We all expected some superannuation changes to come out of the federal budget. There was general consensus high-income earners received most of the spoils on offer and some clawback of tax benefits was warranted to improve the overall fairness of our superannuation system. The government had made strong overtures prior to the handing down of the budget that using superannuation as an estate planning vehicle was inconsistent with the objectives of the superannuation system.
The number and severity of the changes that eventuated, however, caught everyone by surprise. While we were responding to the consultation on defining the purpose of superannuation as recommended by the Financial System Inquiry, the government proceeded with major changes. Some of the proposed changes already seem at odds with one of the core objectives of superannuation around adequacy. In particular, the reduction in contribution caps impacts on all superannuates trying to self-fund a comfortable retirement without any reliance on the age pension.
The reduction in the concessional superannuation cap to a universal amount of $25,000 will help in making the system more sustainable, but this could come at the cost of adequacy over the long term. The next generation of people saving for retirement may not have the same opportunities to build the high super balances achieved in the past decade. Alternative wealth-generating strategies, such as negative gearing, a tax-free family home, family trusts and investment (insurance) bonds, were left unchanged.
The changes to transition to retirement and the anti-detriment rule were well anticipated. So too was bringing down the income limit threshold at which point the super surcharge (division 293) would apply. Also, the low-income superannuation tax offset to replace the low-income super contribution, which was to end on 30 June 2017, was an appropriate and anticipated response to make superannuation fairer for low-income earners.
What really caught most people by surprise was the lifetime cap of $500,000 on non-concessional contributions (NCC) backdated to 1 July 2007 and the cap of $1.6 million on pension-phase balances. These two measures shift the goalposts and have an element of retrospectivity, which is something all governments do not condone. Justifying these changes on the basis it impacts on only a small portion of the population does not make retrospective decisions right.
The dramatic deterioration in the budget deficit, and the need to find revenue somewhere, meant something had to give. Large superannuation balances, with the benefits skewed to the ‘rich’, became the target. People who have used the rules as intended by the government of the day have now been told they must unwind their financial plans and take the money out of their pension accounts. Superannuation policy encouraged large balances and self-reliance for those who could afford extra contributions and were willing to forgo other expenditures for super contributions. People who took advantage of the $1 million one-off injection introduced in 2007 by then-treasurer Peter Costello and/or the annual limit on NCCs of $180,000 or $540,000 under the bring-forward rule have a right to feel short-changed; even more so if they incurred capital gains tax in the process of making NCCs.
The constant changing of the rules will only add instability to the superannuation system and further enforces the need to take superannuation out of the budgetary cycle where it is at the disposal of the government of the day to meet fiscal demands. One of the objectives behind the enshrinement of the purpose of superannuation in law was to protect it from this process.
Regardless of who wins the next election, there will be major changes to superannuation going forward. What shape or form the current budget announcements take will depend on whether the government is re-elected and whether the changes can be passed by the Parliament.
The Labor Party has proposed its own policy of applying a 15 per cent tax on pension incomes in excess of $75,000, which could have similar impacts as the proposed changes with different administrative implications.
As a final note, practising accountants who deal in superannuation and have not taken up one of the licensing options under the Australia financial services licence regime need to be careful not to provide financial advice to clients, especially now the accountants’ exemption has come to an end.
Tax agents can continue to provide advice in respect of the taxation implications or consequences of financial products or strategy. The factual information of the tax implications should not imply any recommendation or opinion about a financial product that would influence a client in making a decision about a financial product or class of financial product. With all these proposed changes to superannuation in the wind, accountants need to ensure they are on the right side of the regulatory line in the sand.