One of the most important issues clients have been raising with us over the past four months has been the proposed changes to the superannuation system.

People have, quite rightly, been upset at yet another potential change to rules which have been tinkered with so often over the last 20 + years (since the commencement of Paul Keating’s compulsory superannuation system). I have sensed that confidence in the system itself was being lost. This is especially critical where people have made significant decisions based upon current rules, only to see the goalposts move.

A superannuation history lesson

Whilst there has been tinkering at the edges since the last major update to the system, under the Costello reforms of 2007, which significantly changed the operation of the way super would be accumulated and taxed. As well as introducing concepts such as transition to retirement. These were major reforms, designed to overcome a significant flaw in the original design. This flaw was that unlike virtually all other retirement schemes in comparable countries, super was taxed on money going in, taxed on the earnings, and then taxed going out when funds were withdrawn. So three taxing points existed. It is true that the tax rates were concessional (subject to reasonable benefit limits) as compared to marginal personal tax rates, however the gold standard has always been that in a compulsory system you have one taxing point, ie on exit. This of course cannot be unwound due to the way our system has developed. What Costello did was reduce the taxing points and after meeting certain conditions of release there has been no tax to pay on the funds earning and withdrawals.

By far the biggest point of contention on the new proposals has been a retrospective (I know the use of this word is hotly disputed but that in my view was the effect of the proposed changes) limit dating back to 2007 on the amount of “non concessional” (amounts effectively contributed from after tax dollars). The proposal meant that this amount would be limited to $500,000 as a lifetime cap. For many people nearing or reaching their vesting ages, this amount was going to be inadequate to fund a decent lifestyle in retirement, even after allowing for employer or self-employed contributions.

Withdrawal of proposed  $500,000 super lifetime cap

The great news however is that the government will be scrapping the $500,000 lifetime non concessional limit, instead replacing it with an annual $100,000 cap (with bring forward rules). This is essentially a reduction in the current cap, however a much more (in my view) sensible proposal to the original. From a purely selfish SMSF administration point of view a lot easier to keep track of as well.

On the negative side there will still be a $1.6 million cap to the amount of funds which will be able to sit in a tax free earning status (once the fund is in pension phase). This will still effect a significant number of current funds and I am disappointed that this amount could not have been matched with the amount that would have applied under the pre 2007 rules. The reasonable benefit limit in that case would now be approximately $2.5 Million.

Please feel free to get into contact with me at Life Balance Accounting Professionals if you wish to discuss any of these points with me.