Finance Your Super Super changes: government forced to benefit rich and poor

Super changes: government forced to benefit rich and poor

Scott Morrison says the government is 'getting on with the job'. Photo: Getty
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Treasurer Scott Morrison has been forced to backflip on the ‘retrospective’ changes to superannuation he took to the election.

Mr Morrison bowed to pressure from Labor, conservative commentators and Liberal backbenchers on Thursday by outlining less stringent changes to after-tax contributions.

“These measures make the superannuation system even fairer, even more flexible and even more sustainable,” he told reporters in Canberra.

What’s different?

0916superThe Treasurer’s new plan, which will be put to Parliament later this year, is a second go at planned changes to after-tax contributions.

There are three ways to put money into a super fund: the employer guarantee (9.5 per cent of your income, taxed at 15 per cent); salary sacrifice (deducted from your pay cheque and taxed at 15 per cent); and after-tax contributions.

Currently, there is a $180,000 yearly limit, up to a maximum of $540,000 in any three-year period, on after-tax contributions.

During the election, the government proposed replacing that with a $500,000 lifetime cap, with any contributions dated back to 2007 included in this cap – which Labor and some Liberals attacked as “retrospective”.

Instead, the Treasurer is now suggesting a yearly $100,000 cap. Wealthy Australians who reach a super fund balance of $1.6 million (indexed with CPI) will be barred from making any more after-tax contributions, but will still be able to make concessional contributions.

This was a revenue neutral announcement. According to the Treasurer, the change to the election plan will cost the budget $400 million, which will be offset by some of the policy tweaks explained below.

Relief for the wealthy

Radio hosts like Ray Hadley helped force the change. Photo: Getty
Radio hosts like Ray Hadley helped force the change. Photo: Getty

The intention of the Treasurer’s original plan was to ensure that superannuation is not used as a “tax-incentivised estate planning vehicle”.

He noted that some wealthy retirees have account balances of $5 million, $10 million and even $50 million. The current rules allow such large sums to be moved into funds, earning strong returns and minimising tax.

The new rules, if legislated, would still stop such large amounts of money accruing (remember the $1.6 million cap for after-tax contributions), but won’t be as harsh.

In the Treasurer’s words, this is a way to encourage aspiration. His theory seems to be that even if the vast majority of us never take advantage of the rules, their existence may incentivise us to try.

Most Australians will be unaffected. Research by the Australian Institute of Superannuation Trustees (AIST) estimated the average after-tax contribution for those aged 50+ is less than $4000 a year.

Certainty for industry

The system will now be easier to understand, according to industry figures. Photo: Getty
Rules will now be easier to understand, according to industry figures. Photo: Getty

The contentious debate over super has arguably harmed public confidence in the sector, and confused consumers.

Industry Super Australia (ISA) welcomed the Treasurer’s announcement, calling it a “workable compromise”.

“We would hope all MPs will now give careful consideration to these changes so the reforms can start to make their way through the Parliament. These are evolutionary, not revolutionary changes,” ISA chief executive David Whiteley said.

AIST, which represents the entire not-for-profit super sector, said the new plan would be simpler and easier to implement.

And the Association of Superannuation Funds of Australia, which speaks for both profit and non-profit funds, said it was “delighted”.

Help for battlers

Photo: Getty
$500 a year in extra super will be a big help for many. Photo: Getty

While not part of the Treasurer’s announcement on Thursday, the super industry welcomed another of the government’s backflips: its decision in the budget to extend support for low-income earners.

If you earn less than $37,000 a year, the government will pay up to $500 extra into your super account per year, depending on how much you and your employer contribute before-tax.

This was a Labor policy, strongly opposed by the government in years past, that was due to expire in June 2017. The only change is that the policy will be renamed from ‘LISC’ (Low Income Super Contribution) to the ‘LISTO’ (Low Income Superannuation Tax Offset).

Lost time for women

Mothers will have to wait until 2017 before they can use the rules to "catch-up". Photo: Getty
Mothers will have to wait until 2017 before they can use the rules to “catch-up”. Photo: Getty

In order to pay for the new plan, the Treasurer said he will delay until July 1, 2017 the start date for so-called “catch-up provisions”.

This budget measure will eventually allow Australians to salary sacrifice (contribute before-tax income to their super fund) even more. It will do this by rolling-over a person’s unused contribution limits from the past five years.

For example, Australians aged under 50 can currently contribute a maximum of $30,000 per year pre-tax. This includes both the employer guarantee and their own salary sacrificing.

Under the budget measure, those with interrupted work patterns, especially women who take time out for pregnancy and child rearing, could make up for lost time. But not until 2017.

Testing times for older workers

Another way the Treasurer will fund his new plan is by giving up on his attempt to remove the work test for those aged 65 to 74.

The current work test bars older workers from making voluntary contributions to their super fund if they work less than 40 hours over any 30 consecutive days in the financial year.

Point scoring for Labor

The opposition seized on the backpedal to paint the government’s retirement policies as a “shambles” and a “massive capitulation”.

It is yet to signal whether it will support or oppose the changes when they are eventually put to Parliament.

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