May 2017: Since this article was first published in May 2016, the Government has modified some of the announcements contained in the 2016 Budget. We have left the original article here for completeness, but please do not act on any part of this article without seeking personal advice first. Many of the modifications are discussed in later blog articles on our site.
When we think of retirement planning we think of super.
Super is huge. It’s one of Australia’s largest industries, employs tens of thousands of very well paid staff, and manages more than $2 trillion dollars. A Google search brings more data than you can ever read. Near the top of the list you will find KPMG’s e-book The trends shaping Australian’s superannuation industry and its as good as you will get for a short and simple super summary.
But is super the best way to build assets for retirement? Is there a better way to build assets for retirement? Has the 2016 Budget really changed the game?
Most people: the 96%ers
The answer, to get to the point quickly, is no, at least for most people. For most people super is better than ever. By “most people” we mean about 96% of people: this is the percentage identified in the Budget, and it seems about right.
Most people can now put more into super: the five year contributions catch up rule and the new rule allowing employees to deduct personal contributions more than compensate for the lower $25,000 cap.
The extension of the spouse offset and the super tax offset make super better for lower income families. The abolition of the work test between age 65 and 75 helps too.
Most people will not be affected by the new $1,600,000 cap on tax free pension assets.
By the way, that’s $3,200,000 for a couple. Earnings on amounts greater than that are only taxed at 15% (or even 10% on most capital gains). If a 65 year old couple has $4,000,000 in super, 80% is tax free. The earnings on the remaining 20% are taxed at just 15%/10%. That’s an average tax rate of 3%/2%.
That’s not a heavy tax charge. That’s virtually tax free.
Most people are not adversely affected by the 2016 Budget super changes.
In fact most people are much better off under the 2016 Budget changes.
The following table contains a summary of the problem that the Budget identified and the way in which the Budget seeks to fix that problem.
| Summary of May 2016 Super budget changes | ||
| The Perceived Problem | The Solution | |
| Super concessions skewed to wealthier persons | From 1 July 2017 concessional contributions capped at $25,000 irrespective of age. From 1 July 2017 individuals with taxable incomes greater than $250,000 pay 30% tax on concessional contributions. | |
| Super concessions skewed to wealthier persons | Individuals with less than $500,000 super can access their unused concessional contributions cap space on a rolling basis over five years. | |
| Super concessions skewed to wealthier persons | From 1 July 2017 a $1,600,000 cap on the super transferred to a tax-free retirement account. The cap is indexed by the CPI. Benefits above the cap can remain in an accumulation account, taxed at 15%. Changes in balances due to profits or losses, or pension payments, are ignored. Individuals with balances above $1,600,000 must transfer the excess back to an accumulation account, or withdraw it. | |
| Super concessions skewed to wealthier persons | The tax exempt status of income from assets supporting transition to retirement income streams stops on 1 July 2017. Earnings from these assets will be taxed at 15%. This is irrespective of when it commenced. | |
| Inequity between similar retirement orientated investment products | From 1 July 2017 tax exemption on earnings in retirement will extend to products such as deferred lifetime annuities and group self-annuitisation products. Some suggestions there will be Centrelink advantages too | |
| Need for better super support for low income earners | A Low Income Super Tax Offset replaces the Low Income Super Contribution on 30 June 2017, to support super for low income earners. The LISTO means tax on super cannot be greater than tax on the individual. | |
| Need for better super support for women | From 1 July 2017 the 18% tax offset of up to $540 is available for any individual contributing to a spouse whose income is up to $37,000. (Previously $10,800.) The offset is gradually reduced above $37,000 and stops at $40,000. | |
| Need for better super support for older persons | From 1 July 2017 there is no work test for super contributions. | |
| Inequity between different types of taxpayers | From 1 July 2017 employees will be able to claim deductions for personal concessional contributions | |