A super sting with a ‘let out’ clause

The government’s draft legislation on superannuation rules has introduced a sting in the tail.

Trying hard to prove they will hit super-rich investors exploiting the superannuation system, the government’s draft legislation on super rules has introduced a sting in the tail for anyone trying to push more than $1.6 million into a tax-free retirement ­account — a so-called notional earnings charge will be enforced at a hefty 9.2 per cent.

Of course, in what is now a classic Turnbull government “let-out” clause, there are exemptions, and anyone who exceeds the cap by less than $100,000 and does the right thing inside 60 days will be off the hook. So a clarification is clouded by an ­instant complication.

But hey — that’s the super system.

Here’s how the measure, unexpected by the financial advice industry, will work. Anyone breaching the new retirement balance $1.6m cap, to be introduced from July 1 next year, will need to push the dollar amount in excess of $1.6m into a different stream where 15 per cent earnings tax is imposed.

If they don’t do it in 60 days, a notional earnings rate of 9.2 per cent is applied on the excess amount — and that dollar figure is then taxed at 15 per cent.

Further breaches will lead to increasingly severe fines.

In an era of low returns, advisers complained that the notional earnings charge at 9.2 per cent was excessive — the government says it is based on short-term interest rates, but most individuals never end up paying that sort of charge unless they are being penalised by the courts.

Will Hamilton at Hamilton Wealth says: “It’s excessive — it’s another reason you will now see money flowing into family trusts.”

The government has remained wedded to its other key changes.

1. Lowering non-concessional (post-tax) annual contribution limits to $100,000 a year from 180,000 — which is still the rule until June 30 next year.

2. Lowering concessional (pre-tax) contributions limits to $25,000 from the current split-tier arrangement: $30,000 if you are under 50 and $35,000 if you are over 50 until June 30, 2016.