While there has never been a more exciting time to watch a budget speech, the devil is always in the detail. And boy was there some detail. We have been working through the proposed raft of changes and what implication these changes may mean for the retirement plans of clients. This is a summary only of the superannuation and pension changes – if you would like a more comprehensive six page summary of potential changes please advise us and we will send a more detailed document through.
Note that most super and pension changes will apply from 1st July 2017.
Concessional Caps to be reduced from $30k and $35k to $25k for everyone. Really? Who actually thought this was a good idea? This is just penalising people for saving for their own retirement. Make sure that you maximise the higher caps for this year and next year. If you are currently using the maximum salary sacrifice to meet your retirement plans, we will need to revisit the strategy and re-model expected outcomes.
Catch up concessional caps (within limits). While dropping the amount we can contribute to super is bad news, allowing clients to ‘carry forward’ unused amounts for five years makes sense and will help with some forward planning around interrupted work or managing a large CGT event.
Lifetime non-concessional caps. This one really came out of left field. There is now a $500k lifetime cap AND it will be retrospective to 2007. It is extremely unusual (and unfair) that retrospective legislation is being discussed. Many clients plan on making large contributions very close to retirement. This has all the hallmarks of being a nightmare to manage with lots of opportunities for clients and advisers to get it wrong
No work test for clients 65-74. Sensible. It allows people to contribute after 65 without needing to complete the silly 40 hours in a 30 day period test. There is no downside.
Removal of the 10% rule. This will allow employees as well as self-employed people to contribute to super and claim a tax deduction. A sensible change which also simplifies administration.
Spouse contribution. The current income threshold will increase from $10,800 to $37,000 allowing a spouse to make a contribution into super. This is a great tool for the low income spouse to increase their balance and the partner gets a $540 tax rebate. Win–win.
$1.6m transfer cap. At present there is no limit to how much super can be rolled into the tax free pension phase. This cap means that the maximum of $1.6m (each) can be moved into pension tax free. Balances over $1.6m will need to remain in super, not the tax free pension. This won’t be a huge issue for most clients, but it will require more forward planning.
Division 293. Clients earning over $300k currently pay an additional 15% tax on their contributions over the threshold. This will be reduced to $250k. Both Labour and Liberal agree on this one so no chance of it changing.
Tightening the TTR rules. TTR pensions will no longer have their tax free status on earnings, but instead will be taxed the same as superannuation. Pensions in retirement however will still be tax free.
Please note that these announced changes are just proposals and are not legislated yet. There are two hurdles needed. Firstly, the Liberals need to win the next election and then the legislation will have to be passed through both Houses of Parliament. So while we have a good expectation of the direction of policy, we are still dealing with trying to plan with a set of moving goalposts. Reduced caps however add to the need for earlier planning and advice, rather than later!
We will be addressing these planning issues with each client at their regular reviews and will consider what the implications of changes are and if any alternate strategies need to be implemented.
If however you are concerned and wish to discuss them earlier, please contact us to schedule a meeting.