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Contribution caps cause for concern for SMSFs

Glenn Freeman  |  04 May 2016Text size  Decrease  Increase  |  

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Glenn Freeman is a senior editor at Morningstar.


High net wealth individuals, particularly those with high super balances, higher income earners and workers aged 55 to 65 years of age are among the key groups to lose out in the Federal Budget 2016.

Handed down by Federal Treasurer Scott Morrison on Tuesday night, the Budget proposes limiting tax-free superannuation accounts to $1.6 million--something the Treasurer suggests will impact only 1 per cent of super fund members.

It would also reduce the cap on concessional super contributions to $25,000 per annum, from $30,000 currently.

The SMSF Association has criticised this decision, with CEO Andrea Slattery describing it as "a backward step that will severely reduce the ability of people to save adequately for retirement".

Responding to what she says are the most significant changes to the superannuation system since 2007, Slattery reiterated the association's view that adequate concessional contribution caps are vital to allow people to save for "a secure and dignified retirement".

"It is especially important that people approaching retirement have adequate contribution caps to maximise contributions to superannuation when they are most likely to have the financial resources to do so."

Speaking to Morningstar.com.au, Jordan George, senior manager of technical and policy at the SMSF Association, refers to a study the association has conducted alongside actuarial firm Rice Warner.

"This data shows that people are overwhelmingly making large catch-up contributions to superannuation, from age 55 onwards--both males and females ... people overwhelmingly make large contributions later in their careers, rather than making them steadily all throughout their career."

In an announcement issued late last night, Slattery said: "We believe that changes to super should have been part of a broader, coherent review of the tax system, rather than singling out one form of savings for changes."

On the upside, she says the government does deserve plaudits for its decisions to remove the 10 per cent rule for personal deductible contributions and the work test for contributions made by people aged between 64 and 75.

"These decisions will reduce the complexity for fund members and employers alike, which is a positive, reducing red tape for members and employers alike."

She says the SMSF Association is also "pleased the government is going to maintain a more equitable treatment for low income earners by introducing the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution".

Louise Biti, director of Strategy Steps, a financial planning research and consulting business, believes an unintended consequence of the Budget could see high net worth investors seek alternative non-superannuation strategies and structures to provide tax-effective wealth accumulation.