What will the government’s superannuation reforms mean for you? A SmartCompany Q&A

After months of confusion, fiery election commentary and multiple pieces of legislation, Treasurer Scott Morrison has said the federal government has secured “fairer, more sustainable” legislation with the passing of the Coalition’s superannuation reforms.

So what now? Here are six key things you need to know.

How did we get here?

The Coalition’s superannuation reforms, first proposed in the May budget, stopped experts and high-net worth individuals in their tracks due to the scope and timeline of the overhaul. The original package, unveiled by Treasurer Scott Morrison, included a proposed tax-free pension fund cap of $1.6 million, and a $500,000 lifetime cap on non-concessional super contributions.

There were many months of fighting over whether the proposal imposed unfair, retrospective elements on those saving for their retirement, with the non-concessional limit initially set to start from budget night.

Some attributed the unpopular reforms to the Coalition’s performance in the July Federal Election, but after Malcolm Turnbull secured the Prime Ministership, the government started to push the legislation through Parliament, opting for a crucial compromise that saw the $500,000 lifetime cap dropped and a $100,000 annual cap on non-concessional contributions brought in. The final draft of the legislation was released two weeks ago, when the world was glued to the US federal election result.

The combined package, which has been pinned as adding $6 billion in savings to the budget bottom line, was then passed through Parliament in three “tranches”, and completed its journey through the houses last night.

What are the big changes?

There are a number of changes to consider, but here are the big ticket items. Unless otherwise stated, the changes will come into effect on July 1, 2017.

• In pension phase, the transfer limit for a tax-free fund will now be $1.6 million. Previously, there was no limit.
• The annual limit for after-tax or non-concessional contributions that can be made by an individual in a year is now $100,000, provided one’s total super balance is less than $1.6 million. The annual limit was previously $180,000.
• The pre-tax contributions cap is now a flat $25,000 a year. Previously it was $30,000 for those aged under 50, and $35,000 for those aged 50 and over.
• From July 1, 2018, super savers will be able to roll these ‘pre-tax’ contribution caps over on a rolling five-year basis, provided their funds have less than $500,000. Previously, if you didn’t use part of this annual tax-free contribution cap, it was gone for good.

Have super savers been panicking?

Over the past six months superannuation savers, both young and old, have lacked optimism over the future of the retirement system, with the complexity of the debate and uncertainty over how this policy would play out leading some to pause in developing long-term retirement plans.

Figures from the Australian Prudential and Regulation Authority (APRA) out this week revealed that after-tax super contributions dropped by close to a third over the past quarter, with the industry blaming the change in fund flows on confusion and caution over what would happen when the legislation was ratified.

What has the reaction been?

Treasurer Scott Morrison has said the Coalition has achieved a big win by getting these changes through. “These important changes level the playing field and provide more Australians with the opportunity to make full use of their concessional contributions cap,” he said in a statement yesterday.

While many continue to oppose the changes on the basis that they create a disincentive for Australians to fund their own retirement, even superannuation bodies that have been advocating for their members from the beginning of this process have welcomed the certainty it now provides.

“It’s particularly important to get on top of the changes, as the taxation advantages will be reduced after this financial year”, SMSF Association chief executive Andrea Slattery said in statement yesterday, saying the next seven months will be the most important time for Australians as they wrap their heads around the new rules.

The rules might be set for now, but Labor has a number of further cuts that it wanted to make through the superannuation system. It’s believed these will form part of the party’s policy to take to the next federal election, suggesting this saga might not yet be over.

What have DIY fund holders lost?

A number of Australians with self-managed super funds have increased their interests in property investment over the past five years with borrowing arrangements through their super funds. Given that the new pension limit will be $1.6 million from 2017, DIY fund holders are now considering when to sell down those investments in order to prepare their funds for pension phase.

Many DIY fund holders cite the freedom to choose their own investments as the number one reason for running their own retirement pools – but even those with a strong handle on the rules of this are being urged to speak with their accountants and advisors to make sure nothing is missed with the new rules. Fund holder should also compare the new super tax environment to what is possible outside of super, says Slattery.

“It is worth emphasising that the income derived on the balance of funds beyond the $1.6 million per member will be subject to a taxation rate of 15%. This is still very attractive compared to how those funds would be treated outside the SMSF/superannuation environment,” she explained to the body’s DIY fund members yesterday.

What should I be doing between now and June 30, 2017?

The major super funds and industry groups advise contacting an accountant or advisor as soon as possible so that they can evaluate how an individual’s assets will be treated under the new scheme and what to do about them.

A majority of the changes will come into effect on July 1, 2017, with the exception of the five-year bring-forward rule for non-concessional contributions, which will begin on July 1, 2018.

Over the past few months superannuation experts and accountants have told SmartCompany SME owners should be planning their retirements early, keeping in mind that their businesses are not a retirement plan in and of themselves. Making super contributions early on can help create a cushion even with this new suite of policies in place, MGI’s Des Caulfield said in September.

“I understand there’s not much surplus cash, especially when you’re starting to plan your business, and people can give up. But the concessions available are still significant – and will be even if they do get limited,” he said.