The 2016 Federal Budget, handed down by The Liberal Party (LNP), included budgetary alterations to areas such as small businesses, taxation and youth employment. However, proposed changes for superannuation have sparked widespread debate, due to their effects on current pensioners, as well as future retirees and their retirement plans.
Perhaps the most significant amendment is the new limit on concessional super contributions. Concessional contributions refer to the mandatory 9.5% contribution made by employers, plus any salary sacrifice made discretionarily, or any tax deductions if self employed. The previous limit of $30 000 has been brought down to $25 000, and amounts exceeding this will face a tax from 1 July 2017. Additionally, a lifetime cap of $500 000 has been implemented on personal, after-tax, non-concessional contributions.
The budget also outlines significant changes to the taxation of super funds. Previously, the income threshold at which the 30% concessional contributions tax was imposed was $300 000. This will be reduced to $250 000, effectively resulting in the widening of the high income earners bracket and increasing the government’s revenue. The Labour Party has expressed strong support for this particular point.
The other taxation change is in regards to technicalities in the stages of superannuation. A tax increase will be imposed on the Transitional Retirement Pension, a career phase where one can reduce working hours without losing income, from 0% to 15%. This implies that assets moved to support transitional retirement pensions are being taxed 15%.
The Government’s attempt to further restrict superannuation transfer is clear in its $1.6 million ‘transfer to income stream balance cap’, where the total amount one can transfer to their accumulated superannuation fund is $1.6 million.
These policy adjustments raise a number of questions. What are their main objectives? Are superannuation savings still encouraged? How do these changes affect the everyday Australian?
The purpose of superannuation changes
There appears to be two purposes of these superannuation policy changes.
The first is to increase equity between high and low income earners. This is done by creating stringent regulations which will seldom affect anyone other than those in high tax brackets. For example, the applicable company tax rate of 30% applied to those earning over $250,000 will disproportionately affect the wealthier subset of the population. Similarly, the cap of $1.6million on tax-free super savings in the pension face will impose limits on those few who would potentially want to transfer sums of money greater than this.
Correspondingly, new obscure measures provide additional assistance for low income earners and older workers. These include removing the need for people aged 65 to 74 to satisfy a work test in order to make super contributions, as well as introducing a $500 tax offset for those earning less than $37 000.
The policy changes have a second purpose which is to strengthen public confidence in the superannuation system. Strengthening the integrity of the system will be achieved by minimizing the incentives to use superannuation as a tax evasion vehicle. Measures include changes to the Transition to Retirement Income Stream and the increase in tax rate for high income earners.
In a nutshell, the new policy’s objective is to reduce the extent to which superannuation is used for tax minimisation and estate planning purposes. The Government wants to ensure superannuation is used for its true purpose, which is to build retirement savings and not a wealth accumulation and tax-avoidance vehicle
Effect on stakeholders
The proposed changes to superannuation ultimately aim to reduce the capacity for high net worth individuals to utilise superannuation to their advantage. The changes will make it harder to put excessive amounts of money in, and less attractive to do so. In response, these stakeholders are likely to shift away from superannuation as their primary savings tool, and seek alternative ways to structure their finances. For example, using other tax effective investments like negative gearing or investment vehicles such as family trusts.
Another potential winner, aside from low income earners who benefit from greater equity in the system, are those who take extended periods of time off work, such as mothers. New clauses stipulate that upon return, these workers will be able to make extra super contributions to account for the amount they forewent whilst unemployed.
For all Australians, the new contributions means the ability to build up funds within the system is limited. As a result, to ensure enough funds are accumulated to lead a comfortable retirement, people will have to begin saving and attempting to maximize the value of the limit much earlier in their careers.
The overall effect on the amount of national savings paid into super accounts is unclear. If savings are ultimately discouraged rather than incentivised, as well as being capped, we may see an increased reliance on pension payments in the future, creating an additional strain on the Government’s fiscal position.
One key issue that has arisen through discussions regarding the proposed changes is whether they are in fact retrospective or not. While Labor leader Bill Shorten is calling the changes “undoubtedly retrospective”, Mr. Turnbull strongly disputes this saying they only apply to future earnings.
A clear example of the supposed retrospectivity is in the new $500 000 lifetime limit on post-tax contributions. Any contribution made since 1 July 2007 will count towards this limit clearly demonstrating how these changes affect actions in the past. The LNP would argue that this view is not valid as whilst the past contributions count towards the limit, there is no penalty imposed if the limit is exceeded. It is also true that people with high super balances will now pay more tax than previously anticipated.
The other argument for retrospectivity is that superannuation involves long-term planning and many people adjust investment decisions according to superannuation policies. People who anticipated lower taxation rates for example may have increased contributions instead of investing in property or equity, following the advice of financial advisors. These plans are now thrown into disarray. This point is particularly relevant for those nearing retirement age, who have calculated income streams around existing legislation. Changes will force some retirees to revise their investment strategies and change their pre-retirement preparation.
This leads us to a core issue at the heart of the superannuation changes, which is the possibility of reduced faith in the superannuation regime. The nature of super means once funds are entered into the system, they are unable to be withdrawn. If people feel as if their retirement savings are at the mercy of the current Government and undetermined policy changes, they may feel less inclined to contribute large amounts of money to their super accounts. In an era where Australia has a rapidly ageing population, leaving more people dependent on retirement savings, it is not in the interests of the government to discourage savings into super. Retirement savings require long term planning and these changes have undermined this process.
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