Announced changes to superannuation may significantly impact wealth management strategies and retire

On 3 May 2016, the Australian Government handed down its 2016/17 Budget, which contained a number of changes to the superannuation system in Australia. These have the potential to significantly impact retirement planning and wealth management strategies employed in Australia.

The bulk of the changes to superannuation proposed in the Budget, which are likely to impact the wealth management industry relate to contribution limits. It is worth noting that the announced changes set out below are only likely to materially affect a small percentage of Australians and the amounts invested in the superannuation system will continue to be significant. If the Budget measures are enacted as announced, the following major measures with direct bearing on superannuation will come into force:

  1. A $500,000 lifetime cap for non-concessional (after-tax) contributions will apply, effective 1 July 2007. Previously, there was an annual cap of $180,000 with the ability to 'bring-forward' three years' worth of contributions. Accordingly, it was previously possible for an individual to 'bring-forward' contributions of $540,000 in one year.
  2. A $1.6 million cap for transferring accumulated superannuation into the retirement (income stream) phase will apply from 1 July 2017. This cap will be indexed in $100,000 increments, in line with the consumer price index. There was previously no cap on this amount.
  3. The concessional (before-tax) annual contributions cap will be reduced to $25,000 from 1 July 2017. Currently, the concessional contributions cap is $35,000 for individuals aged 49 years or over and $30,000 otherwise. There will now be the ability for individuals with superannuation balances under $500,000 to make catch‑up concessional contributions, so that unused concessional contributions cap amounts will be carried forward on a rolling basis for a period of five years.
  4. The threshold at which the higher 30 percent rate of tax applies to an individual's concessional contributions has been reduced to $250,000 from $300,000.
  5. Earnings on assets that support a transition to retirement income stream will be taxable from 1 July 2017. Currently, a tax exemption is available in respect of earnings derived from assets supporting an income stream (including transition-to-retirement income streams).

While the superannuation system will continue to be a major component of the Australian economy, the above changes have the potential to have a significant impact on the wealth management and retirement strategies of high net-wealth Australians. The announced changes mean that these individuals will no longer be able to put significant amounts of money into superannuation. In particular, if individuals were planning to make large top-ups to their superannuation balance, it is unlikely that they will be able to do so. Accordingly, in the future these individuals will be looking for alternative investment vehicles, which could have a substantial impact on the wealth management industry in Australia.

Separate to the Budget papers, the Treasurer and Assistant Treasurer also confirmed that the Government will enshrine in law that the objective of the superannuation system is "to provide income in retirement to substitute or supplement the Age Pension". This objective differs from various industry bodies whose recommendations in relation to the objective of superannuation included the concept of an "adequate level of income throughout retirement"1 or "replacement income that is adequate to provide a comfortable standard of living"2. This defined objective of superannuation, together with the announced changes set out in the Budget indicate that going forward, the Government is unlikely to make legislative change to allow large (in excess of $1.6 million) superannuation balances, meaning that alternative investment strategies for high net-worth individuals will be required.

The Government had also previously ruled out any changes to the negative gearing and capital gains regimes in Australia shortly before the Budget was released.

It should be noted that these announced changes have not been enacted into legislation at this stage. The Australian Government is currently in caretaker mode in anticipation of the Federal election which will take place on 2 July 2016. The Pre-election Economic and Fiscal Outlook 2016 (PEFO) was also released on 20 May 2016, as required prior to a general election. However, given the short time frame between the release of the 2016-17 Budget and the PEFO report, there are no material differences between the two announcements.

1 Association of Superannuation Funds of Australia, submission to Treasury in response to the Objective of Superannuation Discussion Paper dated 6 April 2016.
2 Financial Services Council, submission to Treasury in response to the Objective of Superannuation Discussion Paper dated 6 April 2016.

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon has extensive experience in corporate and financial services law, specialising in complex transactions, funds management and investment distribution. Jon also advises on regulatory issues relating to the use of technology in financial services.

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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Sue Everingham

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Sue Everingham Consultant

Sue is an expert in all aspects of superannuation from constituent documents, insurance and investment arrangements through to benefit design and member communication. Her special interest is in corporate and prudential governance from the Board room through to the Prudential Policies and from Risk Management through to compliance.

Sue has over 25 years experience in the Financial Services industry practising in Australia and for a short period in the US. She has private practice experience as well as leading in-house legal teams at Mercer and at CBA. Sue specialises in superannuation and has a Masters of Taxation and is CPA qualified, and completed a Diploma with the AICD in 2004.

Sue's goal is to help clients identify their need for legal advice and provide the advice that meets their needs.  Good communication skills help Sue understand a client's requirements, business acumen helps her position client needs within the relevant context. The extent of Sue's experience helps her deliver legal advice in a commercial and practical format.

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