What the election could mean for your super

If you have super, I’m sure you’ll be interested in what the politicians have in mind as we approach this year’s federal election. We’ve seen some of the Labor proposals for super already but will have to wait until the Liberal/National Coalition releases its super policy during the election campaign. To get some perspective around what Labor has announced, we can compare it to the current super rules.

Most of the Labor super proposals are about contributions and will further restrict the amount that can be made or do away with some recently-introduced concessions, but we’ll see a minor expansion of superannuation guarantee coverage to lower paid workers.

Contributions changes

1. Reduction in non-concessional contributions

Current law

You can make non-concessional contributions of up to $100,000 if you qualify and have a total superannuation balance of less than $1.6 million.

If you are under 65 it is possible to access the ‘bring-forward’ rule and make non-concessional contributions of up to $300,000 over a fixed three-year period if your total superannuation balance is no more than $1.4 million. But if your total superannuation balance is between $1.4 and $1.5 million you can make non-concessional contributions of up to $200,000 over a two-year fixed period and if your total super balance is between $1.5 and $1.6 million your non-concessional contribution is limited to the standard annual limit of $100,000.

Proposed Labor change

The standard annual non-concessional contribution cap of $100,000 will be reduced to $75,000. The ‘bring-forward’ rule will then change to allow a one-off (after-tax) contribution of $225,000 for an individual, or up to $450,000 for a couple to a maximum of $225,000 each.

The cut in the cap reduces the ability to make a “one-off” contribution to super, which can come from the proceeds of selling investments, an inheritance, a redundancy payment or some other means.

Non-concessional contributions and access to the bring forward rule will continue to be determined by your total superannuation balance which is measured as at 30 June in the previous financial year.

2. Changes to tax deductions for personal superannuation contributions

Current law

You can claim a tax deduction for personal superannuation contributions providing you have notified the fund of your intention and the fund has acknowledged your notice in writing. The maximum amount for personal superannuation contributions, including any employer or salary sacrifice contributions, is $25,000 without incurring a tax penalty.

As an example, if your salary for the financial year is $100,000 your employer would be required to make a 9.5 per cent super guarantee contribution of $9,500 that would allow you to make a personal tax-deductible contribution of up to $15,500 ($25,000 minus $9,500).

Proposed Labor change

Tax deductions for personal superannuation contributions will be more restricted and revert to the previous rules. However, more detail of the announcement is required to work out who may be impacted by any change. The previous rules allowed a deduction for personal contributions if less than 10 per cent of your total adjusted taxable income came from employment sources.

3. Catch-up concessional contributions

Current law

You may be eligible to claim personal ‘catch-up’ concessional contributions from 1 July 2018 if you meet certain conditions. The ‘catch up’ contribution is the difference between concessional contributions you make plus those that are made for you, and your annual concessional contributions cap of $25,000. You can carry forward the shortfall for up to five years and can claim a personal tax deduction up to the catch-up amount if your total superannuation balance as at 30 June in the previous financial year is below $500,000.

As an example, if you earnt $100,000 for a financial year and your employer contributed the compulsory super guarantee contribution of $9,500 (9.5 per cent of $100,000) you would have an unused catch-up concessional contribution of $15,500 ($25,000 minus $9,500) which you can carry forward for the next five years.

Depending on your income over the five-year period and your total super balance you could choose to claim an additional tax deduction for the unused catch-up concessional contributions. The amount of the deductible contribution could be up to $40,500 ($25,000 plus $15,500) depending on any other concessional contributions made by your employer. This would be the concessional contributions cap for the year and the carry forward shortfall from the previous year.

Proposed Labor change

Catch-up contributions will be abolished as they are considered to provide an unfair advantage to upper-income earners.

4. Decrease in the Division 293 high-income super contribution threshold

Current law

If you are a high-income earner you are liable to pay an addition 15 percent on concessional contributions up to the standard cap amount of $25,000 if your adjusted taxable income exceeds $250,000.

This means that if you have an adjusted income of at least $250,000 it will trigger an additional 15 per cent tax (or 30 per cent total rate) on any concessional contributions within the $25,000 cap that are in excess of the threshold.

