Budget 2016: superannuation — building wealth just got harder

With little warning – and zero consultation – Treasurer Scott Morrison has invaded the superannuation system. In doing so, hitting not just obvious targets such as high earners but also people already in retirement. Put simply, the changes make superannuation considerably less attractive and moreover, the new measures make it very hard to actually accumulate any reasonable level wealth.

Without doubt the constituency which will be stunned by the raft of changes are those already in retirement who had been living under the illusion that the rules of the game were set in stone.

With immediate effect the government intends to place a 15 per cent tax on any money above $1.6 million which may be held in super. Until now funds for pension income were free of tax and there was no limits upon it.

WHAT SHOULD RETIREES DO?

For most superannuants with funds in excess of $1.6m, given the choice between leaving those excess funds in super being taxed at 15 per cent or actually pulling the money out of superannuation altogether and facing tax rates as high as they faced pre-retirement – they will most likely keep the money in super.

The obvious move for those about to become retirees – with more than $1.6m available to fund their pensions – would be to reallocate savings aimed for retirement into the family home - the last outright tax shelter.

Having said that there are enormous logistically difficulties emerging for the measure - how the government will actually audit the $1.6m at any given time will be hard to say especially funds that are loaded towards the highly volatile stockmarket.

WHAT SHOULD SUPERANNUATION SAVERS DO?

This issue is in two clear parts – contributions which are concessional (pre-tax salary sacrifice) and non-concessional (contributions made on money where tax has already been paid).

In the pre-tax situation up until now you could put in $30,000 if you were under 50 and $35,000 if you were over 50 : For the under-50s the cap will be cut from $30,000 to $25,000. For the over-50s there will be no change - it will remain at $35,000.

In the post-tax situation where money is put in super - often done in so-called ‘lump sums’ - there are huge changes. Until now you could put a load of money into super in this manner - you could put in $180,000 a year or $540,000 over three years. The new measure - effective immediately according to the budget papers - is that you can instead contribute a total of $500,000 over your entire working life.

If you are making concessional (pre-tax) contributions and you are under 50 the amount allowed annually is now so small you cannot seriously depend on amply financing your post-retirement life through accumulated pre-tax contributions. It will be necessary to get other tax breaks, the most obvious move for the salary earner is negative gearing in property - or for the brave, negative gearing in the sharemarket.

WHAT SHOULD HIGH EARNERS DO?

If you are lucky enough to earn more than $250,000 per annum you have to view superannuation as something to which you make post-tax contributions - pre-tax contribution allowances will be insignificant.

Compelled to make post-tax superannuation contributions will be an unsavoury choice, since you will already have paid roughly 50 per cent tax on your earnings to establish these savings.

High earners will obviously downgrade the role of superannuation in their remuneration packages - this change will be reflected very quickly among remuneration consultants. It won’t be long before annual reports from public companies which publish salary package details will show the change coming through.

WHAT SHOULD WORKERS WITH BROKEN WORK PATTERNS DO?

The sole bright spot for superannuation savers in the Morrison budget is the olive branch to those who have irregular work patterns – this is mostly women who have left the workforce to have children, but increasingly would include people who are employed as contractors or consultants.

Until now the salary earner in this situation might contribute the maximum amount in concessional (pre tax) salary sacrifice one year and then perhaps miss an entire year or have a year where they worked only for a few months and so the contribution was partial – under the old system you made the contribution to the max in the year or you did not – every new year the process recommenced.

The new measures allows you to contribute over a five-year rolling period – so for example if you are under 50 you are allowed to have an accumulated total after five years of $125,000 – regardless of your annual amounts. There is a catch here, you can only access the new scheme if your superannuation balance is less than $500,000.