Are the 2016 Budget Superannuation changes fair? Here's Michael's interpretation of some of the more contentious issues.
“Ask not what your country can do for you – ask what you can do for your country” – John F Kennedy’s powerful call for Americans to put aside self-interest, and strive to build a better nation. This is what I think the Federal Government has asked Australians to do when judging its 2016 Budget superannuation changes. It seems a rather courageous and politically dangerous initiative in an election year but I applaud the reasoning behind it.
2016 Budget Superannuation
People with large superannuation balances and those making higher tax deductible contributions will be impacted but if the individuals involved can lift their vision outside their own circumstance then it is possible to see that these changes are good to help bring balance to the ongoing finances of Australia. The government has attempted to set up Australia’s superannuation system on a more sustainable basis, and to limit the super tax concessions available to those on higher incomes or with higher levels of assets. It’s a logical “next step” move after enshrining the purpose of superannuation into law. Following the 2016 Budget, the purpose of superannuation in Australia is now defined as..
“to provide income in retirement to substitute or supplement the Age Pension”.
However, there is going to be a lot of argument before some of these proposed superannuation changes are set into law… and one of the key reasons is that for the first time, the Budget includes a superannuation change that will be seen as retrospective. For decades, one of the unwritten rules of superannuation is that rules and changes will not be retrospective. This allowed people to plan for their retirement, knowing that whatever changes may come in the future, there would be no penalty for those who follow existing rules. It may be seen that the budget has killed that idea and the assumptions that go with it. Even though the change is a logical one, it will directly impact many people who have operated in good faith and especially those who are close to their retirement.
The 2016 Budget Superannuation changes that are potentially retrospective rule relate to “non-concessional contributions”. That is, super payments for which the super fund member has not received a tax deduction. Prior to the Budget announcement, there was a limit on how much of your own after-tax money you could pay into your super fund. It was set at $180,000 a year with various options around that figure but so long as you met those conditions, you could keep doing this right up until you retired. This was changed in the Budget, which set a lifetime limit of $500,000 for this type of contribution to your super fund.
All well-and-good, except that the “lifetime” was backdated to the 1st July 2007. That means people who have paid more than $500,000 of their own after-tax money into their super since that date will be in excess of the new limit. The good news for those people is that your after-tax contributions prior to the budget will not need to be refunded – even if they are in excess of that $500,000 limit. So in that way, the changes are NOT retrospective.
Why use that particular date? Well, way back in 2006/07 there was a “one-off” opportunity for people to place up to $1,000,000 of their own money into their superannuation account, and a large number of people took the opportunity to do just that. If the lifetime limit of $500,000 was extended back past the 2007 financial year then there would be a lot of issues for people who took up that option.
Backdating any law is a tricky thing, and it will always leave the government open to accusations of cronyism or pandering to special interests or even just plain old simple stupidity. As I suggested earlier, it is a brave politician indeed, who is willing to step above their own electoral preferences in an attempt to do something better for the country. Very brave, and possibly somewhat foolhardy – but I am not a political commentator, so I will leave that to the media to thrash out in the arena of public opinion.
So let’s get back to the financial planning aspects of all these changes…
Aside from suggesting that there are limits to the amount you can squirrel away into your super, the government is also suggesting that there is a limit to the amount of money you can put into the incredibly comfortable and completely tax-free environment of a pension account. Specifically, the limit is set at $1,600,000 for the dollars you can transfer from superannuation to start yourself a pension. And that makes sense also. $1,600,000 is not a small amount of money. It is in fact, a very large amount of money – so the government is really just setting a threshold beyond which you cannot operate in a completely tax-free environment. But they aren’t suggesting you can’t have more than that amount in your super – they are simply saying you can’t have more than that amount in a completely tax-free pension. And that seems a logical thing to do, which also helps to counter some of the accusations and studies that suggest Australia’s tax concessions are too heavily skewed towards high income earners and the wealthy.
Now as a financial planner I am more than aware of the vagaries of our tax system, and there will be many people who will suggest that these changes are unfair and that they are impacting the very group of people who pay a large chunk of the country’s taxes. And that particular point is quite true. People with more than $1,600,000 in their pension accounts will be impacted and they will not receive the level of tax concessions that they enjoyed in the past. Those who have paid in more than $500,000 of their own money are fortunate as they can keep those dollars in the fund. However, those who were planning to add larger amounts of money into their funds in the coming years will now find that avenue severely limited or even closed.
But in one way, the government has been particularly level-headed with its proposed changes in the 2016 Budget Superannuation section. People who are receiving higher level government-funded pensions have also been told to expect to pay tax on a component of the pension money that they receive each year.
So it is a higher level of tax or a lower level of tax concession? In the grand old tradition of Shakespeare’s Hamlet – “that is the question”.
Click here for a link to the government’s excellent 2016 Budget website. You can read from the source material, and decide for yourself whether the government position is fair – or unfair – and whether it helps set up Australia’s retirement system for the longer term.
And a bit of perspective..
Here’s how unpopular pension changes have been received elsewhere in the world…Let’s hope discussion in Australia – about whether $1,600,000 constitutes a reasonable limit from which to enjoy a completely tax-free status – manages to stay civil.
As usual, please remember the Great Disclaimer and do not take any action based on the words I have written here. This is an outlet for my musings and thoughts only, and is not to be considered to be personal financial advice. The law states that I must suggest it is general advice only but I would suggest that it doesn’t even reach that high. There are a lot of rule changes and interpretations in these 2016 Budget Superannuation figures, and any attempt to interpret them precisely is fraught with danger. Not only have these changes not yet been set down into law – they haven’t really even been thrashed out in the turbulent world of politics and public opinion. With an election in due soon, there is no way that competing parties and fractions are just going to lay down and accept all of these changes being implemented as they are.
This post is simply setting out my impressions of just a few of the changes set out for superannuation. There are many more, and some of those will interact with the ones I have mentioned above and possibly in ways that have not been worked out yet. So it is important to do your own research or obtain a professional opinion on how the Budget changes are likely to impact on your personal financial position BEFORE you decide to make any changes to your existing arrangements or retirement plans.