Winners and losers from the government’s compromise on superannuation

The changes to the cap on non-concessional contributions is one of the features of the latest superannuation reform proposals. www.shutterstock.com

The government has watered down its superannuation reforms in the final release of the proposed changes. The superannuation contribution caps and the reforms to the non-concessional cap are less comprehensive than the reforms put forward in the budget documents. The scrapping of some measures to make up for costs will also reduce contributions by women and older workers.

Instead of a lifetime cap of A$500,000 for non-concessional contributions, an annual cap will remain in place, albeit at a much lower level of A$100,000 per annum. To offset the impact of this on the budget estimates, other proposals are being deferred or reversed.

The package of reforms announced in the budget promised to better target superannuation concessions. The core elements of the package were reforms to the superannuation caps; reintroducing support for low income earners; limiting the balance that can be held in a superannuation account in the pension phase; improving the flexibility of the system; and legislating the purpose of superannuation.

The changes to non-concessional cap and transition to retirement pensions generated a backlash, driving the government back to the negotiating table.

Changes to non-concessional caps

Non-concessional contributions are amounts that a person contributes into superannuation that are not tax deductible. The advantage of transferring these amounts to superannuation is that the investment earnings are then taxed at the concessional rate of 15%. This is likely to be lower than the investor’s personal marginal tax rate or are tax exempt once the fund goes into retirement phase. In principle, it was intended to encourage the investor to accumulate additional retirement savings.

However the cap of A$180,000 a year (or A$540,000 over three years) encouraged taxpayers to use superannuation as a tax shelter. For example in estate planning, people took advantage of tax concessional treatment of payments to beneficiaries after the investor has died.

The proposal to change this cap drew substantial criticism, including a debate over whether the measures were retrospective and whether it had the potential to undermine the stability of the superannuation system. In some cases people had entered into contracts that could not be met if the cap applied from budget night (the date it came into effect), and the Treasurer acknowledged that such cases would need to be separated out.

Retaining an annual cap effectively removes the argument that the proposed changes were retrospective. It also addresses issues around contributing lump sums received from life events, such as divorce settlements or inheritance. The proposed non-concessional cap of A$100,000 will still be able to be brought forward by three years, so that with concessional contributions a person will be able to contribute up to A$325,000 in a year. A person can contribute lump sums up to the available cap without needing specific exemptions.

Importantly, a person who has A$1.6 million in their superannuation fund will not be able to make additional non-concessional contributions. This is consistent with the principle that superannuation accounts should not exceed the amount needed to fund the person’s retirement.

Treasurer Scott Morrison had to go back to the drawing board with superannuation reform but now the final shape is in hand. Lukas Coch/AAP

The bad news

The change to the proposed reform to the non-concessional cap is estimated to cost the budget A$400 million over the forward estimates. In the medium term this cost will be limited, as the A$1.6 million account limit still applies. The costs will be recouped by the government by modifying two budget reforms.

First, the proposal to repeal the work test for people between the ages of 65 and 74 will not proceed. The draft regulation to repeal the work test was actually released last week for public comment, but has been superseded by today’s announcements. This measure was supposed to harmonise the rules for older taxpayers with those applicable to taxpayers under the age of 65.

Given the changes in workforce participation and changes to the age pension, the removal of the work test would have removed barriers and red tape associated with superannuation contributions made by older workers. Scrapping this reform is expected to save some A$180 million over the forward estimates.

Second, the proposal to allow catch-up concessional contributions, allowing unused concessional cap balances to be carried forward for up to five years, has been deferred to 1 July 2018, saving A$400 million over the forward estimates. This measure was announced by the government as a measure that would allow women to catch up on superannuation contributions after taking time out from the paid workforce.

Although I have previously expressed reservations on the extent to which women will be able to benefit from the catch-up concessional superannuation contributions policy, this latest change does raise the issue of the gender superannuation gap once again. A policy intended to benefit women is being deferred in order to support a policy that is known to be utilised by more men than women.

The good news

Among the first tranche of superannuation legislation released was the proposal to introduce the Low Income Superannuation Tax Offset, which replaces the Low Income Superannuation Contribution that ceases on 1 July 2017. This will ensure that the lowest income earners will get some tax advantage from superannuation contributions, although it won’t be as beneficial as it is for high income earners.

Interestingly there has been no announcement on the changes to the transition to retirement pensions. The proposal was not included in the first tranche of the legislation announced last week, so in the absence of other information, it should be assumed that the proposal will proceed.

It was clear that there was going to be a political compromise to get this bill into Parliament, and we are yet to see what the other parties and the crossbenchers will make of the final form of the package.

Overall the proposals still reduce the tax concessions available to the highest income earners, while encouraging retirement savings. However the savings measures to fund the backdown will restrict contributions by older Australians and women who are less likely to have the resources to make substantial non-concessional contributions.

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