An article on Switzer quoting Frydenberg on super warnings by Paul Rickard January 17, 2019 .
There are also 5 proposed changes to super that will raise an estimated $19 billion over the next decade.- Non-concessional contribution cap slashed to $75,000
Originally set at $150,000 12 years ago for the 2007/08 financial year, increased to $180,000 for 2014/15, reduced back to $100,000 for 2017/18 and 2018/19, the annual cap on non-concessional contributions is set to be cut back to just $75,000.
Non-concessional contributions are, of course, personal contributions to super from your own resources and are made from your “after tax” monies.
The cut in the cap will reduce the ability to make a large “one-off” contribution to super that may come from the proceeds of selling an asset, an inheritance, a termination payment or some other means. By using the ‘bring-forward’ rule, a person under 65 can make three years’ worth of non-concessional contributions in one year. This means that under current policy, a person can get $300,000 into super in one hit, while a couple can potentially contribute up to $600,000. Under the ALP, this will fall to $225,000 or $450,000 for a couple.
Frydenberg says that this change will hit about 20,000 taxpayers. While that’s a small number in the first year, the change continues the recent shift in thinking in Canberra, which is directed at narrowing the utility of super as a savings vehicle. “We want you to have some money in super…….but not too much”.
- Abolish catch-up concessional contributions
Probably the dumbest of Shorten’s super slugs, he plans to abolish ‘catch-up’ concessional contributions. This will impact, according to the Treasurer, about 230,000 workers.
An initiative of the current Government, the ability to make ‘catch-up’ contributions only came into effect last July. It is designed to allow people with interrupted work patterns, such as a mother who goes on maternity leave, to make additional super contributions when they return to work and still receive the same tax concessions.
The unused portion of the annual concessional cap of $25,000 can be carried forward for up to five years.
Concessional contributions are primarily your employer’s compulsory 9.5% plus salary sacrifice contributions. If you don’t make any concessional contributions for four years, you could potentially make a concessional contribution of up to $125,000 in the fifth year. Or if you made a concessional contribution of $5,000 in the first year, you could make a concessional contribution of $45,000 in the second year.
Eligibility is restricted to those with a total superannuation balance under $500,000 (as at 30 June of the previous year).
Shorten says that he will announce policies that deal with some of the perceived inequities of the super system (such as the materially lower balances women have when they retire), but for some reason, ‘catch-up’ contributions doesn’t appear to pass the test. Hard not to think that this isn’t a case of the “not invented here” syndrome at work.
- End deductibility of personal contributions within the concessional cap
Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5%, salary sacrifice contributions and personal contributions you make and claim a tax deduction for. They are capped at $25,000 in total.
Until recently, the third category was only available to “self-employed” persons who satisfied the “10% rule”, that is, they received less than 10% of their income in wages or salary (i.e. genuinely self-employed). Last year, the Government scrapped the 10% rule so that anyone who was eligible to contribute to super could claim a tax deduction for personal super contributions (within the overall concessional cap of $25,000). This was designed to assist, amongst others, employees whose employer didn’t offer salary sacrifice facilities.
Shorten says that an ALP Government will reverse the change and scrap the widespread deductibility of personal super contributions. (It is not clear whether this means the re-instatement of the 10% rule.) According to Frydenberg, this would also impact up to 800,000 workers who are working part-time at the same time as running a small business. Many are using the salary from their part-time job as the cash flow to make their business grow. He says that “the concession (tax deduction) specifically encourages the dual objective of entrepreneurship and savings for retirement, and helps strengthen the small business sector – the backbone of the economy”.
- Higher income super tax lowered to $200,000
Persons on incomes from $200,000 to $250,000 will have their concessional super contributions taxed at 30% (rather than 15%). Known as Division 293 tax, a higher tax rate (effectively 30%) applies to concessional super contributions made by higher income earners. Originally introduced to apply to persons on incomes of $300,000 or more, the threshold was reduced last year to $250,000. Now, Shorten proposes to lower it to $200,000.
130,000 additional people will pay 30% tax on their super contributions. While they are not going to thank me, I am not against the change per se because they currently get the biggest tax concession on salary sacrifice contributions.
The problem is that the highest marginal tax rate of 47% starts at too low a level of $180,000, meaning that this group (for equity reasons) needs to be drawn into the Division 293 tax net.
And if you are wondering why the threshold is $200,000 rather than $180,000, the income definition for Division 293 tax includes super contributions (which is approximately $180,000 plus the 9.5%).
- SMSFs won’t be allowed to borrow
David Murray’s Financial System Inquiry recommended that SMSFs be prohibited from borrowing to purchase investment assets such as property. The current Government chose not to adopt this recommendation.
Shorten’s Treasury Spokesman Chris Bowen has stated that an incoming ALP Government would adopt this recommendation and change the law to prohibit SMSFs from borrowing. Presumably, this will apply prospectively, with some form of grandfathering or transitional “wind-down” period applying to SMSFs with existing loans. If it doesn’t, then we will all be screaming.