as a prospective change. You have a different opinion. Let's agree to disagree on that one.

(iii) As to whether Labor have made a firm commitment on no retrospective changes, readers can make up their own minds. Here is the direct quote I'm relying on from Shorten's budget reply (see: http://www.billshorten.com.au/budget_in_reply_speech_2016):

"Labor’s reforms to maintain the fairness and integrity of superannuation however, will only ever be prospective and predictable - so people can plan for the future with security."

Thanks again for the opportunity to discuss the issue Graham, it's really appreciated.

Dan P
May 05, 2016

If Paul Keating and Peter Costello are the patron saints of Super then Scott Morrison is the patron saint of advice. The complexity in planning and managing retirement monies has increased, Super is moving from being the retirement wealth strategy to being one of the retirement wealth strategies (though still the dominate one). The advice world evolves and enhances it CVP.

GREG DUNN
May 05, 2016

Another very important change which has not been highlighted is the removal of the LOW
CAP RATE as at 1/7/17 -- currently tax free up to $195,000

Graeme
May 05, 2016

My main disappointment is that the pre tax contribution concession remains a deduction rather than a rebate. This more than anything demonstrates who gains the most benefit from super. For those, I think overall the tax concessions are still a bit too generous, as opposed to pre budget when they were way too generous and never likely to last. Anyone planning a long retirement based on the latter was either naive or badly advised. I also wonder if all those complaining about too many changes were complaining when the changes have been in their favour. I doubt it. Maybe many got a bit too greedy.

Dauf
May 05, 2016

For me, the biggest disappointment is the concessional limit of $25K per year. This will seriously limit things for people like my wife and i who after being on one wage for a long time finally have the chance to build up some super...but a concessional limit of $25 K seriously limits are funds and will make us invest money in our super at a much higher 'risk level'.

While the seriously well off will find the non-concessional lifetime limit more of a problem, for middle class types like us its the 425k that hurts...and i suspect will cost the country more in future pension payments in the long run. Bring on the overly expensive family home in retirement...although i'm sure it will also be assessed in 10 years time!

Why on earth don't they assess super balances for couples not individuals (like Centrelink and household income)...$3.2m for a couple is a fair enough balance for a government to underpin with tax concessions (over which you invest in normal ways if you want)...but $1.6 m will lead to risks when you can only transfer $500K to your spouse!

My final question is around what the politicians super equates to (compared to) the $1.6 millions dollar level. What capital would have to be used to 'guarantee' a pension equivalent to what Morrison, Abbott and Shorten, Gillard, Rudd et etc will get (with no risk) after being such good managers of the nations finances.

The people who make the rules (politicians and federal public servants...not state!) obviously live in a different world

Kym
May 05, 2016

The defined benefit pensions, which the pollies enjoy in their retirement, will be capped in the form of a concessional pension amount which will be $100kpa.
They don't have tax in the fund so they pay tax at marginal tax less 10% on their pensions.
If any of the 2017 Budget circus gets in, the remaining pension drawings will be at marginal tax rates.
Super is either taxed on the way in or the way out so don't get too het up about the pollies.
Play the ball, not the man.
There's lots of water to go under this bridge before we see the final cut.

Graham Hand
May 05, 2016

Hi Phil, I've asked an adviser experienced in this space and he says it is something that has to be considered in the consultation phase. There is not enough information provided yet.

Graham Hand
May 05, 2016

Hi Richard, the limits are per member, not per SMSF.

Warwick
May 05, 2016

"... in the long run it has turned out to be too expensive for the nation to afford ... "

What about all the money that has been released by not having to pay pensions (and other benefits) to self-funded retirees?

The Government should be rolling in cash but instead they've found a way to spend this windfall and then cry out for more!

John Carney
May 05, 2016

Is anyone in a laughing mood? I remember the coalition prior to the 2013 election promising "not to make any unexpected negative changes to super".

Fred
May 06, 2016

John, BUT no doubt Mr. Morrison will argue that his changes are "positive" to give his Party an out from breaking the commitment you quoted.

Mary Curran
May 05, 2016

What about all those SMSF's who have property in super? They won't be able to sell off the bathroom or toilet to bring down the amount. They will, more likely, be forced to sell the property or somehow approportion the rent. Then how will the property be valued? Will a Licensed Agent be able to provide, or must it be a valuer? I think it's most unfair to bring this in retrospectively. Many people own units in SMSF, even commercial property etc from which their business operates. I can see a lot of complications here. Hard to manipulate these figures to make sure you adhere to the $1.6m

Richard Thomas
May 05, 2016

I may have missed it but I haven't seen any commentary on whether a SMSF with 2 or more members can have $1.6million in tax free pension mode for each member.

