Superannuation Policy: What Will These Changes Mean For Your Future?
OK, by the very nature of change there are always going to be some winners and some losers from any changes to superannuation policy. However, understanding the need for these changes is probably a good first step in understanding how you may be affected.
Given Australia’s budgetary deficits, an ageing population, and fiscal taxation, superannuation reforms were inevitable. To be frank – I would rather see them introduced sooner rather than later to aid with the repair process. The government has drawn a line in the sand and set out a clear objective for superannuation which is ‘to provide income in retirement to substitute or supplement the Age Pension’.
In other words, the aim is to take away some of the Government’s financial burden in the future and place more financial responsibility on individuals to save and invest for their own retirements. That means that anything that promotes or provides for superannuation outcomes that are significantly different than the stated policy objective are likely to come under continued scrutiny (or for the more cynical amongst us provide an opportunity for the government to get its hands on some of the approximately $2 Trillion currently in superannuation).
Firstly, depending on your current age and financial situation, the recent changes to superannuation may not even affect you (at least not for now). For example, the Association of Superannuation Funds of Australia estimates that the average super balance for a 65-year-old man is $194,633 and for a 65-year-old woman, $117,144.
According to a Roy Morgan survey of 2.9 million Australians aged between 50 and 64 years of age who are still working (pre-retirees), the average male has a total wealth position of $470,000 and an average debt position of $102,000 giving a net wealth figure of just $368,000. And continuing to shine a light on how much tougher women have it, this survey showed that on average women have combined wealth of $318,000 against average debt of $86,000 for a net wealth position of just $232,000.
So, therefore, some of the changes introduced such as the $1.6 million superannuation transfer balance cap, are expected to affect less than one per cent of Australia’s superannuation account holders.
But with that being said – let’s take a look at the real ‘winners’ and ‘losers’ of these superannuation changes.
Australian Superannuation Policy Changes: The Big Winners
Next year will be a very busy time for Financial Planners as changes that have seen tighter pension asset tests (effective from January 2017) and the even more recent superannuation changes (most come into effect July 1st, 2017). This will most likely have those confused by the complex structural changes and anyone approaching retirement scrambling to adjust their affairs.
A fairer superannuation system which allows all Australians to have a comfortable, or at least a dignified, retirement should be seen as a win. And whilst, the superannuation changes do not guarantee that outcome they are at least a step in the right direction.
Those earning less than $37,000 p.a will benefit from the changes to Low Income Superannuation Tax Offset (LISTO). Prior to these changes, low-income earners could effectively pay a higher rate on tax on their superannuation contributions than they would pay on their ordinary earnings outside of superannuation. Under the new changes, the LISTO will effectively refund the tax paid on concessional contributions (in excess of their out of super liabilities) back into their superannuation accounts up to a cap of $500. It is expected that these changes may benefit up to 3.1 million low-income earners, including around 1.9 million women.
From 1 July 2017, the Government will allow all individuals under the age of 65 (and those aged 65 to 74 who meet the work test), to claim a tax deduction for personal contributions to eligible superannuation funds up to the concessional (pre-tax) contributions cap (now $25,000 p.a). This is in contrast to the current rules that an income tax deduction for personal superannuation contributions is only available to people who earn less than 10 per cent of their income from salary or wages. This reform is set to benefit up to 800,000 Australians who are partially self‑employed and partially wage and salary earners – such as self‑employed contractors, individuals employed by small businesses or freelancers – and individuals whose employers do not offer salary sacrifice arrangements.
Australian Superannuation Policy Changes: The ‘Losers’
In any debate about equality and fairness, it is going to be hard to call high-income earners or those with more than $1.6M in superannuation ‘losers’. However, for those that have worked smart, invested wisely, and find themselves in the enviable position of having achieved this financial position, here are a few of the changes that may affect you from July 1st, 2017.
- From 1 July 2017, the threshold at which high-income earners pay additional contributions tax (Division 293) will be lowered from $300,000 to $250,000. (The Government modelling estimates this will affect less than 1% of Australians).
- The Government will reduce the annual cap on concessional (before‑tax) superannuation contributions to $25,000. This is in contrast to the current thresholds of $30,000 for those under age 50, & $35,000 for those aged 50 and over. (The Government modelling estimates this will affect around 3.5% of Australians.)
- Additionally, the government will allow for catch-up concessional (pre-tax) contributions for those with superannuation balances of less than $500,000. The unused portion of the $25,000 p.a concessional cap can also be rolled over for up to 5 years. These changes only kick in from 1 July 2018. So for example, if in 2018-19 an individual contributes $15,000 they will be able to carry forward $10,000 into the next year.
- The contentious $500,000 lifetime non-concessional (after-tax) cap will be replaced by a new measure to reduce the existing annual non-concessional (after-tax) contributions cap from $180,000 per year to $100,000 per year. From 1 July 2017, the Government will lower the annual non‑concessional contributions cap to $100,000 and will introduce a new constraint such that individuals with a balance of more than $1.6 million will no longer be eligible to make non‑concessional (after-tax) contributions. As is currently the case, individuals under age 65 will be eligible to bring forward 3 years of non‑concessional contributions.
- There will be a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the tax‑free retirement phase. The transfer balance cap will be indexed and will grow in line with CPI, meaning the cap will be around $1.7 million in 2020‑21.
For example, if you had $2M in superannuation and wanted to retire in November 2017 you could transfer $1,6M into a tax-free retirement phase account. The remaining $400,000 could either remain in an accumulation account where earnings will be taxed at 15 percent, or remove all or part of the extra $400,000 from superannuation. (The Government believes that less than one per cent of Australia’s superannuation account holders will be affected by the transfer balance cap.)
So what will all this mean to you and what will it mean from the perspective of property investors?
Well, we don’t know 100%. However, for a lot of wealthy Australians, the zero or low tax environment that superannuation has provided till now, may no longer be seen as attractive. It may well be that some of the big money (above the $1.6M tax-free threshold) will be pulled out of the superannuation environment altogether. If that occurs it is likely that at least some, if not a large percent of those funds, may be diverted into other tax-advantaged investment spaces including the negatively geared property space.
I am going to throw out the call! If you would like us to do a special webinar presentation on these changes so we can cover the topic in more detail, please email firstname.lastname@example.org. If enough people are interested in this topic we will put a special webinar within the next few weeks.
Also, if we have not yet booked your annual reviews for 2017, now may be a good time for you to get in touch with your mentor to make sure your investment strategy will still work as effectively under the new rules.