Making the most of the super changes

Recent speculation about possible amendments to the budget super changes, including special treatment for inheritances and divorce settlements, are unlikely to solve the government's problem of gaining public acceptance of the changes.

Apart from the question of whether a lifetime cap of $500,000 on personal after-tax (nonconcessional) contributions is realistic and fair, there's the controversy about whether this limit should include contributions made after July 1, 2007.

Presumably, this backdating is intended to stop people who, theoretically, if under 65, could have already contributed more than $2 million to their super account before budget night. If this is the motivation, a much simpler and clearly fairer way to introduce the new cap would be to restrict new contributions by people with accounts exceeding a designated cap such as $1 million.

That would be a more realistic cut-off point for a single person, while a couple would be able to build up a retirement account of at least $2 million in super. Under such a regime the source of the money, whether it be from an inheritance, property sale, divorce settlement or other source, would be irrelevant as it should be.

Although the financial plight of individuals post-divorce is difficult, particularly if divorce occurs later in life, new arrangements may not be necessary.

Existing divorce legislation permits the transfer of super between spouse accounts as negotiated in the property settlement. Claims that special recognition of the needs of separating partners to contribute after-tax money to super is needed ignore the total flexibility already provided under the divorce settlement rules.

If one party prefers to transfer all the existing super to the former partner in exchange for ownership of the family home, particularly where children are still at home, that decision could be accommodated within the existing proposal and does not justify further special treatment under the super legislation.

The government is emphasising the need to make budgetary savings from its changes to super arrangements.

Given the severity of the new age pension assets test to apply from January 1, 2017, it would save money by encouraging retirees to boost their super balance to at least $1 million rather than investing more in a family home. At this level of assets in super, there's no age pension entitlement for individuals or married couples, thus reducing pension outlays substantially.

Encouraging the sale or downsizing of the family home by allowing retirees to deposit money into super might increase the cost of the super tax concessions. But with the age pension and related outlays costing about $25,000 annually for a single person and $35,000 annually for married couples, there would be greater reductions in social security outlays.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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