Superannuation - Proposed $500K Cap and 3Yr B/F Rule (ouch)

A couple of Super advisors have highlighted a potentially very nasty situation in relation to the above.

One issue in relation to the $500,000 cap is what happens when someone has used the 3 year bring forward rule to contribute up to a max of $540,000 to Super in the last couple of years. Some experts are suggesting that because one is bringing forward a future contribution any part of that contribution attributable to the period after 3 May 2016 which exceeds the lifetime $500,000 cap would need to be withdrawn from Super.

I imagine a number of those who have purchased IPs in their SMSF may have used the 3 year bring forward rule which includes the period beyond 3 May 2016 to get a large contribution into their SMSF as a deposit etc.

Any Super experts here care to comment on this?

The admin complexity of some of the changes being proposed is mind boggling. That's what happens when Turn-bull's "thought bubbles" become actual policy!

Thanks in advance.

 

Then it truly would be retrospective which they are adamant it isn't so seems very unlikely IMO.

 

"New lifetime cap for non-concessional contributions (NCC)
As of 7:30pm AEST on Budget Night, 3 May 2016, the Government introduced a $500,000 lifetime non-concessional contributions (also known as after-tax contributions) cap. This replaces the existing annual NCC cap of $180,000 and bring-forward provisions.

At a glance

• The new NCC cap will be indexed to average weekly ordinary time earnings and to ensure maximum effectiveness, the new NCC cap will take into account all non-concessional contributions made on or after 1 July 2007.
• Contributions made before the commencement of this cap won’t result in an excess. However, excess contributions made after commencement will need to be removed, otherwise they will be subject to penalty tax."

Imo the bolded bit is key, basically it all comes down to the commencement of this cap. Although the budgey was announced in early may, i dont believe these super changes have been legislated yet due to the election.

Ive only briefly looked at it myself and will be seeking specific advice but if what i suspect is true then there's a small window of opportunity between now and end June/early July to pump more in.

Again, assuming the above is correct, some people could maybe do 180k this financial year and 3 x 180k on 1st July, depending on when tjis gets legislated if at all.


Like i said im no expert though and havent read the proposed legislation thoroughly

 

Btw if it turns out that these super advisors who told you about the 3 yr rule getting you in trouble are wrong sack them immediately.

They have had 5 weeks to study the proposed changes and seek advice if necessary and their sole purpose of professional existencr is to know this space inside out.

 

But in theory it's not retrospective. If the 3 year bring forward contribution includes the period beyond 3 May 2016 it is a FUTURE contribution!

Don't underestimate the stupidity of politicians especially at the start of a new term to make a mess of things, especially with Super.

 

I've seen this issue in a couple of articles the most recent here:
Budget creates additional super admin burden

Or it could be a case of me misinterpreting the statements. I will be thrilled if I have misunderstood what is being said.

 

Sorry your theory doesnt stand up, also politicians dont draft legislation, lawyers do. Something like what youre saying would be an immediate red flag.

Besides, even if the govt is in fact trying to do what youre saying, ultimately it says "contributions made before the commencement of this cap will not result in excess".

What youre referring to, eg 3 year forward contributions made prior to may 2016 but for future years, will not result in penalties because the key words there sre "before commencement of this cap".

 

Hi @sanj,

I'm damn hoping your correct. If not it will hit us hard. I should stress that I personally agree with you. It's not my theory. I'm just relaying what I've seen suggested (If I understood correctly) in a couple of articles.

 

Yeah ultimately it will be interesting to see where this stands, i will look into it next week as we use our smsf extensively, especially my folks who are in their 60s.

From first impressions the 2 main factors arw commencement of the changes and, if that article you linked is correct (i happen to disagrew with parts of it), whether forward contributions made prior to the commencement are affected.

From a worse case scenario it sounds like if commencement is in june but they feel forward contributions made prior will result in a breach of the 500k the money would need to be pulled out but no penalty applied. If thats the case it may still mean its worth considering pumping more money in between now and commencement and keeping it liquid in the event it has to be pulled out. If govt decides they arent a breach then youre all good.

If people have bought illiquid assets they will find it difficult of course which is why i dont see that happening. Both labor and lib govt have really tried to promote super and arguably have been too generous with the concessions. The xhanges are more or less reasonable but having a situation where people sre forced to sell properties etc or cop major penalties because they legally put in forward contributions in the past is probably one the govt wants to avoid.

Can just imagine the bad press and sob stories etc, as well as the overreaction from people who are already skeptical of super or ignorant of its benefits.

 

For property at least this looks optimistic:

 

Here's some commentary from Noel Whittaker in the SMH specifically in relation to purchase of property in SMSF & bringing forward contributions

 

I'm personally waiting until it is legislated and approved for royal assent before making any rush to judgement. It's just not possible to know the intricacies of how it will be enforced and operate until that point in time and with other parties and even people inside the libs not liking these changes (shocking that the rich politicians would hate a policy that specifically targets the rich right?) there is a very decent chance that some of the super changes have to be sacrificed for other things to get through.

