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Budget super changes impact at the margins

Compared with the drama and restrictions in last year’s controversial Budget, superannuation came through mildly this year. There were two changes which on the surface were encouraging but the words ‘devil’ and ‘detail’ soon began to surface. The Treasury fact sheets are linked here.

Here’s a look at the two policies with a few stings in the fine print.

1. Reducing barriers to downsizing

People aged 65 or older will be permitted to make non-concessional contributions to super up to $300,000 each from the proceeds of the sale of a family home. Some of the details include:

  • No restrictions if the person already has more than $1.6 million in super
  • No work test or upper age limit
  • Applies per person, making it a potential $600,000 more in super per couple
  • Home must have been owned for at least 10 years, which minimises the financial planning creativity of buying a home to sell with the proceeds going into super.

Questions are already arising, such as:

  • Will moving money out of the exempt asset of a family home reduce or remove age pension entitlements and negate the benefits of having more in super?
  • What happens if the family home is in the name of one member of a couple?
  • A person may have substantial non-super assets and there is no requirement that the new home be a ‘downsize’, so can someone buy a more expensive house with other resources while putting sales proceeds of the old house into super?
  • Will it be possible to repeat the exercise every 10 years?

This change appears little more than opening the door to more money going into super from people who would have sold their home anyway, while freeing up relatively little additional supply. 'Downsizers' often have little left over from a sale after costs and stamp duty, as a quality apartment might be smaller than a house but not cheaper. Remember that most people below the $1.6 million transfer balance cap can still place up to $300,000 into super in a year after 1 July 2017 (using the three-year bring-forward rule) even without this new rule. It’s more about the politics of seeming to do something about home affordability.

2. First Home Super Saver Scheme

To increase affordability, first home buyers will be allowed to make voluntary concessional and non-concessional contributions to superannuation which can be accessed to buy a home. Contribution limits are $15,000 per year up to a total of $30,000 per person. Money withdrawn from concessional contributions will be taxed at marginal personal rates with a 30% tax offset. This measure is available per person making the total amount for a couple $60,000.

However, any amount will contribute to the annual $25,000 concessional cap, so a person earning say $110,000 with a 9.5% Superannuation Guarantee contribution of $10,450 will only have $14,550 left under the cap, not the maximum $15,000. Any person salary sacrificing up to the $25,000 level at the moment cannot add any extra, but they will be able to access the voluntary contributions if they buy a first home. Contributions will be taxed at 15% which may be above the person’s personal marginal tax rate (if, for example, the extra contribution money came from a wealthier family member).

The parking of money in a concessionally-taxed vehicle benefits high income earners the most. A $10,000 salary sacrifice would place $8,500 in accessible super rather than paying out say 39% (marginal tax rate plus Medicare Levy of 2%) or $3,900 in tax and having only $6,100 left over.

Money invested in the scheme will have a deemed earning rate of the 90 day bank bill rate plus 3%. This is above market rates for cash, so where does the money come from? If the super fund holding the deposit earns less than this rate, the difference is deducted from the rest of the super fund. It's possible, therefore, with a market correction that other super will be eroded to facilitate this payment when money is withdrawn to buy a house. Another level of complexity for super.

The money can only be withdrawn to buy a house, which locks it up if the decision to buy changes. There will also be problems if the saver marries someone who is not a first home buyer but they want the family home in both names.

There will be mixed reactions to this policy, varying from those who praise the affordability assistance to arguments that anything that increases demand for houses will only bid up prices, and it’s the supply side that needs addressing. While something had to be done on affordability in this Budget, the previous First Home Saver Account was not popular and was abandoned in 2015.

And let’s not overlook the fact that this scheme violates super's sole purpose test and the government’s stated objective for super.

These changes have yet to be legislated, although they are likely to be less controversial than last year's with a greater chance of passing unscathed.

In summary, these new rules will have a marginal impact, one improving deposit balances but possibly negated by rising prices, and the other allowing money to flow into super but unlikely to materially increase housing supply. The budget cost is not significant, nor are the policy implications.