As noted above, there is some ongoing tax advantage for amounts over $1.6million remaining in an approved retirement accumulation fund as long as the contributing member qualifies.The problem arises as to what to do with the surplus when the member actually retires and needs to draw more than $80,000 from the fund. Would drawings from that portion over $1.6million previously called accumulation be treated as ordinary earnings in the hands of the member ?

SMSFCoach
May 06, 2016

Richard, the limits are per person. Withdrawals from superannuation after age 60 are tax free regardless of which phase it is drawn from and whether a pension or lump sum. Many will take the minimum pension topped up with remaining living expenses funded from tax free withdrawal from the accumulation account.

Phil
May 05, 2016

What will happen to an individual who has previously purchased a lifetime annuity with $2 million from their superannuation fund? Will they have to unwind this annuity by 1 July 2017 and pay any incurred "break costs" from the annuity provider?

Richard Wishart
May 05, 2016

I don't believe too many young people will have the slightest interest in superannuation now that this precedent has been set for retrospective change.

It was however, always unrealistic to expect that unlimited amounts could be accumulated in a tax-free environment. Those with young families and mortgages to pay off should not have to pay extra because public revenue is used to subsidise those who don't need it.

The real test on whether the politicians are genuine about fairness is what they do with their own pension entitlements. It isn't easy to compare the retirement arrangements made for politicians, judges and public servants with the rest of us because they have no tax impost as their benefits are being accumulated unlike superannuation for others which pay 15% tax on contributions which are tax-deductible, 15% tax on the income of tax amounts being accumulated and 10% tax on realised capital gains made while in the accumulation phase.

With a $1.6 million tax-free pension limit supporting an annual income of around $80,000 I do not see why any politician should be entitled to an after-tax pension paid for out of the public purse that would give them more than that same amount.

Those parties which don't make the position clear in relation to their own pension entitlements before the election should not receive our vote.

John
May 05, 2016

It's a pity that these politicians don't live in the real world,instead of in their ivory tower shielded for real life. Don't we have to keep records for 5 or 7 years for super funds, not back to 2007. This is not the clever country, it's the stupid country, over regulated, over governed and too much red tape.

Paul
May 05, 2016

Hear Hear Bruce

Graham Hand
May 05, 2016

Hi Alex, I am not a financial adviser so anyone who is can correct this if I'm wrong, but I did not read anything changing the withdrawal rates from pension accounts. And yes, I believe a 74 yo can still make a CC. In fact, this was a good part of the budget where all Australians under 75 can claim a tax deduction for any personal contribution to a super fund. This will count against the concessional cap.

Richie
May 05, 2016

It is just politics being played out here that I and everybody else are sick of. Superannuation & retirement incomes should not be a political football. Given that this current government has now made numerous retrospective changes - Centrelink Assets Test Post 1/1/2017, $500K NCC & $1.6m Pension WHY SHOULD ANYONE BELIEVE THAT A FUTURE GOVERNMENT WON'T BE ABLE TO KEEP THEIR HANDS OUT OF THE SUPERANNUATION HONEYPOT POOH BEAR.

I remember going to an FPA function in the early - mid 1990's when the Libs were in opposition. A LIb speaker who was their Super spokesman (of whatever he was called in those days) was asked - When are we going to have a bipartisan approach to super/retirement income. The reply was "We are all for bipartisanship, as long as they are LIBERAL ideas" !!!!!

Ian Newell
May 05, 2016

When amendments are made to taxation law, a well practised convention ensures that the existing law is typically grandfathered for taxpayers who have acted in good faith in applying and relying on the law in order that they are not disadvantaged.

Hard working, self-funded retirees have been busily providing for their retirements on the premise that the current superannuation and taxation legislation means something – if it does not, then why was it introduced?

Mr Morrison has implicitly endorsed and supported this understanding and on numerous occasions during the last 6 months and more recently, explicitly confirmed those understandings.

The ($1.6m) cap on pension phase transfers so far as they relate to transfers already made, can only logically be viewed as being retrospective in operation, reprehensible in nature, and a shameful betrayal of trust.

Weasel words by Mr Morrison that the taxation legislation will not change but that (presumably) the superannuation legislation will be amended to reverse that which has already occurred, changes nothing.

Doubtlessly, unprincipled politicians find it convenient to find politically expedient solutions to sell the fairness argument, even if fairness is itself a casualty in the process.

