Is the amount you can have in superannuation now limited to $1.6 million?

No, there is no limit to the amount a person is permitted to accumulate in superannuation. However, the value of (tax free) pensions will be measured against a person’s transfer balance cap (TBC) and the amount in pension phase will not be permitted to exceed $1.6 million from 1 July 2017 (this limit will be subject to indexation).

Also, if a person’s total balance(s) in all their superannuation funds exceeds $1.6 million, it is not possible to make further non-concessional contributions to superannuation. Employer concessional contributions will still be allowed.

The new superannuation rules, which commence from 1 July 2017, will impact the amount of tax paid in the superannuation fund for members with a pension value of more than $1.6 million or those receiving a transition to retirement pension (TTR or TRIS). Any excess over $1.6 million will be required to be transferred to accumulation phase i.e. back to a superannuation account (where it is subject to tax) or taken from the fund as a lump sum.

What happens if I am over the new transfer balance cap on 1 July 2017?

The ATO says: “If the total value of your retirement phase income streams is between $1.6 million and $1.7 million you have six months to remove the excess capital without penalty. This concession only applies to income streams you were receiving just before 1 July 2017”.

“If the total value of your retirement phase income streams is more than $1.7 million (or you do not rectify a small breach within six months), you’ll be required to remove excess amounts. Where you exceed your cap, we will issue you with an excess transfer balance determination, outlining the amount in excess of your cap and the excess transfer balance earnings that must be removed from retirement phase. You’ll also be liable to pay excess transfer balance tax on excess transfer balance earnings. The excess transfer balance tax rate is set at 15 % for breaches in the 2017–18 financial year. From the 2018–19 financial year, the tax rate is also 15 % for a first breach, and increases to 30 % for second and subsequent breaches”.

The Regulators are applying the brakes to Investment Property Lending

To help constrain run away housing prices in Sydney & Melbourne in an environment where the Reserve Bank is reluctant to raise interest rates, the Australian Prudential Regulation Authority (APRA) recently announced a series of macro-prudential measures to tighten up bank lending standards. Additional supervisory measures on mortgage lending apply particularly to investor lending, to reinforce “sound residential mortgage lending practices in an environment of heightened risks”.

However, APRA has not increased the capital risk weightings used for home loans. If they did this the banks would need to raise more capital, likely impacting bank share prices and increasing the cost of loans for borrowers.

Since December 2014, APRA, together with Council of Financial Regulators (CFR) members, has closely monitored residential mortgage lending trends and the resulting impacts on the resilience of lenders, as well as the household sector more broadly.

According to the regulator, this increased scrutiny has been in response to “an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures”.

APRA has written to Authorised Deposit-taking Institutions (“ADI’s” i.e. banks, building societies and credit unions) advising that APRA expects them to:

  • limit the flow of new interest-only lending to 30% of total new residential mortgage lending (it has recently been at around 40%), and within that:
  • place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80%; and
  • ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%;
  • manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 %growth;
  • review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
  • continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).

APRA chairman Wayne Byres said that “Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”

Mr Byres added that lending on interest-only terms represents nearly 40% of the stock of residential mortgage lending by ADIs – a share that is high by international and historical standards. “APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile. We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30 per cent of total new mortgage lending.

“APRA has chosen not to set quantitative limits in relation to serviceability assessments at this point in time. However, APRA considers it important that borrowers retain some level of financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness.

He added that APRA continues to monitor the prevalence of higher risk mortgage lending more generally, including lending at high loan-to-income ratios, lending at a high loan-to-valuation ratios, and lending at very long terms or with long interest-only periods (e.g. beyond five years).

“APRA will continue to observe conditions in the residential mortgage lending market, and may adjust the above measures, or implement additional ones, should circumstances warrant it”.

What we have seen since these announcements is that the banks have responded by increasing interest rates for most borrowers, in particular interest only loans and loans for investment purposes, and by cutting back on investment property lending.

Good news for Australia – no economic downturn in China

While many have long forecast a hard landing in China, this hasn’t occurred and China expert Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist and currently a senior fellow at Yale University, says, “Another growth scare has come and gone for the Chinese economy”.

Roach comments:

“Since 2007, when former Chinese Premier Wen Jiabao laid down the rebalancing gauntlet for a Chinese economy that had become “unstable, unbalanced, uncoordinated, and unsustainable” China’s economic structure has, in fact, undergone a dramatic transformation. The GDP share of the so-called secondary sector (manufacturing and construction) fell from 47% in 2007 to 40% in 2016, whereas the share of the tertiary sector (services) increased from 43% to nearly 52%. Structural shifts of this magnitude are a big deal. The key point missed by reform deniers is that China is actually making rapid progress on the road to rebalancing”.

He also notes that “official data in the first two months of 2017 showing solid strength in retail sales, industrial output, electricity consumption, steel production, fixed investment, and service sector activity”. Adding, “the icing on the cake came from the trade data – namely, annual export growth of 4% in January and February, following a 5.2% contraction in the fourth quarter of 2016. This underscores a key contrast between the latest and previous Chinese growth scares”.

In my view this is undoubtedly good news for Australia as China is by far our largest export market and is also vital to our tourism and education sectors. China now accounts for approximately 32% of our exports (Japan is #2 at 16%) and in 2016 just over 1.0 million Chinese tourists visited Australia. With direct air links into Australia now from most of China’s 20 largest cities, tourist numbers are expected to continue their rapid growth. Australian Government Department of Education data on international students show that over 213,000 of the total 712,000 foreign student enrolments in 2016 were from China, including Hong Kong. At 30%, this is easily the largest number from any country (India was #2 at 78,000).

Anzac Day Tribute

Here is a link to a moving musical tribute to all those men and women who have bravely served their country.

Co writers on Spirit of the Anzacs were Lee Kernaghan, Garth Porter & Colin Buchanan. It commences with former Prime Minister of Australia Hon Paul Keating. Kernaghan says this speech at the entombment of the Unknown Soldier inspired the song.

Well worth a watch if you have already seen it.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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