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New superannuation rules cost but will fix the inheritance rort slowly

Scott Morrison and Kelly O'Dwyer surprised superannuants.

Scott Morrison and Kelly O'Dwyer surprised superannuants. Photo:AAP

The Turnbull government’s move to abandon the introduction of a lifetime after-tax superannuation cap is an expensive move that will only be made to work overtime by the ageing of the population.

The original reform plan proposed by the Turnbull government would have capped after-tax or non-concessional contributions at $500,000 for a lifetime and started the count from July 2007.

That, Treasury said, would have given the budget a $250 million boost over the coming four years of the forward estimates.

But the proposal was widely criticised as being ‘retrospective’ because of the 2007 start date. The Labor opposition took that line and said it would support the cap but make the start date budget night, May 2, 2016, when the measure was first announced.

That was an expensive move that slashed the government’s $250 million gain to a mere $20 million.

Surprise!

Other proposals being put forward by dissenting Coalition members would have lifted the lifetime cap to $750,000, a move that Treasurer Scott Morrison said would have used up the whole $250 million savings over four years.

But Mr Morrison and Financial Services and Revenue Minister Kelly O’Dwyer surprised most observers when they scrapped the cap and replaced it with annual non-concessional limits of $100,000 only allowed when super balances are under $1.6 million.

That will cost the budget $400 million over four years and, says the government, $2.2 billion over 10 years.

So how will that money be made up?

In part it’s by deferring the right to carry forward unused concessional caps to use in the future for a year which will save $400 million over the forward estimates.

Then there’s scrapping plans to allow those aged between 65 and 74 the right to make super contributions without working. That will bring in $180 million in four years and a massive $1.92 billion over 10 years as the population ages and more people move into the target cohort.

A few will benefit

Industry Super Australia says about 25,000 people will benefit from the government’s backflip and they are mostly people with average balances of $1 million. They will be able to make more in non-concessional contributions than under the original plan.

“The number of winners is quite small,” said ISA public affairs director Matt Linden.

super nest eggs

The super omelette has a new makeup. Photo: Getty

“They are a very specific group who have made more than $500,000 in non-concessional contributions already but have a balance less than $1.6 million.”

But the new system will help end an intergenerational tax avoidance arrangement known as ‘re-contribution’.

That is a technique where people who have built up big super balances using concessional, or pre-tax, contributions take these out when they retire.

They then re-contribute these as after-tax or non-concessional contributions and live on their big super balances.

When they die they can pass the part of their fund consisting of non-concessional contributions tax-free to their non-dependent heirs like adult children.

Some balances will build slower. Photo: Getty

Some balances will build slower. Photo: Getty

Where concessional contributions are passed on there is a tax rate of around 17 per cent.

This is a big issue because high-income earners built up big concessional balances a decade ago when caps on these were as much as $100,000 a year.

Under the current system the wealthy can contribute up to $540,000 in one hit every three years in non-concessional contributions.

The $500,000 cap would have knocked this on the head immediately. But the new arrangements will achieve something similar but more slowly.

That’s because the new reforms will limit non-concessional contributions to $100,000 a year or $300,000 in one hit. That will only be available to people with less than $1.6 million in their funds.

Lower contribution levels and the $1.6 million cap will dry up the possibility of re-contribution in a few years.

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