By Peter Burgess
Ever noticed that bad news attracts more attention than good? The superannuation measures announced in this year’s Federal Budget are a prime example. Yes, there were changes that many would prefer to do without – such as the $500,000 lifetime limit on non-concessional contributions and $1.6 million pension cap. But there were also other changes which will open up new tax and wealth-planning opportunities – and which so far have gone virtually unnoticed.
At the top of the list for me is the proposed removal of the age based work test from 1 July 2017. Currently, those aged 65 to 74 wanting to make a personal super contribution must have worked for a minimum of 40 hours over 30 consecutive days in the financial year the contribution is being made. The vagaries of the test and difficulties associated with its application have been a major source of frustration for the industry.
Long overdue, the removal of the test will enable retirees aged 65 to 74 to contribute surplus funds to super and, in some instances, benefit from lower rates tax on investment earnings. Surplus funds could include earnings derived from non-super investments or pension payments which are surplus to income needs. However, it’s important to ensure the contribution of surplus funds doesn’t result in a breach of the lifetime $500,000 non-concessional contribution cap.
One of the more expensive superannuation measures, in terms of its impact on the Federal Budget, was that of allowing personal contributions, up to the cap, to be claimed as a personal tax deduction regardless of work status.
Under the current rules, only those who derive less than ten per cent of their annual income from “employment related activities” are able to claim personal contributions as a tax deduction. Individuals combining self-employment and waged income, together with those unable to access salary sacrifice, will benefit from these changed arrangements.
Also in line to benefit are those aged 65 to 74. Combined with the removal of the work test, retirees in this age bracket will be able to make personal super contributions up to the concessional contribution cap amount, claim the contribution as a tax deduction and use that deduction to reduce their taxable income.
Another positive Budget measure is the proposed introduction of catch-up concessional contributions, allowing individuals to carry forward any unused concessional contribution cap amounts accrued from 1 July 2017 over a rolling five year period.
The measure will enable concessional contributions to be made in excess of the annual cap where the individual has not reached their contribution cap in previous years. Given most people rarely exhaust their entire concessional contribution cap each year, this measure arguably reduces the impact of a lower cap by enabling concessional contributions to be made in excess of the annual cap where personal circumstances permit.
From a tax planning perspective, the ability to make catch-up contributions may open up some useful opportunities, particularly for self-employed people who hold assets in their own name with large unrealised capital gains. Saving up unused concessional cap amounts over a few years and then making a catch-up concessional contribution may provide some important taxation benefits if the capital gain is realised in the same income year that the catch-up contribution is made.
An unfortunate caveat with the proposed catch-up contribution measure is the requirement that the member must not have a super balance in excess of $500,000. If the balance exceeds $500,000 no catch-up concessional contributions will be permitted. Using a balance threshold to assess a member’s eligibility will, in my view, be complex and difficult to administer. For example, in order to discourage individuals making withdrawals to keep within the $500,000 threshold, consideration may need to be given to including withdrawals in a member’s account balance calculation. If they are to be included, this would necessitate super funds reporting all drawdowns, that is, pension payments and lump sum withdrawals.
Similarly, on what date should the $500,000 account balance be assessed? Members will require up-to-date information about their super balance so they can determine their eligibility for catch-up contributions in advance of a financial year – and in many cases this information will not be available until well after the new financial year has commenced. To overcome this, one option would be to use an individual’s 30 June balance two years prior to the current year. This was an approach floated by the Labor Government back in 2011, as part of their proposal to allow a higher concessional contribution cap for members over age 50 with a balance under $500,000. However such an approach may create other issues. For example, is it fair that a member, whose balance two years ago was under $500,000 but now exceeds that amount, be permitted to make catch-up contributions? Conversely should a member be excluded from making catch-up contributions because their balance was over $500,000 two years ago but is now under that amount due to negative investment returns?
In my view, the cost of imposing a $500,000 threshold outweighs the benefits. Whether a member decides to make a $25,000 concessional contribution each year for the next five years, or no concessional contributions for four years and then a $125,000 catch-up contribution in the fifth year, the total amount of contributions made over a five year period is still the same.
It also raises some interesting equity issues. A member with a balance in excess of $500,000 would be permitted to make $25,000 in contributions each year but that same member would not be permitted to make catch-up contributions totalling the same amount over a five year period.
Perhaps as an alternative to imposing a $500,000 threshold, the catch-up contribution amount could be capped? It is interesting to note the Labor Government’s 2011 proposal was later abandoned due in part to the complexities associated with using a balance threshold for eligibility purposes. Let’s hope this catch-up contribution measure doesn’t meet with the same fate.
When it comes to superannuation reform it pays to take a glass half full approach. Even if it sometimes means wearing rose coloured glasses!