 

Yes it was reading Noel's column yesterday and the other article posted earlier that prompted me to look into this again.

In fact my post that started this thread is actually an extract of what I emailed to Noel Whittaker in responce to his Column. I also included politicians from both sides of Government as recipients of my email. No replies as yet.

 

If you wait til it is legistlated you lose the chance of taking advantage of any opportunities between then and now.

 

Another reason I started this thread is that some of these issues can influence individual's voting intentions. Super is a big issue for many in this election. I generally vote for the Libs but the sheer mess they are making with these Super proposals has me seriously considering Labor this time around. And I'm not the only longer term Lib supporter thinking this way.

I'm all for fairness with Super and don't object to reducing overly generous concessions but the way the Libs are going about it is a shemozzle. Importantly there is a strong possibility the Greens may have the balance of power. And they hate anyone with more than a trivial amount in Super. So anything's possible in this scenario. It may be a case of even worse changes to Super as a concession for the Greens to agree to other changes.

 

Exactly. Which is another reason why I like to keep right on top of even proposed changes.

I'm always looking for opportunity or at least to potentially minimise negative consequences from Super changes. I believe in being forewarned is forearmed!

 

There is no window for exploitation, this is a change that provides no opportunity, if you didn't know it was coming (and, seemingly, no one did) then you could do nothing to avoid it and you must now operate as though it will get through until such time as it doesn't.

I'm a massive fan of the changes, it's one of about two Liberal policies/approaches that I actually find myself agreeing with this election (normally I'm very much in line with general liberal policy) but I do agree that the implementation is a bit roughshod right now. This 500k cap is the part that really is a massive curveball and giving no time to prepare and even backdating it is pretty brutal and largely unnecessary, imo.

The shame is that super should be an excellent thing and is instead a bungled mess that has ended up being a tax cut to the wealthy, an impediment to business (it's an administrative nightmare) and it genuinely harms the lower-middle class of Australia by making them poorer now by taking nearly 10% of their income away from them. It's basically not doing any of the things it was meant to and is instead actually adding more expenditure to the government in the form of substantial tax cuts to those who should be paying tax at 50% and are instead paying it at somewhere between 0% and 15% for the most part.

 

I think most agree with or accept the fairness principle myself included. Super tax concessions will still be excellent if either party's policies are legislated AS LONG AS YOU CAN GET YOUR MONEY IN THERE!

The major problem keeps coming back mostly to the way the $500,000 cap is being implemented. Regardless of the bring forward scenario this change is very unfair on those (probably most) who really can't get much into Super until later in life. Typically the household mortgage, raring children, women out of the workforce for long periods and a myriad of other expenses earlier on prevent many from getting money into Super until later. As for the 5yr concessional contribution catchup well it's hardly generous.

In theory the $1.6 Mil cap overtime in growth assets should be better tax wise than Labor's $75k (unindexed) income threshold. But if we're in the middle of a strong bull market / property boom come 1 July 2017 the income production from ones pension will be impacted negatively. And should a major correction occur down the track topping up the pension is not allowed. I'm bloody hoping we're in the midst of a damn miserable crash or bear market at that time. That would allow one to kick off a very nice dividend income pension in comparison.

One excellent proposal however is getting rid of the 10% rule. It is long overdue.

As for your keenness to have higher income workers paying 50% tax don't underestimate it's impact on ones desire to keep working. My wife retired at 51 in part because of this. An extreme high achieving and motivated Top 20 Senior company executive. Do you really think this is good for Australia's future if talented people leave the workforce due to excessively high tax? I can assure you she is not alone in her large circle of corporate friends doing same.

I'm assuming you don't have many high income earners as tax clients?

 

Legislation sounds like it hasnt even been fully drafted, how do you know with absolute certainty that there is no potential opportunity there?

Like i said earlier, if the rules start from commencement of the new legislation, as it has been referenced to,then potentially there is a loophole to act between now and then. Im saying potentially not definitely but you seem to know more than what has been publicly released so i guess i could be wrong.

Ultimately im not affected, more curious than anything.

As it stands there is not enough clarity for anyone to be certain of anything because the changes depend on not only who wins the election but how their specific changes are drafted.

 

Couple of points. The proposed changes are not going to make more people retire on their Super alone without any government pension. Atleast, I don't see anything in there to make that happen. They allowed catchup payments but at the same time reduced yearly limit from $30K to $25K.

The main thing the changes addresses is stopping the rich people using Super to pay less tax. Which is fine. There has to be some tax to pay after certain super balance or income. Although, we would like that to be much higher than proposed but that's just wishful thinking. I just hope this number gets increased over the years with inflation.

What will most likely happen is the rich people will find other avenues/asset classes where they can divert their money in order to pay less tax. One asset class loses another one benefits. Very rarely do the government benefit to the extend they think they would.

Cheers,
Oracle.