Morrison's super changes still have victims

Treasurer Scott Morrison has caved to pressure from his backbench on the $500,000 non-concessional contributions (NCC) superannuation cap, announcing a major restructure of its policy.

The $500,000 NCC limit, which was to be backdated to 2007, will be scrapped. The replacement rules will be similar to the existing rules, but with some major changes that will create some other "victims".

The existing annual NCC limit system will be kept, but with drastically reduced limits.

The current level of $180,000 a year for NCCs will be dropped to $100,000, but the three-year pull-forward rules for those under 65 will be retained, allowing people to put in up to $300,000 in a single year (versus $540,000 previously).

However, members will not be able to put in any NCCs once their combined super balances have hit $1.6 million.

There are potential losers here – and we will await the fine print – as it has not been determined how "reaching" the $1.6m will be measured.

The changes will allow a greater number of Australians to continue to put NCCs into their super. But the "wealthy", with existing large balances of more than $1.6m, will not be able to.

While the Coalition has given with one hand, it has equally taken away with the other.

The biggest losers

The new victims include 65 to 74-year-olds. The Budget night package was going to scrap the "work test", which would have allowed older Australians to continue to put both NCCs and concessional contributions into super until they were 74.

The work test means that in order to make voluntary contributions after age 65, members needed to work 40 hours in a 30-day period during a financial year.

Instead of being dumped, the work test is going to be kept. This is a significant setback for older Australians, with smaller superannuation balances, who might have been able to contribute to super as NCCs from the sale proceeds of, say, investment properties or share portfolios after retiring.

The second main victims come from those who might have benefited from the "catch-up" provisions. The start date for the catch-up provisions has been pushed back by one year, to July 1, 2018.

The catch-up provisions will allow those who hadn't been able to use their full concessional contributions cap ($35,000 for the over-50s and $30,000 for the under-50s for FY17, but $25,000 for all from FY18 onwards) to play catch-up on previous years.

For example, if a self employed worker was only able to afford to make $10,000 for four years, then in the fifth year, they could make their $25,000 of concessional contributions, plus another $60,000 (4 x $15,000) to make up for the previous years.

Importantly, the Government has not given in on the $1.6m transfer to pension (TTP cap). While this had some opposition in the Coalition party room, the Treasurer has been able to keep this cap.

Morrison said the three main changes balanced each other out and would be revenue neutral to the budget in the medium term.

Morrison's greatest problem with selling his superannuation reform came from within his own party room. Many Coalition members threatened to vote against it, after being savaged by their own rank and file party members during the election campaign. Many members claimed their volunteer numbers dropped off, as did donations, and directly linked it to the superannuation changes and in particular the $500,000 NCC cap.

Expect some backlash

While the changes might allay some concerns there, I wouldn't be surprised if there is a new backlash from the recently retired, who would have been looking forward to being able to make contributions up to age 74 via the removal of the work test.

A sizeable number of Australians continue to hold on to investment property, in particular, beyond their working lives, but need to sell some time after 70. Being able to tax-effectively contribute this money to super was a big selling point of the Budget night changes.

I won't be surprised if Coalition backbenchers who fought for the change might face further criticism from their local constituents on the backdown on the removal of the work test.

The fact that Morrison is claiming that he has been able to negotiate a peace deal with his backbench that is revenue neutral to the initial Budget night deal is important. He's still saying that most of these measures will only affect between 1 and 4 per cent of the population.

"These measures will ensure that 96 per cent of Australians remain better off or unaffected by the Government's superannuation reforms that will introduce greater flexibility and sustainability to our retirement income system," he said in a statement outlining the changes.

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.