Super system’s reboot gives a degree of clarity at last

Investors need to digest changes and make key decisions in the next few months.

The superannuation landscape, though far from simple, has become a lot clearer.

After almost four months of relentless behind-the-scenes bargaining Australia’s new superannuation rules finally took shape this week as the Turnbull government outlined a broadly popular compromise which every investor now needs to include in wealth planning.

The essential feature of the adjusted plan is the scrapping of a “lifetime cap” on superannuation contributions contained in the May budget which was to be set at $500,000 and was supposed to be backdated from 2007.

In place of this highly contentious idea is a new annual limit on non-concessional (post tax) super contributions of $100,000 a year ... it’s a big change and at a stroke it is going to prompt investors in several new directions.

Optimising contributions over the next 10 months

As Doug Turek, managing director of Professional Wealth suggests: “You have to expect the immediate effect is likely to be a ‘rush’ as wealthier investors move in the final months to June 30, 2017, to make maximum use of existing (after tax) non concessional contributions — so some individuals might be able to put in as much as $540,000 between now and June next year ”. The existing annual limits of $180,000 get cut down to the new level ($100,000) per annum from July 1 next year.

Similarly, advisers suggest they will be encouraging salaried workers to maximise what now looks like a last chance to make significant (pre-tax) concessional contributions which remain at $30,000 for under 50s and $35,000 for over 50s for a few more months until this tax benefit also gets tightened up on June 30 next year — from July these pre-tax limits (typically used through salary sacrifice arrangements) drop to $25,000, regardless of age.

Making the most of the new system

Wealth advisers have despaired as the government wrangled over super changes in recent weeks. Now at least the landscape — though far from simple — has become a lot clearer.

Here’s a guide to key developments.

• The $1.6m cap limit on the amount an individual can use to fund income in super is now almost certain to be introduced. The essential feature to digest is that it is an individual limit and it is on earnings made from funds over $1.6m which will be taxed at marginal rates.

• The new $100,000 per annum (after tax) non-concessional limit will start on July 1, 2017 — however if you have a liquidity event — a large redundancy, a bonus or an inheritance you are allowed to put up to three years’ worth of contributions into super inside one financial year.

• Following the latest changes from next financial year the most you can contribute inside a single financial year on a (after-tax) non-concessional basis will be $300,000.

A new dimension to the system is that these non-concessional contribution allowances are only open to those who have total funds (at the start of any financial year) under the new $1.6m cap limit.

• Advisers are also reminding all investors that under the tax system any individual can make up to $18,000 tax free each year ... and that includes superannuants.

•  The cutback in (pre-tax) concessional pre-tax contributions to a flat $25,000 per annum may have been underestimated in the furore around the “lifetime cap” debate — it means that one of the last remaining tax breaks for salary earners is now sliced back dramatically.

Overall the changes will almost certainly reduce inflows to super: Graham Hand of Cuffelinks suggests: “We’ll have weaker flows into superannuation than in the past, it’s likely to hit SMSF investors harder since these are generally used by wealthier investors who can afford extra contributions.”

One thing however that most wealth advisers can agree on is that the political compromise this week may finally lead to some stability around the superannuation system.