Troubled times for super
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Australia's knife-edge federal election result has brought with it increased uncertainty for super funds, with proposed budget changes seen facing further revision.
What might investors expect?
Firstly, a look at what Treasurer Scott Morrison proposed in his pre-election budget:
• A $1.6-million super transfer balance cap on the total amount of super an individual can transfer into retirement phase accounts, which according to the government "will affect less than 1 per cent of superannuation fund members";
• A 30 per cent tax on concessional contributions, up from 15 per cent, for those with combined incomes and super contributions greater than $250,000, again only seen affecting 1 per cent of members;
• Lowering the super concessional contributions cap to $25,000 a year, expected to affect 3 per cent of members;
• A $500,000 lifetime cap for non-concessional contributions.
Other changes included:
• Introducing the low income super tax offset to replace the previous low income super contribution, benefitting individuals with taxable incomes of $37,000 or less;
• Allowing individuals aged over 75 to claim tax deductions for personal super contributions;
• Increasing the spouse tax offset income threshold from $10,000 to $37,000; and
• Introducing catch-up concessional super contributions by allowing unused concessional caps to be carried forward for up to five years for those with balances below $500,000.
The government will also apply the same contribution rules for all individuals aged up to 75, abolishing previous restrictions for those aged 65 to 74.
And barriers to new super products will be eased, with the tax exemption on earnings in the retirement phase to be extended to products such as deferred lifetime annuities and group self-annuitisation products.
However, the super changes attracted criticism from both inside and outside government, particularly over the retrospectivity of the $500,000 lifetime cap, which has been backdated to 2007.
Morningstar's head of equities research, Peter Warnes, described the changes as failing to pass the "KISS (keep it simple stupid) test," due to the retrospectivity of the cap and the reduced concessional contributions cap which "provides little incentive to save".
"Post-budget comments suggest the changes to superannuation could force high income earners to have more money outside a super fund, possibly encouraging the exploitation of alternative tax-friendly structures, including negative gearing and margin lending ... With central banks forcing investors further and further out the risk curve, I believe this is creating a time bomb," Warnes said.
Morrison's changes have also been criticised by his Coalition colleagues, including Liberal National Party MP George Christensen, who has threatened to cross the floor over the "Labor-style" policies.
"If the government's superannuation policy does not change, I will be crossing the floor and voting against these measures," he said.
Amid the debate, various concessions have been proposed, including allowing super fund members to make one-off deposits into their retirement savings accounts, even if they have already reached the proposed $500,000 limit.
Other exemptions have been flagged for divorcees, farmers and heirs to deceased estates.
Liam Shorte, director at Verante Financial Planning, said the budget changes and rumours of further exemptions had created "massive uncertainty, with no outlook for the final legislation before October or November".
"Attempts to create exclusions will lead to misinformation and people trying to find loopholes and it will be very difficult for financial planners and accountants to provide good advice without comprehensive checklists," he said.
"The government should bite the bullet and either get rid of the $500,000 limit or have it start from a future date to get rid of claims of retrospectivity".
Shorte also suggested the $25,000 concessional limit "reduces the incentive and ability for those in their 50s and 60s to close the savings gap in those years before retirement, when people have traditionally been more confident in making contributions because the retirement deadline looms closer".
"More and more people are carrying mortgage debt in to their 50s and 60s, so it really is only in their later years that they can afford to put more away and the $25,000 limit will just not meet their needs to save a decent balance.
"If people see no incentive to save then they will decide to be more reliant on the age pension--that is just human nature."
On 20 July, Morrison suggested that "technical issues" could be addressed within the scope of the proposed changes, as part of its "practical implementation".
However, he said changes such as dropping the proposed $500,000 cap would deliver a "significant" hit to the budget bottom line.
According to The Sydney Morning Herald, an exposure draft of the budget changes is expected by year-end, likely to be followed by a Senate inquiry and a vote perhaps not until next February or March.
For SMSFs and other super fund members, the only certainty in super is perhaps more uncertainty--making professional advice even more important for those planning for retirement.
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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
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