2016 Federal Budget Part 2 – Super
Back in part #1 I had a look at whether the federal budget had actually addressed bracket creep like they had been saying. In this next part I would like to touch on the changes to Super that impact me. Super (or Superannuation) is more or less the Australian equivalent of the 401k in the US – it is the required method for saving for retirement. Now if you are getting closer to retirement then there are areas I will not be looking at here. If you are uber wealthy, then I won’t be considering those situations either. I will be focusing on the things that impact me – an average not quite middle-aged person who has been working for a number of years, and has always contributed extra into super. I will also quickly look at some of the other bits that could impact me if things go well – like a 300% pay rise!
I am not against these proposed changes, many of them are very sensible, I just wish they would stop screwing around with the terms and conditions on what is essentially a very very long-term untouchable savings account. How are people supposed to make good decisions now when you have to lock the money up for 30 to 50 years and the details around how that money is treated changes every few years? By the time I retire I will probably have five to ten different pools of money in Super, each with different rules applied to them following the law changes over the decades.
The Super Bits
There are two specific changes that I care about in the budget. As you will see below there are many others, and many that I have not covered at all. While many of these may impact me one day, there are two that impact me today (or will if they come around). Strangely enough, these two are my focus today as they will change the way I deal with my super.
This one is easily the most frustrating change. The limit for the amount of pre-tax money you can put into super (including required contributions) is lowered from $30,00 to $25,000. In years gone, this limit would not have impacted me. I have always added extra into my super, but never really got close to the $30,000 cap.
Fast forward a few years, and I managed to reach that limit last financial year. Once you have paid off your house it is much easier to put some extra money towards super. I also hope to reach it this financial year and next financial year. Just as I start to really utilise the power of super they are limiting it.
This now puts us almost exactly on par with what the US is able to put into their retirement saving account. They are able to contribute about $18,000, which at today’s exchange works out to a sliver over that $25,000 proposed limit. I know there are many differences between the US and us, but it was nice to know we were ahead of the US in that respect. At least we will not move behind them (assuming the government follows the US and manages to wait long enough to get another of their $5,000 indexation increments before changing the cap again).
Result: A step backwards for me, but not too bad in general.
The second change that will directly impact me is the catch-up rule. This change allows you to make your pre-tax contributions for the current year anytime in the next five years! As an example, if your pre-tax contribution for one year was $24,000. Then the second year it was $24,000 again. Then the third, fourth and fifth year you also contributed $24,000 each year. The end result would be $120,000 contributed when a possible $125,000 was able to be contributed. The catch-up rule says each of those “missing” potential $1,000 contributions (totaling $5,000) can still be made within five years from each respective $24,000 contribution. This means that in year six (five years after year one), you could contribute $30,000. The $25,000 you are normally allowed, plus each of those missing $1,000.
This will be a fantastic rule if people have sporadic, or unreliable income year to year. It will also be good if at any point I decide to try my hand at some sort of side business that takes me away from my day job. I can dream can’t I? The only catch is that it can only be done if your balance is under $500,000 – no problem for me at the moment.
Results: Much more flexibility on how and when I am able to contribute extra to my super – Win!
The Other Super Bits
In addition to the two items above, there are a few other areas that caught my eye for one reason or another. Most of these are either “one day it would be nice if they caused a problem” or else “that just seems to add complexity” or both. They are all items that are generally designed to stop reasonably wealthy people using the Super system to lower their tax (although I am sure some of them will impact people who are approaching retirement and have been saving well).
- $1.6 million cap on money in pension mode accounts.
- This is not all super accounts, but it actually limits the amount you can have in zero-tax accounts. Annoyingly this looks to be retrospective, so if you currently have $2 million in pension mode then you will have to take $400k out (and start paying 15% tax on its earnings).
- Lowering the income threshold from $300k to $250k for the additional high income earners tax on pre-tax contributions.
- This will mean that if you earn over $250k (including required super contributions) you will have to pay 30% tax on some portion of your pre-tax contributions (be they required or concessional) rather than 15%. This point is actually quite complicated as there is a maximum for the required super contribution, meaning there is always room for confessional contributions, but if you earn too much you may have to pay that 30% on all your super contributions (even the required ones).
- Researching into this really opened a rabbit hole into areas of Super that I never knew existed and I really feel like there are too many edge cases. I believe this area is a prime candidate for simplification.
- A $500,000 lifetime after-tax contributions cap.
- This one is easy to explain and (apart from arguing around the amount) is a great idea. It is designed to stop people sticking all their investments into super and getting a much lower tax rate on them. Basically the government is saying “Super is for making sure you have enough money to retire on – the end”.
- An increase in the low-income level for contributions to your spouse/de facto.
- The income limit for the low-income spouse/de facto contributions offset increased from $10,800 to $37,000. This should mean a much larger portion of the population is able to top-up their partners super. One important thing about this is that if your partner stops work for whatever reason, it will allow you to keep their super going. Obviously this will be good for new mothers, but also for anyone leaving full-time employment to work on a business or live off their passive income. If one partner still has a reasonable income, they can now keep the super (and future tax benefits) of the other person rolling along.
Now there are also a bunch of others that I am not even going to mention here (the ones above just had nice numbers). So if you think they could impact you in the slightest, go and have a read or a read or a read or a read or a google. If you still don’t know, you could always find an accountant to assist you.
Well, that is enough super for me for a while. If you haven’t checked yours for a while, who not go check on how it is going? And don’t forget to check out part #1 on bracket creep if you haven’t already.