Most happy to welcome backdown over $500,000 lifetime cap

The government’s backdown on the sharpest end of proposed superannuation reforms will be widely welcomed among investors, especially the dumping of an ill-considered $500,000 lifetime superannuation “cap” but it will ­affect different demographics in very different ways.

Most savers do not get a chance to make significant superannuation contributions until they reach early middle age, at which time family expenses can decline and earnings can reach a peak.

Here’s how the changes might affect key age groups:

• For those in their 40s, it means pre-tax (concessional) salary sacrifice possibilities are now extremely limited. As a result, the focus will need to be on getting after tax (non-concessional) contributions into super.

Alternatively, investors in their 40s will look afresh outside super at the tax breaks offered by negative gearing, especially for residential housing investments. Other tax shelters such as long-term tax protected investment bonds that typically pay out after 10 years will also be on the agenda;

• For those in their 50s, lower non-concessional (post-tax) limits means that those who may “come into money” — through such items as business sales, bonuses or inheritance — will have to make their contributions more carefully staged over several years;

• For those nearing retirement, the changes are most important. Long-term plans of selling assets to put into super will most likely have to be accelerated — alternative tax shelters, especially family trusts, will now be actively examined by this group. Investors in this age range may also be keen to split assets inside different super ­accounts or to split assets “inside and outside’’ super so that a wider range of tax allowances can be ­exploited.

Put simply, the new rules — likely now to be passed through parliament for implementation on July 1, 2017 — mean the maximum anyone can contribute to super each year on a non-concessional (after-tax) basis is $100,000 up to a maximum of $1.6 million. That’s the individual pension funding limit, which is also now reset to become effective on July 1, 2017 (not 2007 as originally announced in the May budget).

The degree of compromise is significant but also rational, on the basis the original changes — announced without consultation — were clearly unpalatable even inside key sections of the Liberal Party. At worst, under the now scrapped budget plans, the lifetime maximum contributions of $500,000 were to be less than individuals had been able to put in on a non-concessional basis over any three-year period. Separately, the government intends to go ahead with its plan to introduce a new maximum for concessional contributions (pre-tax) at $25,000 — it is currently $30,000 for under 50s and $35,000 for over 50s.

If Scott Morrison gets his amended plans through, he will still have achieved a number of very significant changes to the wealth management system in Australia:

• First, non-concessional contributions which had clearly been used for building small fortunes inside super by a minority of wealthy investors will be trimmed back sharply — from a current maximum of $180,000 a year to $100,000. Importantly, a “three-year” rule remains in place where up to three years’ worth of non-concessional contributions can be made inside a single financial year.

• Second, the Treasurer will achieve a breakthrough in getting pension income taxed, even if it is only at the highest levels. The $1.6m cap on pension fund earnings means wealthy investors are likely to divert amounts above that level into tax-protected vehicles such as family trusts .

• Third, the level of concessional (pre-tax) superannuation benefits, which are regularly criticised as inequitable, gets trimmed significantly. Of course, someone has to pay for the adjustments and there will be some backlash in days to come as women and older workers realise they must fund the changes. The Treasurer has pushed out by one year (to July 1, 2018) the start date for a five-year carry forward scheme for concessional (pre-tax) super where workers with irregular working patterns can “catch up” on contributions. Women have more irregular work patterns than men.