As an example, if you had an adjusted taxable income of $275,000 and concessional contributions of $25,000 were made to super you would end up with an additional tax bill of $3,750 ($25,000 multiplied by 15 per cent). However, if your adjusted taxable income was $260,000 and concessional contributions of $25,000 were made to super then only $10,000 would be taxed at the additional 15 per cent ($1,500).

Proposed Labor change

Labor have proposed to reduce the high-income superannuation contribution threshold to an adjusted taxable income of $200,000 from the current $250,000 threshold.

Superannuation guarantee changes

1. $450 superannuation guarantee threshold to be phased out

Current law

Superannuation guarantee is not payable by an employer for employees who earn up to $450 in a calendar month.

Proposed Labor change

The $450 monthly threshold is to be progressively reduced in increments of up to $100 each financial year between 2020 and 2024. The effect of this change is intended to benefit low-income earners, casual employees and those in part-time employment.

2. Superannuation guarantee to be paid on the Federal Government’s paid parental leave

Current law

Superannuation guarantee contributions are not required to be made if you are receiving paid parental leave.

Proposed Labor change

Superannuation guarantee is to be paid on amounts you receive under the Federal Government’s paid parental leave scheme. At present, $719.35 is paid weekly for 18 weeks if you are female, meet a work test and earn less than $150,000 per year. The amount paid for the superannuation guarantee in this case would be 9.5 per cent of $719.35 ($68.34 weekly to a maximum of $1,230.08 over 18 weeks).

Limited recourse borrowing

1. Direct borrowing by superannuation funds and limited recourse borrowing

Current law

Your SMSF can borrow for purposes of a limited recourse borrowing arrangement where a single acquirable asset is held in trust for the SMSF on certain conditions.

Proposed Labor change

Limited recourse borrowing arrangements by superannuation funds is to cease prospectively.

Common political ground

There are some issues around superannuation where Labor and the Coalition appear to be in agreement including:

1. Increasing the superannuation guarantee rate to 12 per cent

The super guarantee rate is set to increase from the 2021/22 financial year at 0.5 per cent per year until it reaches 12 per cent by the 2025/26 financial year. The planned incremental increase in the superannuation guarantee rate twill take place despite the Productivity Commission’s recent recommendation opposing any increase. However, Labor has expressed a desire to increase the super guarantee rate as soon as practicable.

2. Increasing the Age Pension age

Increases in the Age Pension age will occur at six-monthly intervals to age 67 by 1 July 2023, however the plan to increase the Age Pension age to 70 was abandoned by the current government and will not be introduced if Labor takes government.

Other financial differences for comparison

Dividend imputation

Current law

Individuals and superannuation funds are entitled to a refund of franking credits, if the franking credits plus any pay-as-you-go tax paid by the individual or fund exceeds their tax liability.

Proposed Labor change

Refunds of excess franking credits that exceed tax liabilities will cease for some taxpayers. Generally, the policy will apply to most individuals, SMSFs and some larger superannuation funds. The original announcement by Labor exempted SMSFs which had at least one member who was a welfare recipient on 28 March 2018 from the policy as part of their ‘pensioner guarantee’.

Budget deficit levy

Current law

The budget repair levy equal to two per cent was payable on taxable incomes exceeding $180,000 from 1 July 2014 and ceased after 30 June 2017.

Proposed Labor change

Labor are proposing to reintroduce the two per cent budget deficit repair levy for anyone with an adjusted income of more than $180,000.

Taxing discretionary trust income

Current law

Distributions from discretionary (family) trusts are taxed depending on the personal tax rate of the beneficiary.

Proposed Labor change

Labor intends to introduce a minimum tax rate of 30 per cent to discretionary trust distributions aimed at reducing tax minimisation and artificial income splitting.

Cap on tax deductions for managing tax affairs

Current law

No cap applies to tax deductions for the cost of managing your tax affairs.

Proposed Labor change

A cap of $3,000 will apply to tax deductions for the cost of managing your tax affairs.

What next?

It’s a bit of wait and see at the moment as the Coalition and other parties have not announced their superannuation policies. But once they do, we will be able to compare them to see how you and your superannuation will be impacted.