Self-managed super fund groups are calling on Treasury to lift the $500,000 balance cap on ‘catch-up’ concessional contributions to $750,000 before the law goes into effect in July, so more people can take advantage of the tax benefits when saving for their retirement.
Both the Self-Managed Superannuation Fund Association (SMSFA) and the Self-Managed Independent Superannuation Funds Association (SISFA) say the cap inhibits the ability of savers to self-fund a comfortable retirement adequately. The $500,000 limit, they agree, is too low a point to start dis-incentivising pre-retirees from making before-tax contributions.
SMSFA spokesman Jordan George tells Professional Planner that because the rule does not come into effect until July 1, 2018, the government has a golden chance to amend it.
“We definitely applaud the catch-up contributions rule and the way it helps small-business people, primary producers and women who take career breaks for family; however, we would like to see a higher limit,” George says. “We think $500,000 is much too low. We still have time if the government wanted to do it, though there would be a fiscal cost.”
Under the catch-up rule, if an individual’s total superannuation balance (TSB) is below $500,000 at the end of the financial year, they are entitled to top it up until it reaches that amount with any unused parts of their annual $25,000 concessional contributions from up to five previous years. This ‘carry forward’ provision is due to start at the beginning of the 2018/19 financial year, which means the 2019/20 financial year will be the first one in which previously unused concessional contributions can be brought forward.
‘Creating opportunities’
The SMSFA first signalled its intent to call for a change in the rule in its December budget submission, in which it called for the limit to be raised to $750,000 “when the government has the fiscal capacity to do so”.
The document makes a point of emphasising the need to give women, whose contribution streams are often interrupted by childbirth, more of a chance to catch up on missed concessional contributions.
“An increase in the limit,” the report continues, “would be a significant improvement towards creating opportunities for individuals, especially women, to build adequate retirement savings.”
George argues that the TSB limit for catch-up contributions should match the higher (tax-free) pension limit, but concedes that the government is unlikely to do that.
“Logically, the balance cap for unused contributions should be $1,600,000, as that is the amount the government believes is sufficient to generate an adequate and untaxed retirement income,” he says. “But I don’t think the government would be comfortable with $1,600,000, because they’re looking at making things more equitable for the lower-income savers.”
George says $750,000 represents a fair concession and a reasonable compromise between the two amounts.
“It’s much better than $500,000,” he says. “The government doesn’t have an appetite for an open-ended catch-up contribution system. They made it clear in the 2016 budget that there should be reasonable limits, but we think around $750,000 would make an adequate amount.”
This view has been echoed by SISFA, which merged with the Self-Managed Superannuation Fund Owners Alliance (SMSFOA) in May 2017. SISFA spokesman Duncan Fairweather agreed that the $500,000 limit tainted what was otherwise good policy.
“The ‘CC’ catch-up provision was one of the good measures that was brought in, but we’d love for the $500,000 cap to be lifted,” Fairweather says. “There is an option to set it at the pension cap of $1,600,000, but the government, and certainly the opposition, won’t because there’s no political appetite for it. But $750,000 would be much better than $500,000, and a good move in terms of the overall health of the superannuation system.”
Raising the concessional limit
The SMSFA is also making calls for the $25,000 concessional limit itself to be raised for individuals over 50 years old, preferably back to the previous level of $35,000.
“The (previous) higher cap for older workers recognised the fact that most people who are able to make voluntary contributions to superannuation do not do so until later in life, when they have a greater financial capacity to do so,” George says. “We understand the government has made these changes to make super more sustainable in the long term, but the limit doesn’t give people the opportunity to make top-ups when they can most afford to – from their mid-50s onwards.
“That’s when the kids have moved from home, so they’re now in that pre-retirement phase and they can finally ramp up their contributions.”
Fairweather concurs, saying that SISFA “would love to see the $25,000 limit lifted”.
“We want it back to the old $30,000/$35,000 split, which is still a big drop from the old days under Peter Costello,” he says.
Both the SMSFA and SISFA concede, however, that there is little chance of the $25,000 limit being revisited in the next budget cycle.
“We think it’s futile to pursue it at the moment,” Fairweather says.
George stresses that the SMSFA wants to take a long-term view.
“We do realise the government may have limited appetite for this type of change, but we think it’s important to outline long-term policy goals,” he explains. “Change may not happen in the 2018/19 budget, but when they get more sustainable fiscal footing, they may want to consider it. We want to start making the argument now.”