Bruce
May 05, 2016

You ask what we would have done differently in the last 10 years if the rules had not been as they were.
For a start we would not have sold capital gains tax free assets (downsized homes,sold businesses etc) and transferred into what we were promised to be a tax free environment after retirement. We may have left money in family trusts . Also we may not have made the same arrangements with ex spouses for net payments and we might have worked longer to save more.
Retrospective taxes should not be tolerated in democratic societies. It is not the governments money to give and take as they wish, they have to ask for it well in advance under known rules.

Bruce

Alex Murchison
May 05, 2016

At the end of the day/budget I still regard my SMSF as the best place for my money, regardless of the new changes. You can now have a $1.6m cap in the pension amount with nil tax on the earnings and no CGT on any sales. In the accumulation phase, that amount is taxed at 15%, better than 30% outside. CGT is 15% in the first 12 months v 100% outside, and after 12 months CGT is 10% v 50% outside. Re the amount that will now be the $1.6m in the pension account, I'd assume that the 4 & 5% etc pension withdrawal amount will apply only to the amount in pension phase, and not to the amount in accumulation phase. Would this be correct? It would be a bonus if so, as you won't have to withdraw an excess pension amount for the whole sum total. As to future contributions, there is now a cap on NCC of $500k, but will it still be possible to make the new DCC of $25k up until 74yo?

Hank
May 05, 2016

Until the rules change - AGAIN!

SMSFCoach
May 06, 2016

Alex you calculations on CGT are wrong. Under 12 months it is 15% in accumulation on 100% of the gain as opposed to 100% of the gain at your marginal tax rate outside. After 12 months it is 15% on 66.63% in super v 50% of the gain at your marginal tax rate outside.

Chris
May 05, 2016

I believe that the "retrospective" aspect of this is being overdone. Individuals are not being retrospectively taxed. They are being given adequate notice that from 1 July 2017, any earnings on balances above $1.6 million will be taxed at higher rates. Individuals are still able to access concessional tax rates for any excess balances by moving them back to the accumulation phase.

John
May 05, 2016

Chris,
all I can say is that you are obviously not one of the people who have been planning, based on the rules at the time to place after tax money into their super fund. The rules happened overnight without any thought of peoples plans.

Philip Jones
May 05, 2016

STOP playing with Super - the budgeted taxation changed on TTR accounts is just one example of the uncertainty which people have to (try) and live with in arranging retirement budgets. Imagine someone had taking early retirement 5 days ago and with the few of 0% tax on earnings on there TTR account. Then they wake up the day after the budget to find they have to now go back to work, due to an extra tax being implemented.

OR

Scrap Super and just call it a SG tax for the old age pension and hand it all back to the Government. The economy of scale that would be achieved, by getting rid of all the Super Boards, CEO's, CFO, financial planners etc. now involved with the Super industry would be incredible. We would then be able to introduce a realistic old age pension for all Australians, despite what their income has being through there working life. This no doubt aligns with the governments Budgeted changes to have different thresholds for taxation concessions on Super.

Hank
May 05, 2016

Great article.... as a 34 year old with a reasonably high disposable income I will not be putting any money outside of the bare minimum into my SMSF from here on in. Governments over the years have proven way too fickle with their tinkering of the rules. I have little faith in them to a) get the policy right and b) me ever being able to enjoy my money... rather I will be establishing a company (almost certainly offshore) and investing via that - at least that way I have some control over MY MONEY!

John
May 05, 2016

I agree that the most dangerous aspect of the changes to super is the retrospectivity. It sets a provident and will be used again by all sides of politics. The point made by a number of commentators is that this will create greater uncertainty in retirement planning. I agree with Stefy that this has really pissed me off as well. Credibility in government is crucial and this make me concerned about our leadership.

Colin
May 05, 2016

Thanks for the info Graham

One question? There is now a lifetime cap of $500,000 on NCC contributions and the bring forward rule has been abolished, is there also a yearly cap on NCC, or if I have no NCC since 2007 am I now able to make a deposit up to $500,000 in one hit?

regards

Colin

Graham Hand
May 06, 2016

Hi Colin, that's my understanding but you should double-check and ultimately it depends on how it is legislated. If someone is100% certain they have no NCC, they could put $500,000 in as this was even allowed under the old bring forward rule as well. This is a general comment as I don't know your circumstances.

Trevor Morrison
May 05, 2016

The 500k lifetime cap? Is this from today OR retrospective.

2007 allowed individuals to pay in up to $1 million

Graham Hand
May 05, 2016

Hi Trevor, it is the amount you had already used in your non-concessional contribution between 2007 and 7.30pm on Tuesday 3 May 2016 when the Budget was delivered. But if you already exceeded the cap, you do not need to take it out. In this way, you could say this particular limit is not retrospective. My arguments about retrospective relate to the $1.6 million in pension phase.

