How the latest Government announcements on Superannuation might impact You
The Federal Government has modified a number of the announcements made in the Federal Budget.
Key changes are:
- Abolishing the proposed lifetime non concessional contribution (NCC) cap of $500,000 and replacing it with an annual cap of $100,000 (still a reduction from the current annual cap of $180,000). This will assist those looking to boost their retirement balances before retiring.
- People aged 65 to 74 will still need to meet a ‘work test’ to be able to contribute to super. This is a disappointing change for those older people wishing to add money to their Super accounts after they stop working. This means that those aged between 65 and 74 will still need to work a minimum of 40 hours in a 30 day period to remain eligible to contribute to super.
The Government has indicated they intend to proceed with other super proposals announced in the Federal Budget, including:
- An annual concessional contribution cap of $25,000 for everyone, irrespective of age.
- Introducing a Low Income Superannuation Tax Offset which operates in the same way as the Low Income Superannuation Contribution, which was otherwise due to expire 30 June 2017. The offset will mean that individuals with an adjusted taxable income up to $37,000, such as part time workers, will receive a refund into their superannuation account of the 15% contributions tax paid on their concessional superannuation contributions, to a maximum of $500.
- The ability to claim personal super contributions as a tax deduction, regardless of employment arrangements. This is valuable to many, particularly employees who late in the year wish to top up their concessional contributions.
- The requirement for people with incomes greater than $250,000 (currently $300,000) to pay an additional 15% tax on all their concessional contributions i.e. 30% rather than 15%.
- The introduction of a lifetime limit of $1.6 million on the amount of superannuation that can be transferred into ‘retirement phase’ accounts.
- An increase in the tax paid on earnings on investments held in ‘transition to retirement’ pensions from 0% to 15%. This will make TTR pensions less attractive, particularly for those less than age 60.
A one-off opportunity this financial year to make a large contribution to your Super
The new annual NCC cap of $100,000 will be effective from the start of the 2017-18 financial year, so the current annual cap of $180,000 remains in place for 2016-17. This means that an individual with significant funds that they would like to put into Super (from an asset sale, an inheritance or whatever) can contribute up to $540,000 this year using the bring forward provisions (assuming they haven’t already accessed the bring forward provisions during the previous 2 financial years).
For a couple this means they can potentially contribute up to $1,080,000. After 30 June 2017 the maximum an individual could contribute will reduce to $300,000 and $600,000 for a couple. The rules are somewhat tricky so it is best to check your circumstances very carefully and to get advice before acting.
Risky – APRA chairman warns of Bank hybrid risks
Hybrid securities, as regularly issued by the big four banks and others, are complex instruments so anyone considering buying them should, at a minimum, do their research to ensure they understand the risks associated with the particular security.
Wayne Byres, the chairman of the Australian Prudential Regulatory Authority (APRA), the regulator of Australia’s banking system, recently warned investors that hybrid securities serve as a “first line of defence” in a banking crisis.
There are over $30 billion of bank hybrids on issue and he stressed that they are there to do a job in a banking crisis and carry much higher risks than a regular term deposit. Not only can APRA put restrictions on hybrid distributions (interest payments) if a bank’s common equity falls below 8%, it can force a bank to convert hybrids to equity or even to write them off. Clearly there’s a reason returns are higher than bank deposits; be aware that they are not substitutes for term deposits.
Australia – celebrating 25 years without a recession!!
While there’s an element of luck involved, such as the growth of China over the last decade, the fact is that Australia has now had 25 years without a recession, which is typically defined as two consecutive quarters of negative growth. This is the longest period in our history and no other country has had such a long period of continuous growth.
The picture is not quite so positive when you consider that our GDP (gross domestic product) growth has been partly a result of strong population growth and inflation; real GDP per person has declined in the past few years. Also, other measures, such as unemployment, suggest we had a mild recession in 2009 and gross income per person has actually declined a little in the past few years. Nevertheless, rather than quibble we should celebrate our success.
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.