It’s election time! And whilst Scomo and Shorten keep busy trying to pick apart each other’s words during their election campaigns, let’s clear all the noise for a moment and look at their actual policies & proposals. Let’s break down how this election result may impact you and your superannuation.
Here’s a summary of the current legislation under the coalition and what Labor intends to do should they win on 18 May.
Non-concessional contributions cap
Currently, you can make ‘after tax’ or non-concessional contributions (NCC) of up to $100,000 per year provided you meet certain eligibility criteria.
If you are under 65, it is possible to access the ‘bring-forward’ rule and make NCCs of up to $300,000 over a fixed three-year period, depending on your total super balance.
The standard annual NCC cap of $100,000 will be reduced to $75,000. The ‘bring-forward’ rule will reduce accordingly to allow a one-off (after-tax) contribution of up to $225,000.
The cut in the cap will reduce the ability to make a ‘one-off’ contribution to super, which often comes from the proceeds of selling investments, an inheritance, a redundancy payment or some other means.
So if Labor wins on 18 May, this will reduce the ability to put money into superannuation.
Concessional contribution cap
The coalition introduced the current ‘before tax’ or concessional contribution (CC) cap in July 2017, which stands at $25,000 per financial year. This contribution includes employer contributions, salary sacrifice contributions, as well as personal tax-deductible contributions. The cap is increased in line with indexation every few years in amounts of $2,500. However, the current cap will not increase for the 2019/20 financial year.
Labor has not announced any changes to the concessional cap, however, it has announced changes to the “catch-up” concessional cap rules, discussed below.
Tax deductions for personal superannuation contributions
In 2017, the coalition removed the “10% rule”, which meant that virtually all employees can now claim a tax deduction for personal superannuation contributions, provided they follow the correct process and their total concessional contributions stay within the cap of $25,000. Under the previous “10% rule” this ability was largely restricted to the self-employed (i.e. those with less than 10% of their total adjusted taxable income came from employment sources).
Labor intends to re-introduce the 10% rule, which would mean once again more restrictions on super contribution for most people. If you’re an employee, this would mean the only way to make additional concessional contributions to super (on top of your employer contributions) is via a salary sacrifice arrangement with your employer.
Catch-up concessional contributions
Also recently introduced are the ‘catch-up’ CCs if you meet certain conditions. In simple terms, this means you can carry forward any unused portion of your $25,000 yearly CC cap to your cap in future years. So for example, if you only make $20,000 CCs this year, then the unused $5,000 gets added to next year’s standard $25,000 cap, effectively increasing your cap to $30,000. Unused CCs can be carried forward for up to five years, and your total super balance must be less than $500,000 to be eligible for this rule.
Catch up contributions will be abolished as Labor considers these to provide an unfair advantage to upper income earners.
Division 293 high-income super contribution threshold
This is an additional tax on high income earners under the current rules. If your adjusted taxable income exceeds $250,000, you are required to pay an addition 15% tax on CCs up to the standard cap amount of $25,000, which means a total tax rate of 30% after the 15% contributions tax deducted by your super fund.
The high-income superannuation contribution threshold will be reduced to $200,000, which means more people will be subject to this additional tax.
$450 superannuation guarantee threshold to be phased out
The superannuation guarantee (9.5%) is not payable by an employer for employees who earn up to $450 in a calendar month.
The $450 monthly threshold is to be progressively reduced in increments of up to $100 each financial year between 2020 and 2024. The intention of this change is to benefit low income earners, casual employees and those in part-time employment.
Superannuation guarantee (SG) to be paid on the government’s paid parental leave
Currently, superannuation guarantee contributions are not required to be paid by your employer if you are receiving paid parental leave.
Superannuation guarantee contributions will be paid on amounts you receive under the federal government’s paid parental leave scheme. At present, $719.35 is paid weekly for 18 weeks if you are female and meet a work test and earn less than $150,000 per year. The amount paid for the super guarantee will be 9.5% of $719.35 ($68.34 weekly to a maximum of $1,230.08 over 18 weeks).
LIMITED RECOURSE BORROWING
Direct borrowing by superannuation funds and limited recourse borrowing
Under a Limited Recourse Borrowing Arrangement, your SMSF can borrow to invest as long as the loan arrangement and the asset being acquired satisfy strict rules under superannuation law.
Limited recourse borrowings will cease, however, those in place prior to the law changes will be allowed to continue.
OTHER DIFFERENCES THAT AFFECT SUPER
Here is a brief summary of three other differences to complete the picture.
Arguably the most controversial election issue is Labor’s stance on franking credits. For many years now, individuals and superannuation funds have been entitled to a refund of franking credits. This is effectively a refund to shareholders of the company tax paid on share dividends. In the event where the franking credits plus any PAYG tax already paid (by the individual or SMSF) exceeds their tax liability (in other words, there is an “excess” franking credit), they receive a refund.
Under Labor, refunds of excess franking credits that exceed tax liabilities will cease for some taxpayers. Generally, the policy will apply to most individuals, SMSFs and some larger superannuation funds. However, as part of Labor’s ‘pensioner guarantee’, SMSFs which had at least one member who was a welfare recipient (i.e Age Pension) on 28 March 2018 are exempt from this policy.
Currently, a discount of 50% applies to capital gains made on CGT assets held by an individual for at least 12 months. A one-third discount applies to capital gains made on CGT assets held by a superannuation fund for at least 12 months.
Labor has proposed that this 50% discount is halved to 25% for CGT assets acquired from 1 January 2020. There will be no change to the one-third discount that applies to superannuation funds.
Taxing discretionary trust income
Distributions from discretionary (family) trusts are currently taxed depending on the personal tax rate of the beneficiary. This is often used by high income earners to distribute their income and ultimately pay less tax (in a legitimate way of course).
Labor intends to introduce a minimum tax rate of 30% to discretionary trust distributions aimed at reducing tax minimisation and artificial income splitting.
There above points capture the majority of potential changes relevant to the upcoming election. I hope this helps you make an informed decision come election time. In any case, it’s worth remembering that any proposals must generally be passed through the senate, so some of these proposals may yet face some stiff opposition.