Demystifying the hype on new super changes

“In my opinion, much of the hype around the proposed super changes has more to do with emotion than logic due to a lack of understanding of the proposed changes.”

There has been a lot of media coverage regarding the superannuation law changes proposed in the recent federal budget. But is all the hype about super changes warranted or is it based on ignorance?

Reducing the super contribution cap

The move to limit the maximum deductible super contribution limit to $25,000 – down from $35,000 (for those over 50) and $30,000 (for those under 50) is of serious concern to me, primarily because it appears to ignore business owners.

Most business owners invariably reinvest all their available cash back into growing their business, in addition to paying off their home loan and educating their children. These financial pressures doesn’t ease until well into their forties. Often, business owners don’t draw a full salary so don’t get the benefit of the 9.5% compulsory superannuation guarantee levy (SGC).

It is only by the time they reach their fifties that they are in a financial position to contribute significantly into super and make up for the lack of opportunity during earlier years. The budget papers argue that this change will affect only 3% of super fund members. I, however, believe it will impact a significant number of business owners.

The $1.6 million cap

Much has been made of the move to limit the amount of money a retiree can have in superannuation to $1.6 million and pay no tax when in pension phase. The hype around this, in my opinion, is absolute codswallop.

According to ATO statistics, the average size of a self-managed super fund (SMSF) is around $1 million and consists of two members – usually this is your average “mum and dad” super fund. This means the average individual SMSF balance is around $500,000 – a long way short of $1.6 million.

One point that has been lost in all the media hype is the fact that the $1.6 million limit is per member, not per fund, meaning an average joint fund could have $3.2 million in it before this becomes an issue. In any case, it is only the income earned on the excess above the $3.2 million fund balance that is taxable and even then, it is only taxable at 15%.

The $500k non-concessional contribution cap

Another proposed change is to limit to $500,000 – the maximum amount a member can contribute to the fund and not obtain a tax deduction for. And this will be backdated to 2007. Previously, this was $180,000 per annum with no cap over your lifetime. In addition, you could “bring forward” up to three years contributions and make one contribution of $540,000 and repeat this every three years.

This could result in unforeseen consequences, for example, if future contributions were to be made in order to clear debt in the super fund. Hopefully, the government will consider these implications as part of their “transitional measures.”

The government budget papers argue that less than 1% of super fund members will be affected by the change. Once again, I believe the business community has been forgotten about and that a significantly higher number of business owners will be affected.

It appears that business owners will now be denied the opportunity to shift wealth accumulated outside super, into super to fund their retirement.

In my opinion, much of the hype around the proposed changes has more to do with emotion than logic due to a lack of understanding of the proposed changes. Considering 99.7% of actively trading businesses in Australia are classified as SMEs, these changes could affect over 2 million business owners, so the media hype is warranted, it’s just directed at the wrong people.

Grant Field, Managing Director, MGI South Queensland and Executive Chairman, MGI Australasia

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