Andrew Peters
May 05, 2016

So the ATO will be the source of truth when trying to find out if you have used up your $500K limit from 2007.

Our financial planning business contacted the ATO for a request on what's called the low rate threshold. No button , no portal - a letter was needed.

The response took 6 months - and I suspect the answer was wrong anyway.

Given it's in place now - how on earth can you advise without the records??

Sam
May 05, 2016

Good reflections Graham. Putting aside the retrospectivity shock for a moment, superannuation remains incredibly generous. Ian Silk of Australian Super astutely observed last night on The Business that both LNP and ALP have the tax free pension pool ending at around the same place: 4 to 5% drawdown of $1.6M is $64 to $80k tax free, while ALP have a $75k pension income cutoff over which a 15% tax on pension income. Hopefully this is a fair degree of consensus around the degree to which taxpayers ought be helping self funded retirees.This is a tax free income slightly above the median wage and a tax benefit that is close to a single full pension. Its very hard to argue that's not fair or not generous. Costello's ridiculous removal of all limits on super balances turned a retirement funding system into an estate planning vehicle for the wealthy. One of the worst pieces of public policy in living memory and credit to the LNP for finally pulling that plug. I'm also very pleased to see low income earners benefitting.

However, what really concerns me greatly was the lack of grandfathering and that this will undermine confidence in the system due to perceived/actual regulatory risk and doubts over whether long term plans will stick. Morrison stood up in front of an SMSF conference recently and said no retrospective changes to pensions! LNP are usually hysterical on the issue of retrospective laws/taxes, yet here they are brazenly getting away with it. If the ALP had done this then media & the industry would be screaming from the rooftops. Of course LNP have taken a very cynical political view that no-one is going to feel sorry for anyone in the position of having greater than 1.6m in super. That's true, but its very hard to not believe a piggy bank raided once won't be raided again when it politically suits.

Graham Hand
May 05, 2016

Hi Sam. Completely agree. I wrote an article after hearing Morrison speak at the SMSF Association in February 2016, including this:

"He made one point firmly. He does not want to tax people in the retirement phase. Stability and certainly for people looking 30 years ahead is important. He said we should not penalise people who have put money into super using the current rules (cue lots of applause). This is retrospectivity, even if it is not called that. He was clear and he obviously criticised the Labor proposal to tax retirement incomes."

Get that - "HE WOULD NOT PENALISE PEOPLE WHO HAVE PUT MONEY INTO SUPER USING THE CURRENT RULES."

Greg McKay
May 06, 2016

You make some very good points. Sam Dastyari?

Sam
May 06, 2016

Wrong Sam, I am!! :-)

stefy
May 05, 2016

I am very much impacted by the $500,000 lifetime limit, in large part due to the fact that I placed a very large inheritance into super. I have also made numerous NCCs over the years.
I have 2 questions.
What happens if you are over the limit?
How long is it required by law to keep super records?
Since 2007, I have changed my super provider twice, and now have my own SMSF? I have not kept records of my previous providers statements.

I would like to add that I have been of the opinion for many many years that retrospective changes of this nature should be outlawed. I am deeply pissed off.

Graham Hand
May 05, 2016

Hi Stefy

If you have exceeded your $500,000 lifetime cap, you do not need to take the excess out of super (although you will need to take any excess over $1.6 million out of a pension account). Anyone who is considering a non-concessional contribution will need to know how much they have already contributed since 2007, which suggests to me that records need to be kept since at least 2007. I don't know what the formal requirement is in other contexts.

SMSFCoach
May 06, 2016

Stefy, if you exceeded the $500k cap before budget night you are safe and can keep 1.6m in pension phase on 1 July 2017 and the rest in accumulation phase.

Graham Hand
May 05, 2016

Hi John, any balance above $1.6 million in a pension account must be transferred out, either to an accumulation fund or out of super. So you cannot have tax-free earnings on assets above this level. The Budget fact sheet is here:

http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/02-SFS-Retirement_transfer_balance_cap.pdf

Aaron Minney
May 05, 2016

Graham
I think there is a split answer to John's question. Your reply applies only to those already in the pension phase. That is the balance needs to be reduced below $1.6m by Jul 2017. Growth due to earnings after than can stay in tax-free stage. If the market doubled in August 2017, you could have $3.2m without having to take it back to a taxed status
Aaron

Alex Murchison
May 05, 2016

Aaron,
Are you saying that the cap of $1.6m in pension phase is the base starter, and if in the following years it increases past the $1.6m cap it will be allowed for all of that increased 'value' to be held in pension phase, even if it's grown to $2m or more? I would have thought that there would be a re valuation done every FY, and the amount re adjusted between the pension account and the accumulation phase account, so that the cap is constant at $1.6m, and the overflow is in the accumulation phase account.

