Budget 2016: The risks for super

A string of super concessions are on the line this year.

Summary: There are a number of potential policy changes to get across before Budget 2016: these include a possible end to transition to retirement income arrangements, possible reductions to concessional contributions limits, a raising of contribution taxes and a possible raise to capital gains tax paid inside super.

Key take out: The most important potential change for super savers is the removal of transition to retirement income streams – if you are eligible for this currently and have not put it into place, the removal of TTR in the May budget could hurt in the long run.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

We’ve had talk of reduced contributions limits, lowering of income thresholds for penalty tax rates and reductions to capital gains discounts.

It’s also been mooted that the removal of transition to retirement (TTR) arrangements could be unveiled on budget night.

But we’ve got a budget coming up- soon. It’s been brought forward to May 3. So, what are the threats?

And is there anything that super fund members should act on?

In a word, yes.

Superannuation is in the gun sight. Wealthier Australians are living in fairy land if they don’t believe their superannuation could be a target.

During the traditional pre-budget kite-flying season of February and March, many super suggestions were flown, and most of them seem to have largely been shot down. But risks still exist. And if there was something that you could have done about it, but didn’t, then you’ll be kicking yourself.

Transition to retirement (TTR)

TTR was started in the Howard Government’s final years. The idea was to allow older Australians to be able to reduce their working days from, say, five to four or three and top up that lost income with a super pension.

Nice idea. But it’s not how it has been used. It has been almost solely used as a way of reducing tax – salary sacrificing up to the maximum allowable income at a tax rate of 15 per cent, while drawing down on a tax-free income stream, for those over 60.

Arguably, for most people aged over 60, they are literally throwing away money if they are not using a TTR strategy.

It has been around for only a little more than a decade. It would be relatively easy, legally, to dismantle it, going forward.

The fact that it would be reasonably easy to undo is the reason why those who aren’t currently using a TTR strategy should urgently consider getting one in place.

Most legislation is not made retrospective. It’s reasonably rare that some warning of these sorts of changes isn’t given. But it is one of those laws that could potentially change at 7.30pm on budget night.

I wouldn’t say the risks are huge. But it is certainly possible. It is probably more likely that the government would announce an end-date of 1 July or January 1, 2017.

But if you’re over 60, still working and know that you would benefit from a TTR strategy, why take the risk? If you start one, they can be stopped easily. But if you haven’t started one and they change the rules, you will have potentially locked yourself out of this tax strategy for good.

TTR remains a strategy that may be open to you now, and you can find out more in Scott Francis's feature today on the wider strategy options that are available – read these here: Future proofing your super.

Contribution limits reductions

There has been talk of reducing the concessional contributions (CCs) limits further. These are currently $30,000 for the under-50s and $35,000 for the over-50s. A few years ago, they were $25,000 and $50,000. And before that, they were $50,000 and $100,000.

One kite that was flown suggested the government was considering reducing these to $20,000. This would significantly hurt higher-income earning Australians.

A salary earner on, say, $100,000 a year would receive $9500 a year in Superannuation Guarantee super contributions. If they had a limit of $30,000, they could top up, via salary sacrifice, $20,500. If they were restricted to $20,000, then they could only add an extra $9500 into super.

The extra $10,000 would be taxed at a marginal tax rate of 39 per cent, rather than 15 per cent in super. That’s an extra, immediate, $2400 in revenue to the government.

Given the nature of CCs mean they are generally made over the course of a 12 month period and some planning would be required to alter this, it would be considered highly unlikely that this would be a change that was announced with an implementation date of budget night.

But some industry experts believe it’s possible. And if you have the ability to top up your CCs to your age-based limit beforehand, then you should consider doing so.

A bigger risk, I feel, is to non-concessional contributions (NCCs). I think there is a far bigger chance they will be cut dramatically, if not in this budget, then in a budgetary reality not too far away. It is through NCCs that truly large super funds are developed and where the wealthy can significantly reduce the overall tax burden of family wealth.

Higher contributions taxes

Very separate from CC and NCC limits are higher contribution taxes.

The previous government introduced a 30 per cent super tax for those earning over $300,000 a year. There were no tears shed. And likely, no votes lost.

Labor’s tabled plan is to reduce that threshold to $250,000. But the Turnbull Government leaked that it was considering cutting the threshold to $180,000. So, when the top marginal tax rate of, effectively, 49 per cent kicked in, you would also see your super contributions tax double from 15 per cent to 30 per cent.

Again, this is not something that is likely to be an urgent budget night implementation. If announced, this would almost certainly be a July 1 introduction. And possibly not even 2016, but 2017 or later.

Raising capital gains tax

Currently, super funds get a one third reduction of a capital gain before the 15 per cent tax rate is applied. This essentially leads to what is referred to as a 10 per cent CGT rate for super funds.

Consideration was certainly given to reducing the one third deduction to a one sixth reduction when it was floated in February. This would convert to an effective CGT rate of 12.5 per cent for super fund gains – gains made on the sale of an asset held for longer than one year.

Would you sell an investment in super to save 2.5 per cent in tax? Perhaps, and it would probably depend considerably on the size of the investment.

And could this be a budget night implementation? The Howard Government famously updated the CGT rules as at 11.45am on 21 September 1999, the moment the press conference to announce it started in Canberra. Assets purchased after that specific time had to pay tax according to the new rules, while those purchased before had a choice between the former indexation method and the new 50 per cent CGT reduction method.

On the positive side…

We can only hope that, at some stage, a lifetime super limit is introduced. And it has been talked about in recent months.

That is, if you don’t use your entire CC limit in one year, you can bring that forward to use the following year. If you only use $15,000 of your $30,000 CC limit in, say, FY2016, then you could potentially pump $45,000 into super in FY17.

The strategy with the least potential downside and the most potential upside is for those who could start a TTR strategy.

If you’re 60, it’s most likely that you should be doing it anyway for the thousands of dollars a year that you could save. If you could, but you hadn’t, and they shut it down on budget night, it will rightly be something that you’ll be kicking yourself about for, literally, years to come.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
 

Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.