Super changes set to hit more than government suggests

The sheer breadth of Scott Morrison’s changes are causing consternation with an election looming.

Pauline Vamos says the investment community is rattled. Picture: Sam Mooy

Scott Morrison has managed to pull off that rarest of political acts … he’s managed to upset just about everyone with his superannuation changes. But what really matters is that the Treasurer has not just upset, but embarrassed the nation’s wealth advisers and for that sin he will not be easily forgiven.

Investment is after all a matter of making plans and sticking to them, but now many plans are off … or at the very least in jeopardy.

As Will Hamilton of Hamilton Wealth Management puts it: “A blanket rule has been introduced which has produced extreme anger and an erosion of trust.”

In this uneasy period — following the budget announcements but before the election on July 3 — one of the central issues has been just how many people have been affected by the changes?

Ron Lesh, managing director of superannuation software company BGL, is in the exceptional position through his company database to measure the effect of the proposed changes: BGL is one of the most widely used administration tools in DIY funds. After examining data from 60,000 SMSFs, Lesh says the $1.6 million cap on superannuation tax-free income will hit 15 per cent of his clients: “Our numbers are a perfect proxy for the wider economy — the number of people affected are at least three times higher than the 4 per cent the government says,” he suggests.

Lesh has also become one of the first industry participants to put numbers on the volume of people who will be hit by the equally controversial “lifetime” cap on post tax (non-concessional) contributions of $500,000.

He says it will affect at least 10 per cent of SMSFs (56,000 SMSFs with 106,000 members at September 30 last year).

“Though I have to say it will be virtually impossible to calculate accurately for us or anyone else,” he adds.

As the number of investors ­affected by the raft of budget changes appears to be widening, Pauline Vamos, the outgoing head of super industry body ASFA made the additional point this week that whether you get hit or not — the entire investment community has been “rattled” by the changes announced with no forward consultation on budget night.

Investors are perplexed on what was good, bad or ugly about the changes. In reality, for most people the changes that matter don’t start in a few weeks’ time on July 1 — rather they start on July 1 next year and that is assuming:

(a) The changes are left without any amendments: Foreign Minister Julie Bishop hinted they may be amended, but Prime Minister Malcolm Turnbull appeared to eliminate any possibility of changes;

(b) The Liberal Party wins the election on July 3 and gets a mandate to implement the changes.

Meanwhile, many are left with the government failing to get “on message” with the nature of key amendments to the super system.

The most misunderstood change has been the lifetime superannuation cap of $500,000 and whether it is retrospective or not.

It is hard to see why anyone would describe it as anything other than retrospective since a date from a decade ago (July 1, 2007) was announced on budget night as the date from which the lifetime cap is measured.

But crucially, an item in the budget papers the government has failed to highlight is that the start date — which is crucial — is May 3 this year and as the particular budget measure says: “Contributions made before commencement cannot result in an excess”.

In other words if you have put in more than $500,000 in non-concessional contributions to super before May 3 this year you are exempt from the ruling. For everyone else the way it works is that you can’t put in more than $500,000 post-tax over your whole life … and the day the ATO started counting is July 1, 2007.

All the same there is considerable anger from investors and advisers alike over this measure: It is crudely done and grossly unfair to people who had been planning long-term, especially those with illiquid assets such as investment property.

But what you’ve got into super before May 3 this year is safe … this is important and somehow the government has not managed to make it clear in the first week of the election campaign.

Unfortunately, for every question answered another question arises.

One vexed issue is CGT and how it might be treated when investors are forced under the $1.6m cap rule to move money beyond that amount out of tax-free super and either into a second tier of super which is taxed at 15 per cent or out of the system entirely — did Turnbull and Morrison think all of this through?

Rather it looks now like they viewed “consultation” as a tiresome process which to date had not served them well in getting things done — this time around the idea has been to punch first and let the questions be asked later … now the questions are coming hard and fast.