Morrison's struggles may spur super changes

Treasurer Scott Morrison is on a mini-roadshow, selling his proposed superannuation changes.

The odd thing is who he's having to go the hard-sell to. Not the public, not the media, but his own government colleagues.

It appears potential concessions are being considered by Morrison, though this is being publicly denied, because his own party won't buy it. The debate is centred on the most contentious of the changes, the $500,000 lifetime limit on non-concessional contributions.

Rumours suggest a couple of options are on the table. Firstly, a lift in the limit to $750,000 or even $1 million.

And the second that it not be backdated to include all NCCs made since 2007, but prospectively, from budget night 2016 onwards.

The super battleground within

Morrison is publicly denying any concessions are being considered, saying he wouldn't be able “to look his children in the face” if he further pushed out budget repair. But he needs to get the package over the line, which starts with getting support from his own party.

In the background, you've also got Labor telling the Coalition that they're willing to do a deal.

Stopping the backdating of the NCC limit to 2007 would be a significant concession. If the government changed it to "after the 2016 budget", members would be able to get a further $500,000 into super from now. This would probably remove much opposition regarding retrospectivity, as it would give many of those who are at the pointy end now the ability to make one last major contribution.

There would be a significant hit to the budget bottom line. It would allow money to flow into super, and many would take the opportunity.

Much of it would enter the realm of tax-free pension funds, while the remainder would hit a maximum tax rate of 15 per cent.

The loss to public revenue is somewhere between 0 per cent and the top marginal tax rate of 49 per cent. As Morrison has recently pointed out, most people with enough money to be able to drop another $500,000 into super would be in the top two marginal tax rates of 39 per cent or 49 per cent.

Also, many of the people who would be able to drop in another $500,000 into super could well have more than the $1.6 million transfer-to-pension cap. So this money would, in many cases, simply be being shifted from non-super tax rates to a tax rate of 15 per cent.

This would be a great win for many Eureka Report readers.

More assets in super still makes sense

Despite the $1.6m transfer-to-pension cap, it will still make sense for most people to have most of their assets in super, because the 15 per cent maximum tax rate is still going to be lower than the marginal tax rates faced by non-super money.

For example, if an individual with a reasonable super/pension balance held even $500,000 outside of super (shares, property, bonds or cash, obviously at higher interest rates than today) earning 4 per cent, then they would have annual income of $20,000 and would be in the 19 per cent marginal tax bracket.

Assets of $1m outside super that earned 4 per cent ($40,000 a year) would be above the $37,000 threshold and would be in the marginal tax bracket of 34.5 per cent.

Getting $500,000 of that into super would reduce overall tax. And if you're a couple, that would be $500,000 times two, or another million dollars that could enter the 0-15 per cent tax rate.

Changing the lifetime cap start date

If the government doesn't want to see the limited number of mega super funds ($5m or more), then it could potentially put a cap on any backdown.

That is, for example, remove the retrospective date of 2007 for the NCC lifetime cap start date, and move that to budget night 2016, then allow anyone who had, say, less than $2m or $2.5m in super/pension (as of a specified date, such as budget night, or June 30, 2016), the ability to get another $500,000 of NCCs into super.

If necessary, taper it above a certain amount.

The $1.6m pension cap means most of the money for individuals who can afford one last shot at getting half a million into super will pay tax at 15 per cent, rather than 0 per cent, so it won't be completely lost on the revenue side for the government.

And if the bulk of the new policies get in, it will always make sense to have income of around $20,000 being earned outside of super, where it is paying 0 per cent tax.

As I wrote two weeks ago (It's time to make some super decisions), this can't be allowed to drag on. Too many people have got too many decisions to make.

But, for Eureka Report readers, my guess is that the longer it drags on, the more likely that Morrison will have to accept a change to the non-concessional contributions cap to get the majority of the policy through. So some might be wanting this to drag on for a bit longer yet.

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 a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.