The recent budget contained two more changes to super.
The first will get rid of the ‘work test’ for people aged 65 and 66 wishing to make super contributions. To align with an eventual increase in the pension age to 67, from 1/7/20, people aged 65 and 66 will be able to make personal after-tax (non-concessional) super contributions, salary-sacrifice contributions and have spouse contributions made on their behalf without needing to satisfy the ‘work test’ (defined as working 40 hours over any 30 day consecutive period). They can be fully retired and still make super contributions.
They will also be able to access the ‘bring-forward’ rule, which allows a person to make up to three years’ worth of non-concessional contributions in one hit. Potentially, a way to get $300,000 into super, or for a couple, up to $600,000. Currently, you need to be under age 65 during the financial year to trigger this. It will be extended to under age 67 from 1/7/20.
The second change will make it easier for spouse contributions to be made, by extending the age of the receiving spouse from under age 70 to under age 75. The receiving spouse will no longer need to meet the ‘work test’ if aged 65 or 66 (but will need to meet the work test if aged from 67 to 74 years). Potentially, this means that more spouses can claim the tax offset for making a spouse contribution(up to $540), and extends the opportunity by another 5 years to equalise superannuation balances between spouses.
Both changes are sensible and arguably overdue, and on paper, should be supported when they finally make there way through the legislative processes.
However, the day after the Budget was delivered, the Government quietly dumped one of its headline super changes from the 2018 Budget – a plan to increase the maximum number of members in a Self-Managed Super Fund (SMSF) from 4 to 6. Originally the centrepiece of an omnibus bill covering changes to superannuation, craft brewing and global infrastructure and imaginatively entitled Treasury Laws Amendment (2019 Measures No. 1) Bill 2019, all references to the SMSF change had gone when the Senate finally gave it the nod. Presumably, some pesky cross-bench Senators had concerns (or were lobbied by other interest groups), and in the wrap up of Parliament, the Government took what was on offer. Craft-brewers were celebrating the excise relief, while SMSF members were left stranded.
This is a reminder that changes to superannuation requires changes to the law, which means running the gauntlet of the Senate cross-bench. If there is a change of Government at the May election, there is no guarantee that the super changes announced by Josh Frydenberg in the Budget will make their way back into Parliament.
This is because all bills lapse when the Parliament is dissolved (as happens at a General Election). Moreover, the ALP has its own set of priorities for the super systems and has already announced 5 changes. The “not invented here” syndrome possibly also comes into play. Here is a re-cap on the ALP’s proposed changes.
1. Non-concessional contribution cap slashed to $75,000
Originally set at $150,000 12 years’ ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions is set to be cut back to just $75,000.
Non-concessional contributions are of course personal contributions to super from your own resources and are made from your “after tax” monies.
The cut in the cap will reduce the ability to make a large “one-off” contribution to super which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. Under the ALP’s plan, if you access the ‘bring forward rule’, the maximum contribution will fall from $300,000 to $225,000, or for a couple, from $600,000 to $450,000.
2. Catch-up concessional contributions abolished
An initiative of the current Government, the ability to make ‘catch-up’ contributions came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.
The unused portion of the annual concessional cap of $25,000 can be carried forward for up to 5 years. Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year.
Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).
3. End deductibility of personal contributions within the concessional cap
Concessional contributions include your employer’s compulsory super contribution of 9.5%, salary sacrifice contributions and personal contributions you make and claim a tax deduction for. They are capped at $25,000 in total.
Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (i.e. genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.
4. Higher income super tax lowered to $200,000
Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, the ALP proposes to lower it to $200,000.
5. SMSFs won’t be allowed to borrow
David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.
Shadow Treasurer Chris Bowen says that an incoming ALP Government would adopt this recommendation and change the law. Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans. If it doesn’t, then we will all be screaming.