FYI | May 11 2016
By Peter Switzer, Switzer Super Report
Alright, I agree, my ex-student’s super changes in the Budget are excessive and for a lot more Australians than he thinks, the new rules of the game are unfair. And I suspect over the course of the election campaign or if they get a second chance to be in Government, before these super changes are passed, there will be some improvements to ensure equity.
I know Treasury has not well-advised Treasurer Scott Morrison of some of the anomalies these reforms bring with them. Also knowing how normal people seldom think deeply about super and government policy I thought I’d do a Q&A session on what it might mean for you if these proposed new super rules become law.
I will start with the known knowns before dealing with some of the unknowns that could make the Treasurer think about some fairer and more sensible reforms to his ‘reforms’.
Q. The Treasurer said only 4% of Australians will be affected by these super changes but is that right?
A. No as the concessional caps have been brought down from $30,000 and $35,000 to $25,000 for all super members then our chances to build up our super has been reduced and so we’re all affected.
Q. Can I now put money into my super fund until age 74?
A. Yes and you don't have to be employed and spouse contributions have been extended to age 74.
Q. Can these be concessional and non-concessional contributions?
A. Yes but there is a $500,000 lifetime cap on non-concessional contributions so having a spouse strategy and working longer to access concessional contributions might have to be thought about to build up your super.
Q. If I am under 75 and I make a personal super contribution can I claim a tax deduction?
A. Yes that’s right but they will be seen as a concessional contribution and so you can only inject $25,000 a year via this method.
Q. If I earn less than $37,000 a year will I get my super-taxed money back?
A. Yes up to $500 and it will be paid back into your super fund.
Q. How does the low-income spouse tax offset work?
A. If say higher paid spouses want to build up their lower paid spouses’ super they can contribute $3,000 a year and receive a $540 rebate for doing so. (Where do they receive it Paul?) The Government has pushed up the income threshold of the lower paid spouse from $10,000 to $37,000.
Q. If my spouse spent time out of the workforce can he or she access unused caps to build up their super?
A. Yes the Budget allows someone to use up to five years of unused concessional caps, that’s five times $25,000 or $125,000.
Q. When do all of the above changes start?
A. They should kick in on 1 July, 2017 if the Turnbull Government wins the election and they end up with a more agreeable Senate! There’s a lot of ifs there.
Q. Does the $25,000 concessional cap apply to all workers no matter there age?
A. All employees and superannuants under age 75 face a $25,000 cap and it starts on 1 July 2017, so you have one year left to access the $30,000 cap for under 50s and $35,000 for 50s and over.
Q. Does the Budget’s new lifetime cap for the non-concessional cap start from Budget night?
A. Yes but if the Turnbull Government doesn’t get elected there could be changes. Labor undoubtedly will cash in on the disaffection created by this super change in particular.
Q. Is this a retrospective tax?
A. No but it looks potentially unfair to lots of people as it goes back to 1 July 2007. So if you have put in say $300,000 into your super via non-concessional contributions then you can only put $200,000 more in. Obviously using a spouses’ super gives you a chance to put $1 million worth of non-concessional contributions into super. I guess this change will be good for relationships!
Q. What if I have already put $700,000 into super via non-concessional contributions, will I have to draw down to make it $500,000?
A. No.
Q. What if I go over the cap in the future, what happens?
A. A penalty tax will apply.
Q. What if I am retired and have put non-concessional money into super and then drew it out to help family and for renovations but I intended to put the money back in when money came along? Is there any netting provisions — money in minus money out — or am I stuffed? Is the only way to rebuild my super is by the concessional contribution route?
A. You look to be a casualty of Treasury not thinking about your example, which could be more numerous than many might think.
Q. Has this lifetime cap made the re-contribution strategy defunct?
A. Pretty well. For those who don't know what we’re talking about, here you could draw out money that went in as concessional contributions and you then could put it back in as a non-concessional contribution, which de-taxed these monies when they were left to family after death.
Q. With this $1.6 million lifetime ‘transfer cap balance’ for superannuation in pension mode, what happens if you have $2 million in super? When I draw it out will I get stung with a capital gains tax?
A. The $400,000 you have in super in excess of $1.6 billion can be transferred into accumulation mode but it means you will face a 15% tax on earnings. You will be taxed at 0% on the $1.6 billion. No capital gains tax will apply.
Q. What if I draw out altogether?
A. You will face tax rates like anyone else so you better get good returns on that money?
Q. As a strategy, should I put money in accumulation mode into very safe, low return assets to keep the tax down while take more risks for higher returns with the $1.6 billion?
A. I’m sure some people will see this as a strategy. It’s funny what Government policy can lead to, isn't it?
Q. When does this $1.6 million cap start?
A. 1 July 2017.
Q. Do the changes where super earnings on a transition to retirement pension are now taxed at 15% and not 0% make these pensions virtually useless?
A. Regrettably the answer is yes. I guess if you want to access up to 10% of your super each year until you fully retire, it still works. And if you want to use salary sacrifice to build up your super balance it helps as well.
Q. Could you explain when you get slugged with a 30% tax on your super contributions? I’m told it’s not based on your taxable income!
A. You are right, the definition of income is not just your taxable income, but also includes reportable fringe benefits, reportable employer super contributions such as salary sacrifice and net investment losses (such as from negatively gearing a property). So these are added back onto your taxable income and if you are over $250,000 — it was $300,000 before the Budget — then you are taxed 30% on your super contributions and it’s on all your contributions each year you are over than threshold. That’s bound to create work for accountants and financial advisers!
Q. Will Labor support these changes?
A. So far Labor says it will reject the $1.6 billion lifetime cap but it proposes to tax earnings over $75,000 a year in super at 15%. There is no movement from Bill Shorten on the $500,000 cap for the non-concessional contributions.
Q. Obviously if my super balance is big and my wife’s is small I should help her build up her balance by getting her to maximize the concessional cap and by me pushing her non-concessional cap up to the $500,000 maximum.
A. Yep, spot on.
Q. I have been planning to sell my business, factory and house in a very good Melbourne suburb to move to the country with a nice super fund. My current balance is low because I have been building my business, employing people, etc. I will be really worse off if these super changes become law, won’t I?
A. The true answer is yes, you are worse off. It will take you much longer to get your money into super and that means it will be taxed more heavily depending how you invest your money. While between you and a wife/partner you can have $3.2 million in super, between you can only put $1 million as a non-concessional contribution and the rest will have to be put in as concessional contributions but these are capped at $25,000 a year or $50,000 between you. These new super rules hit business sellers and home downgraders who planned to put the excess proceeds into super. You still have the money but you will be taxed more on it and I makes property as well as other assets such as artwork more interesting.
Conclusion: Don’t cut your wrists yet over these super changes as I hope Scott Morrison rethinks some of his super changes over the election campaign, while Labor could easily make the $500,000 lifetime cap apply from Budget night and not 1 July, 2007. Of course the Senate could change some of these measures but that’s a gamble given what our upper house has looked like in recent parliaments!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
