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

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26 May 2016

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.

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