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Forget franking, SMSFs face even more cuts, warns peak body

Glenn Freeman  |  18 Apr 2019Text size  Decrease  Increase  |  
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Labor's plan to axe cash refunds for excess franking credits may have monopolised attention in the countdown to the election but investors stand to lose out even more from other proposals, Australia's peak superannuation body warns. 

Women and those with broken work patterns are among those most likely to be affected by Labor's reforms, according to Peter Hogan, head of technical at the SMSF Association.

If it wins office on 18 May, Labor vows to reduce the cap on non-concessional contributions to super, Hogan told Morningstar. Labor will reduce this to $75,000, from $100,000, in the year ending 30 June, 2018.

"This would mean it's been reduced by more than 50 per cent in a short period of time," Hogan says.

The current government already reduced the non-concessional cap from $180,000 to $100,000 from 1 July 2017.

More to super changes than Franking

While the franking credits overhaul or so-called retiree tax has stirred most debate, investors will have to grapple with other lesser known reforms, Hogan says.

"Beyond the proposed changes to franking credits, there are a few areas that people perhaps aren't aware of, and overall these could mean quite a significant reduction in the ability of people to make contributions to super above the basic SG amount," he says.

The aforementioned reduction in caps would also create the following changes:

  • a bring-forward cap of $225,000 over three years where an SMSF trustee's total superannuation balance is less than $1.4 million just prior to a financial year
  • a bring-forward cap of $150,000 over two years, for funds with a balance of between 1.4 million and $1.5 million just prior to a financial year.

Ending the carry-forward

Labor is also proposing to stop all catch-ups of unused concessional contribution cap amounts.

Since the start of July 2018, individuals were able to accrue any unused concessional cap amounts for up to five financial years, providing their super balance was under $500,000.

Then from 1 July 2019 onwards, they would be able to make additional concessional contributions to catch up these unused amounts.

For example, if an employer contributes $20,000 this year - such as through an employer contribution plus additional salary sacrifice - for the next financial year, they would be able to contribute $30,000, comprising $25,000 plus another $5,000.

"Labor is saying from 1 January 2020, 'we're not going to allow you to do that, we're going to abolish the measure altogether,'" says Hogan.

He says these provisions had been viewed as important for women and other people with broken work patterns, in allowing them to make meaningful catch-up contributions into their super.

"So it's somewhat surprising that hasn't received much attention, given that at the time it was promoted as a way for women to help close the gap in the retirement saving rates," Hogan says.

How to respond

In responding to these changes, individuals should start planning their retirement early in order to make non-concessional contributions earlier, says Liam Shorte of Verante Financial Planning.

Shorte also suggests trustees use any carry-forward allowance in early 2019 and 2020, rather than wait for a first potential Labor budget.

The 10 per cent test

Labor has also proposed reducing the eligibility of employees to make personal tax-deductible contributions into super.

Under the current regime introduced from 1 July 2017, most individuals are able to make personal tax deductible contributions, even if more than 10 per cent of their total income is provided by an employer.

The following count against the $25,000 cap on tax-deductible contributions:

  • employer contributions
  • any salary sacrifice contribution
  • any personal deductible contribution.

Before 2017, only the substantially self-employed were eligible to make these contributions, due to a rule that stated no more than 10 per cent income could be derived from salary and wages in order to be eligible.

If this is re-introduced, Hogan suggests the majority of Australia's full-time employees would be restricted to just SG and salary sacrifice contributions.

"It's a bit of red tape that you question why it needs to be there, really," he says.

The ALP has proposed reversing this change, partly because it was a "compliance nightmare" for the regulator.

Hogan suggests this would likely come into effect from the start of either the 2019 or 2020 financial years, though this level of policy detail is yet to be provided.

Further cuts in Division 293 threshold

Currently, this area of tax legislation imposes a 30 per cent tax on contributions for individuals earning more than $250,000 a year.

"That threshold is proposed to be reduced to $200,000, so if you have combined salary, wages, fringe benefits and concessional contributions higher than this, the excess amount will be taxed at 30 per cent.

This change would mark yet another drop in a capped amount, which has already been reduced in recent years, to $250,000 from $300,000 by the current government.

How to respond

Verante's Shorte suggests SMSF members subject to Division 293 tax will still likely benefit from using their full concessional contributions cap. These contributions are effectively taxed at a maximum 30 per cent instead of the highest marginal rate, currently 45 per cent plus relevant levies.

 

is senior editor for Morningstar Australia

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