 

Graham Hand is Managing Editor of Cuffelinks, and this summary is based on an understanding of Budget 2017 before the changes are legislated.

4 Comments
Bruce Gregor
May 25, 2017

This government has no scruples when it comes to superannuation. You can put "extra" money in for a home deposit but it is within the cap for saving for retirement? You can't split investment strategy for the say 5 year term home saving and 50 year retirement saving? What is a first home? A panel van, motor home, caravan, aboriginal bark hut? Not defined in Treasury fact sheet.

Chris
May 11, 2017

The problem with the First Home Saver measures though, is that the money is put into superannuation "with the rest of it" as the 9.5% superannuation guarantee, which is dangerous. It’s “one account, two principles”, as part of the money is needed in the shorter term and part is needed in the longer term.

The capital is subjected to what it is actually invested in; as a younger person saving for their first home, their super is likely to be (and should be) in a growth option and thus, short-term capital is going to be subject to the vagaries and volatility of the stockmarket. It’s all very well and good in a rising market, but if there is a correction or a crash before they go to withdraw the money, it might cost them more than any 15% or 30% saving that they make on tax.

It’s only really an option for those with the money and the foresight to start saving some 7-10 years in advance (because that’s how long an average market cycle is to iron out volatility) and if you need the money sooner than that, you shouldn’t BE risking capital in growth assets.

The other side of the coin (sic) is that you switch into the defensive option of bonds, cash and fixed interest to preserve your short-term capital, but that’s not going to cut it either in the longer term for your superannuation, which again, as a younger person, should be in the growth options.

This is a very badly thought out / thought through policy, obviously made by people who don’t understand simple financial principles like “short term debt” versus “long term debt”.

Ashley
May 11, 2017

Personally I don’t take any notice of the budget, for a few reasons:
· What is relevant is only what ends up eventually getting passed into law – which historically is different to the grand statements on budget night
· there have been some big changes introduced and made law (retrospectively) from budget night – eg CGT in Sep 1985, etc – but you couldn’t do anything about that unless you had inside knowledge before the event
· actual government balance/borrowing always ends up very different from the budget estimates – eg over the past 10 years the actual outcome has been lower (worse) than the budget estimate by about $10b per year on average.
· The reason of course is the government has little or no control over the main drivers of tax revenue (wages, profits, retail sales, commodities prices) or outlays (the number unemployed, number of pensioners, etc). These are largely cyclical and are largely driven by external factors.
· But the budget is useful as a broad statement of fiscal policy – ie loose/accommodative deficit, or tight/restrictive surplus.
· So the 2017-8 budget is a statement that the government will continue and extend its loose/accommodative spending/borrowing to prop up economic growth and jobs for another year. This is important now that the RBA is reluctant to exercise monetary tightening to slow asset price inflation, and now that the government no longer has other policy levers to influence growth and jobs – monetary, exchange rate, tariff, wages, controls over bank lending volumes and interest rates on bank deposits and loans, etc. So government spending/borrowing is virtually the only policy lever left in the government’s hands.
· History has shown that government deficits have been good for share prices and surpluses have been bad – for the simple reason that deficits put more money in the hands of consumers and much of this ends up company revenues, profits, dividends and share prices. But the main driver is actual government balance outcomes, not budget estimates. I have written about this in cuffelinks.
· The budget measures are also interesting indicators of political manoeuvring and vote buying – fascinating I‘m sure, but not relevant for investors.

Peter
June 01, 2017

Hi Ashley. To describe the 1985 CGT changes as retrospective is incorrect. There was nothing retrospective about the introduction of CGT in 1985. because it only applies to assets acquired after 19 September 1985.

For example, if you signed a contract on 30 August 1985 to purchase a flat which you intend to use as a rental property and you settled on 30 October 1985, that flat is free of CGT. So if you sold that same flat today after 30 years of using it as a rental property you do not pay CGT.

It does not matter if you purchased that flat for $50,000 and sold for $900,000 30 years later, because it is a pre CGT asset and thus not subject to CGT.

As you see it is not retrospective at all, and only applied to purchases after budget night (19 September 1985).

This is how legislation should be written, and in Australia almost always is.

 

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