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The end of a horrible SMSF year

It was Queen Elizabeth who made the phrase, annus horribilis, such a memorable one.

In a speech in late 1992 to mark the 40th anniversary of her accession to the throne, she famously said: “1992 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an annus horribilis.”

The recent passage of the federal government’s superannuation reforms through both houses of Parliament notwithstanding, I can think of no more apt phrase to describe how 2016 unfolded for our industry. The federal budget, the election, the post-election politicking on the changes to super – it all proved highly challenging for the industry and our clients.

Indeed, the end effect of all the change was to undermine a cornerstone of superannuation – the trust people have in the system. When you ask people to surrender nearly 10 per cent of their wage package and lock it up for future use (often decades away), they need a strong belief in the system. All the anecdotal evidence I hear from clients suggests it will take considerable time and effort by government and regulators alike to rebuild that trust in superannuation.

An excellent starting point would be for the Parliament to legislate to define the objective of superannuation. This was a key recommendation of the Financial System Inquiry and one the government has said it will address. It’s imperative it does so as a matter of urgency as an objective will provide the necessary (and hopefully bipartisan) system by which any future changes can be measured.

More important would be a commitment by all political parties to stop moving superannuation’s goalposts. Stop seeing it as a short-term fiscal remedy and remove it from the budgetary cycle. One option could be a five-year period between any substantive changes to superannuation, and then only if that change dovetails with super’s objective and follows a parliamentary inquiry.

Superannuation is a long-term policy objective aiming to give people security and dignity in retirement, and it’s time all political parties reflected the long-term nature of super when policy is formulated.

That said, the passage of the superannuation package through both houses of Parliament did allow the industry to finish the year on a better note. What needs to be done now, of course, is for all those involved in the SMSF sector – administrators, advisers and trustees – to understand what these substantial changes mean for their SMSF or their client. There is a lot to absorb and only half a year in which to do it.

There are three key changes: the concessional and non-concessional contributions caps and the pension transfer balance cap.

To take the concessional contributions cap first, this has been significantly reduced. From 1 July 2017, all concessional contributions will be cut to a maximum of $25,000 a year – irrespective of age. This financial year, 2016/17, will be the last time SMSF trustees and members will be able to take advantage of a concessional contribution cap of $30,000 for people aged under 49 and $35,000 for people aged 49 and older.

In regard to non–concessional contributions caps, the government has sensibly retreated from its budget proposal of a $500,000 post-2007 lifetime cap on non-concessional contributions to super funds. In its place, and after much negotiation with the industry and its backbench, the government decided to maintain the current annual non-concessional contribution amount until 30 June 2017. It is a welcome concession that will give SMSF trustees and members the necessary time to maximise their after-tax contributions.

But from 1 July 2017, the rules change, with non-concessional contributions to be capped at $100,000 a year. In addition, from 1 July 2017, non-concessional contributions cannot be made if they push a fund member’s account balance above $1.6 million – again highlighting why SMSFs have to act now.

Lastly, the pension transfer balance cap, which will limit the tax-free earnings of a member’s total superannuation pension balance to $1.6 million, takes effect from 1 July 2017. SMSFs that have more than $1.6 million in their fund’s pension phase will be required to transfer the excess to an accumulation fund, where any income will be taxed at 15 per cent – still a very competitive tax rate.

What the government is saying for most SMSFs where a husband and wife are the members is that they can have a super savings retirement pool of $3.2 million before the taxman will start taking an interest.

None of these changes would have been on my wish list. From my perspective they punish those people who are prepared to sacrifice now to ensure a secure retirement. But at least it has given some certainty – well, at least until 1 July 2017.

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