Winding back a decade of generosity

After months of backlash from the wealthy and Abbott’s media friends, and frequent point-scoring from Labor, the Coalition government has finally conceded and changed its package of superannuation reforms. In particular, it has removed its proposed lifetime cap of $500,000 on non-concessional contributions, which was backdated to 2007. Widely seen as the most controversial of the superannuation changes proposed in the Federal Budget by Treasurer Scott Morrison in May, it will be rolled back as part of the amendments to the Government’s superannuation tax reform.

On Thursday 15 September, Treasury outlined the changes to the proposed superannuation reforms. The most important of these were:

• The replacement of the proposed $500,000 lifetime cap on non-concessional contributions with a generous allowance of $100,000 a year, which is still a reduction from the current $180,000 a year.
• The introduction of restrictions on non-concessional caps when a superannuation balance of $1.6m is reached. We believe this $1.6m covers the total of all the individual’s accumulation and retirement balances. It is unclear what the rules will be for those with defined benefit accounts.
• Non-concessional contributions can now be made up until the age of 74 if the individual is still working. At present, they stop at age 65.
• Deferral of the proposed ‘catch-up’ on concessional contributions until the 2019 financial year (from July 2018).
• Individuals will be able to continue to make concessional contributions up until the age of 74 if they continue to work, and until age 65 if they are not working.

Overall, these changes should not affect the efficacy of the overall package in delivering budget savings to the government. The removal of the lifetime concessional cap will cost approximately $400m over the forward estimates; however, this will be offset completely by the delay in the start date for catch-up contributions and the restriction on non-concessional contributions after the age of 65.

Winners and Losers

There are some clear winners from this change in policy. Younger superannuants or those with smaller balances wishing to accumulate significant tax-concessional retirement savings will find it easier now to reach the $1.6m cap for pension accounts. Given the reduced cap on concessional contributions ($25,000 a year), there will be an increased importance of non-concessional contributions in augmenting balances.

Members who have already made more than $500,000 in non-concessional contributions since 2007 but have less than $1.6m in their superannuation account will also be better off. They can continue to make post-tax contributions to their superannuation account.

Ironically, some of the losers will include wealthy bleaters who have been prolific in voicing their opinion over the last three months:

• Members with balances larger than $1.6m will no longer be able to make any non-concessional contributions. Those who had not exceeded the $500,000 non-concessional cap would have been able to make further contributions under the original proposals.
• The government was going to allow those over 65 to make non-concessional contributions (as long as they remained below the lifetime limit of $500,000. This has now been restricted to those who are still working between 65 and 74. The definition of ‘working’ has a low bar – you only need 40 hours within a 30 day period once a year.
• Those who have retired but make concessional contributions out of investment earnings will also have to stop these payments at age 65. Previously, they could have made a further $25,000 of concessional contributions for ten more years.

Overall, these groups represent only a small fraction of the superannuation population. For the majority of members, interaction with super will be business as usual and they will wonder what the fuss is all about.