So changes to superannuation contributions caps and taxation of concessional contributions is on the agenda for the upcoming Federal Budget to be delivered on May 3 – this was confirmed as such through a leaked post-budget advertising script obtained by Sky News that promotes how the Government is looking to save $16 billion over four years through a series of tax reforms, including a crackdown on superannuation concessions.
The script makes mention of the following in respect to the pending superannuation changes to be delivered in this year’s Federal Budget:
‘New and important changes are happening to Australia’s Tax and Super System. These will make the system fairer and continue driving economic growth. We need superannuation to be flexible enough to work for everyone – particularly those on a low income…’
The focus of the Government has been on changes in accumulation phase rather than post-retirement. This messaging has been around for some time, even when changes first started being mooted for the Tax White Paper. The messaging today, whilst remaining relatively the same, is certainly bringing in the current discussions about the objective of superannuation and the accepted recommendation put forward by the Financial Systems Inquiry (FSI) panel that the objective of the superannuation system is to provide income in retirement to substitute or supplement the Age Pension.
With changes to superannuation contributions not only on the radar, but now a key plank of policy reform for budget night, what is expected? Well, the Government is saying we need to wait until May 3, but let’s take a pretty calculated ‘stab’ at it:
Concessional contributions caps to reduce to $20,000 (currently $30,000 p.a.)
Putting aside that the concessional contribution cap will reduce to an all-time low position, in my view there are two key issues that we need to focus on in the Government resetting this cap:
- Will the reduction be a flat reduction or will we see an introduction of rolling caps – that is, currently within an income year, if you don’t use it… you lose it. In much of the messaging we have seen, the Government raises the importance of flexibility for tax concessions. As a result, it could be probable to see the Government look to adopt a policy setting that may allow for a contributor to roll-forward their concessional contributions for a period of time, say 3-5 years. Therefore, whilst we see a cap reduction occurring in light of current economic circumstances, we also see an opportunity for some taxpayers to avail themselves of additional contributions in years where they have capacity to do so (e.g. time out work due to health or other circumstance).
- Furthermore, will we see any additional concession for individual’s closer to retirement? For a long period of time, there has been an ability for people closer to retirement to contribute more = this has been an important plank in super policy to allow individuals to become more self-sufficient for retirement. Will a reduction to $20,000 apply right across the board? or will we see some higher cap or increased ability to accelerate contributions into super for those closer to retirement?
Interestingly, when the Labor Government laid out their superannuation agenda if elected (see Fairer Super Plan), no reference was made to a reduction of the concessional contribution caps.
Lowering the ‘income’ threshold for Division 293 tax
Whilst ordinarily superannuation has a 15% tax rate being applied on concessional contributions, we have had a tiered taxation system within superannuation for some time, since the re-introduction of a ‘surcharge’ on concessional contributions (Division 293 tax) in the 2012-13 year. Div 293 tax applies where individuals that have ‘income for surcharge purposes‘ and low-tax contributions in excess of $300,000 are subject to an additional 15% on their contributions . Add to this, the Low Income Superannuation Contribution (LISC) that effectively rebates the 15% contributions tax on super guarantee amounts for people with income* of less than $37,000 and you can see that taxpayers already pay varied rates of tax on their concessional contributions.
To help alleviate financial pressures on the Federal Budget, we are now almost assured of seeing the Government reduce the Div. 293 threshold from $300,000 to $180,000. This is in contrast to Labor previously announcing a reduction in the threshold to $250,000.
* ‘Income’ for LISC relates to an adjusted taxable income calculation, with eligibility based on you or your employer paying concessional contributions, including super guarantee into a complying super fund.
Expect LISC to stay
Currently legislated until 30 June 2017, expect the Government to announce within the Federal Budget for the low-income super contribution to continue beyond the current timeframe. This was something advocated by the Labor Government to continue if elected as well and fits into the narrative above to support those on low income.
Impact of non-concessional contributions
With a likely reduction of the concessional contribution cap, we await to see whether the Government decides to keep non-concessional contributions intrinsically linked to the CC cap, currently legislated as 6 times this amount (6 x $30k). A change to $20,000 (for example) will mean a NCC cap reduction from $180,000 to $120,000, with the bring-forward rule reducing the NCC to $360,000 over the three-year period (currently at $540,000). It would be interesting to see how the bring-forward rule will play out where someone has already triggered the $540k under the current 3 year period. The legislation provides for qualification at the time the contribution is made, not based upon the future window period, so would an change apply retrospectively here?
So, just how much will occur with changes to superannuation in the upcoming Federal Budget? Will we predominantly see changes that will impact accumulation members, but spare those in post-retirement? Or will some of the supposed ‘excesses’ get targeted as well in the process of Government tightening its belt on super tax concessions (e.g. Transition to Retirement).
It would not be unreasonable to suggest here that once again we have a Government putting the ‘cart before the horse’ when it comes to superannuation policy. Whilst deliberating on a key objective for superannuation, here we are looking at changes to rules without having laid the foundations on which we want current and future Governments to shape policy direction on this topic. Previous recommendations to introduce super custodians under the Cooper Review fell on deaf ears, which has ultimately lead to superannuation remaining a political ‘football’.
Whilst this information about proposed changes appears to have been leaked, in reality we were always expecting any negative news of changes to superannuation to hit the press before budget night. Why, because it pushes much of the bad news away from the key messaging (good news stories) the Government want delivered on budget night. This was the case when the rumours of super reforms got out of control back in April 2013 as well when Labor was forced to release their policy changes in the lead up to the 2013-14 Federal budget.
Let’s now wait and see what will eventuate come May 3…