The Federal government delivered an unexpected proposal during the May budget when they proposed a lifetime cap of $500,000 (indexed to AWOTE in $50,000 increments) on non-concessional contributions, which will be backdated to 1 July 2007.
Some background on the issue:
Before 9th of May 2006 an individual could contribute an unlimited amount of non-concessional (un-deducted contributions). From 9th May 2006 to 30th June 2007 there was a $1m transitional rule. From 1 July 2007 the $150,000 per financial year applied prior to age 75, with a 3 year aggregation of your cap if you were under age 65. This annual contribution cap moved to $180,000 on 1 July 2014. A $500,000 lifetime limit was then proposed to operate from 3rd of May 2016 (backdated to 1 July 2007).
In the span of 10 years, we have moved from a Superannuation environment of unlimited after tax contribution limits to very restrictive limits. This is of concern for those seeking to fund their own retirement.
What the proposed rule changes may mean:
· Divorce- The lifetime limits, if introduced, will change the way assets are allocated in a settlement. It may result in some inequitable situations if one party has used all of their $500,000 lifetime limit and the other spouse receives 100% of the Superannuation.
· Disenfranchising Superannuation Participants- The general population are concerned with governments “tinkering” with the Superannuation Contributions Limits and the framework of legislation and rules that sit behind this. We need a stable superannuation system which encourages Voluntary Superannuation Contributions. These changes may also impact the capacity to continue funding the Centrelink Aged Pension Payments.
· Backdating to 1 July 2007- Governments are setting a concerning precedent if they backdate legislation in terms of the Non Concessional Lifetime limits back to 1 July 2007.
· The three-pillar structure of the Australian retirement income system is - the Age Pension, compulsory saving through the superannuation guarantee and voluntary superannuation saving. Is the imposition of such a low Non Concessional Limit attacking the very framework of our three pillar system?
· An amount of $500,000 is too low for some couples to fund their retirement- A report prepared by an actuary Accurium titled “SMSF Retirement Insights” in July 2016, demonstrates a couple aged 60 needs $2.15m in Superannuation to support $100,000 per annum income stream (Based on an 80% confidence level). The $500,000 lifetime limit will make it increasingly difficult for people with a combined Superannuation balance of under $500,000 at present to build towards a nest egg of $2.15m at retirement.
· Divesting of Assets for High Net Worth Families- A consequence of the $500,000 lifetime limits is that high net worth families may divest assets to their children earlier rather than in their estate. Historically the strategy has been for those clients to contribute as much into Superannuation prior to age 75, as possible.
· Re-Contribution Strategies- Those who have undertaken re-contribution strategies since 1 July 2007 to move their Superannuation Components from Taxable to Tax Free, have in essence used up their lifetime limit and they may actually need to make additional contributions, which they will be unable to make, if they have reached their limit.
· Limited Recourse Borrowing Arrangements- Those who have a pre 3rd of May 2016 arrangement in place, already with significant borrowings committed before this date, and who have reached the $500,000 lifetime limits may run into cash flow issues if they are relying on the Non Concessional Limits to pay off the debt.
Prior to the proposed rules being approved, I would hope the following would be considered:
1. The commencement of the test time for the $500,000 limit to be implemented from 1 July 2016. Generally, complications occur if changes straddle financial years.
2. The quantum of the $500,000 Non Concessional Lifetime Limit should be increased to $1m to allow for both a larger retirement nest egg for retirees and to allow for Limited Recourse Borrowing Arrangements to be paid off.
3. Where a member is divorced and their Superannuation is split (pursuant to a court order) to the other spouse (tax free components), there needs to be a mechanism to re-instate their “forfeit” lifetime limit.
Contact Foundation Advisory to find out about how these changes may apply to you, Phone 03 9878 7647 for an obligation free meeting.
