Instead of clarifying the likely future rules governing new super investment, the 2016 federal election has created massive uncertainty, especially for older Australians wanting to build their retirement assets. The fate of the budget proposals is now in the lap of the gods or, more accurately, the independent senators. Whichever party forms the next government will be forced to negotiate with them.
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The greatest uncertainty surrounds the proposal to limit, from budget night, future non-concessional contributions since July 1, 2007. Presumably the backdating of the lifetime limit to 2007 was intended to stop people who had previously deposited more than $500,000 of personal after-tax money making further contributions.
After the budget and throughout the election campaign, this was a controversial position for several reasons, including its harsh impact on people with relatively small amounts in super. For example, many people using the highly popular withdrawal and re-contribution strategy to transfer balances to their partners or improve their fund's tax status would be deprived of the opportunity to build up their super.
Even if the proposed change wasn't backdated to include contributions made since 2007, a lifetime cap of $500,000 on non-concessional contributions would still penalise people not receiving large employer super contributions during their working life. For a considerable number of people, the opportunity to build up a large amount in super arises from money received from the sale of a home, investment property or an inheritance.
With a super balance of more than $1 million required to provide even a modest retirement income, a $500,000 lifetime contribution cap is inadequate for the needs of those with little other super. If the government's objective is to limit the amount future retirees can have in super, a simple and effective change would be to limit or prevent future contributions to those accounts with large balances, say the proposed $1.6 million cap on pension accounts.
Given this background, the odds are high that this budget proposal will have to be modified to be enacted into legislation. Fortunately, the other major changes including the lower $25,000 annual concessional contribution cap and the $1.6 million limit on money invested in tax-free pension accounts are not set to start until July 1, 2017.
While there is still complete uncertainty about what the future rules will be, people can still proceed to draw their pensions and contribute concessional money to super under current arrangements for this financial year. The sad thing for all super fund members is that coming just after Brexit, a political gridlock is likely to have an adverse impact on investment returns. Another year of low or modest investment returns is a distinct possibility, especially if the Federal Parliament is paralysed for an extended period.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
