The election and your super
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia
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Whether you enjoy the casual walk to the local school on polling day for a sausage sizzle, a home-made cake and a drink or you decide to pre-poll vote before election day, anyone with super needs to know what the candidates are saying about it.
So far, we’ve seen what Labor has in store and some announcements from the Liberal/National Coalition in the lead up to the impending election.
Many of the Labor super proposals are about further restricting or doing away with some recently-introduced concessions, but we may see a minor expansion of superannuation guarantee coverage to lower paid workers. Of course, the most notable announcement is the planned abolition of franking credit refunds for individuals and SMSFs. The Coalition will continue with the system we have and raise the age at which non-concessional contributions can be made without any work tests as well as increase the number of members an SMSF can have.
Below is a full round-up of the changes that have been announced to date and how they could impact on our current super system.
SMSF members
Coalition announcement
Increase the maximum number of members of an SMSF to six.
Labor announcement
No announcement by the Labor party on the maximum number of members of an SMSF but a recent parliamentary committee review of the possible increase to six members was not supported by Labor members on the committee.
Current law
SMSFs are permitted to have up to four members.
Contributions changes
1. Reduction in non-concessional contributions
Coalition announcement
No change to non-concessional contributions but the Coalition proposes an increase to the age at which non-concessional contributions can be made to super without the need to meet a work test to 67.
Labor announcement
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.
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.
2. Changes to tax deductions for personal superannuation contributions
Coalition announcement
No change to concessional contributions but the Coalition proposes an increase to the age at which concessional contributions can be made to super without the need to meet a work test to 67.
Labor announcement
Tax deductions for personal superannuation contributions will be more restricted and revert to the previous rules. However, more detail 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.
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).
3. Catch-up concessional contributions
Labor announcement
Catch-up contributions will be abolished as they are considered to provide an unfair advantage to upper-income earners.
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.
4. Decrease in the Division 293 high-income super contribution threshold
Labor announcement
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.
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).
Superannuation guarantee changes
1. $450 superannuation guarantee threshold to be phased out
Labor announcement
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.
Current law
Superannuation guarantee is not payable by an employer for employees who earn up to $450 in a calendar month.
2. Superannuation guarantee to be paid on the Federal Government’s paid parental leave
Labor announcement
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).
Current law
Superannuation guarantee contributions are not required to be made if you are receiving paid parental leave.
Limited recourse borrowing
1. Direct borrowing by superannuation funds and limited recourse borrowing
Labor announcement
Limited recourse borrowing arrangements by superannuation funds is to cease prospectively.
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.
Common political ground
There are some issues around superannuation where Labor and the Coalition appear to agree, 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 will 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
Labor announcement
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’.
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.
Budget deficit levy
Labor announcement
Labor are proposing to reintroduce the two per cent budget deficit repair levy for anyone with an adjusted income of more than $180,000.
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.
Taxing discretionary trust income
Labor announcement
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.
Current law
Distributions from discretionary (family) trusts are taxed depending on the personal tax rate of the beneficiary.
Cap on tax deductions for managing tax affairs
Proposed Labor change
A cap of $3,000 will apply to tax deductions for the cost of managing your tax affairs.
Current law
No cap applies to tax deductions for the cost of managing your tax affairs.
What next?
Just because we will know the results of the election before parliament sits again, any changes to super legislation will still have a long way to go. Legislation will need to be introduced into both houses of the parliament and make it through a Senate that may not see the government’s point of view. So just because a change may have been proposed, it does not necessarily follow that it will become law.
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Important notes
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