John
May 06, 2016

Hi G
On the attachment that you provided, can you check "the details" on 4th bullet point re earnings. I checked with ntaa and my belief is subsequent earnings on the initial $1.6m cap are not impacted. Hope I am right. That is why it is a transfer cap and not just a cap.

Graham Hand
May 06, 2016

Hi John, good point it is not just a cap. I assume by the 'bullet point' reference you mean this: "Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space." This suggests that if you start 1 July 2017 with $1.6 million, and then the balance rises due to "earnings growth", you will not exceed the cap. But what does "... or pension payments are not considered" mean? If there is no change to the portfolio in 2017/2018 except a pension payment, seems you cannot do a top up (now I'm guessing).

Why do I feel there's a lot of water to go under the bridge on these new rules?

Albert
May 07, 2016

Hi Graham,
As it is a transfer cap and not an absolute cap. This means that you can only do this once apart from some indexation. This has certain implications such as :
1. What could happen is the $1.6 million could evaporate overnight if say it was invested in a few shares that went bust eg. in a recession/bear market. Then your Pension fund is worth ZERO and you cannot top this up except with the indexation. Seriously bad luck as you would then have access only to the taxed Accumulation Phase Super funds.
2. Also presumably the old withdrawal limits apply i.e. maximum withdrawal of 10%(age dependent) of the value of the Super Pension initially $160,000 pa. this may not be enough for some people. If it was all invested in cash then after 10 years your Super Pension is worth ZERO. Meaning that you would have to get money out of the Accumulation Phase of your Super to live.

Perhaps the partial answer is to :
1. convert your Accumulation Phase to the Pension Phase and sell the high CGT shares/property you have. Buy it back at market price. No CGT incurred.
2. come 30 June 2017. Convert your Super Pension phase back to Accumulation phase.
3. when you eventually want to retire: get $1.6 million high dividend/growth assets into the pension phase again.
4. withdraw the minimum amounts from the Pension of $1.6 million.
5. take what $ you want out of the Accumulation phase when you need to.

Graham Hand
May 07, 2016

Hi Albert, you make a lot of good points. I was amazed when I read this in the AFR: "Senator Cormann was forced to concede retirees whose private pension savings were wiped out by another GFC-type event would not be allowed to replenish the capital."

The fact sheet says, "Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space." So you are correct. I expect this will make many people highly conservative in their pension account, and leave the risk-taking in accumulation. Might also lead to growth in options protection and similar.

I really wonder if this section will survive through the legislative process.

John
May 05, 2016

Isn't the $1.6m a transfer cap, thought it can still earn tax free earnings above that I think

Alex
May 05, 2016

The industry makes too much of the whole ‘super’ thing – mainly because they feed off it and want continue to do so for as long as possible. Most of the real wealth in Australia is made outside super – equity in homes, businesses, rental properties, inheritances (mostly from sale of parents’ houses).
I know plenty of people over 70 years old and none of them are ‘retired’.All are still active doing a range of things to keep their minds busy and cash coming in. Of course they usually can’t do this in the last few years of life when their bodies wind down and they have to rely on savings.
But expecting 30 or 40 years of work to fund 30 or 40 years of ‘retirement’ is just plain stupid and an undesirable policy outcome from a number of angles - physical health, mental health, economics, etc.

SMSFCoach
May 05, 2016

Ah "Hindsight" or "Handsight" is a great thing.

Good article Graham and I too was initially shocked especially with the retrospective nature of the changes. There will be some tears and angry debates in the coming months.

As to your $540,000 contribution last week.... what if the Government had stopped any lump sum withdrawals from super in the budget in an effort to ensure people took income streams and not take lump sums which they could spend and live on the Age Pension?

That could have been far worse an outcome for someone parking the funds temporarily in super to give them options!

what I do know is that I will find solutions for my clients and yes I may have to work a little harder on the strategy side to do so but that is a good thing as it will emphasise the value of good holistic advice going forward and mean tied agents and industry fund planners may struggle with the best interest duty when they must consider all the alternative vehicles.

Looks like every financial adviser will require a much broader understanding of structures and strategies which should improve the professionalism of the industry. I pity the poor Accountants who have done RG146 expecting to make money on SMSF specific advice!

 

Leave a Comment:

     

RELATED ARTICLES

Noel's share winners and loser plus budget reality check

How Canberra explained super changes to me

Survey on potential superannuation changes in Budget 2016

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.