Bill Shorten hasn’t been caught out after all about his super slugs. He didn’t “mis-speak”, he just “misheard”. Maybe? Let’s give him the benefit of the doubt on this occasion.
What he can’t hide from, however, is that these slugs are another attack on the superannuation system and the attractiveness of it relative to the Government providing for your retirement. The $34 billion it will raise over the next decade through higher taxes and reduced tax concessions will come from more than a million Australians.
Take the change to the non-concessional contribution cap to just $75,000. Twelve years after it was established at $150,000, Shorten will slash it to half its original amount. Adjusting for inflation, it’s less than one quarter.
Super was designed to reduce people’s dependence on the government aged pension. Rather than the taxpayer, get the individual to prepare, plan and save for their retirement. But almost every change made to super recently is making it less attractive as a savings vehicle. Now Shorten is planning to add to this by introducing five further changes. Each change makes super less attractive in its own right, and will cause many savers to question why they should tie their money up in the super system for the next decade, or two or three.
Here’s a simpler “no super” strategy for savers: spend the money on your family and have some fun yourselves, invest in the tax-free family home, “gift” surplus assets to your kids five years before you retire, go on the government aged pension, and, if needed in your old age, seek some “reverse gifts” from your family to supplement your government pension.
Here’s a run-down on Shorten’s super slugs and who’s impacted:
1. Non-concessional contribution cap slashed to $75,000
Originally set at $150,000 12 years’ ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions will be cut back to just $75,000.
Non-concessional contributions are, of course, personal contributions to super from your own resources and are made from your “after tax” monies.
The cut in the cap will reduce the ability to make a large “one-off” contribution to super, which may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make 3 years’ worth of non-concessional contributions in one year. This means that under current policy, a person can get $300,000 into super in one hit while a couple can potentially contribute up to $600,000. Under the ALP, this will fall to $225,000 or $450,000 for a couple.
While only impacting 20,000 superannuants in its first year, the change potentially impacts all superannuants because this will set the standard for decades to come. It reduces the utility of super as a savings vehicle
2. Abolish catch-up concessional contributions
Probably the dumbest of Shorten’s super slugs, he plans to abolish ‘catch-up’ concessional contributions. According to Treasurer Josh Frydenberg, this will impact about 230,000 workers.
An initiative of the current Government, the ability to make ‘catch-up’ contributions only came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.
The unused portion of the annual concessional cap of $25,000 can be carried forward for up to 5 years. Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year.
Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).
Shorten says that he will announce policies that deal with some of the perceived inequities of the super system (such as the materially lower balances women have when they retire), but for some reason, ‘catch-up’ contributions doesn’t appear to pass the test. Hard not to think that this isn’t a case of the “not invented here” syndrome at work.
3. End deductibility of personal contributions within the concessional cap
Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5%, salary sacrifice contributions and personal contributions you make and claim a tax deduction for. They are capped at $25,000 in total.
Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (ie genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.
Shorten says that an ALP Government will reverse the change and scrap the widespread deductibility of personal super contributions.(It is not clear whether this means the re-instatement of the 10% rule.) According to Frydenberg, this could impact up to 800,000 workers who are working part-time at the same time as running a small business. Many are using the salary from their part-time job as the cash flow to make their business grow. He says that “the concession (tax deduction) specifically encourages the dual objective of entrepreneurship and savings for retirement, and helps strengthen the small business sector – the backbone of the economy”.
4. Higher income super tax lowered to $200,000
Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, Shorten proposes to lower it to $200,000.
130,000 additional people will pay 30% tax on their super contributions. And if you are wondering why the threshold is $200,000 rather than the $180,000 threshold for the 47% marginal tax rate , the income definition for Division 293 tax includes super contributions (which is approximately $180,000 plus the 9.5%).
5. SMSFs won’t be allowed to borrow
David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.
Shorten’s Treasury Spokesman Chris Bowen has stated that an incoming ALP Government would adopt this recommendation and change the law to prohibit SMSFs from borrowing. Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans.
If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.