UPDATE: In the May 2012 Federal Budget, Treasurer Wayne Swan, and Minister of Superannuation, Bill Shorten, have broken their promise about extending the over-50s concessional contributions cap. The over-50s concessional cap has been halved to $25,000 for the 2012/2013 and 2013/2014 years. For more information, see SuperGuide article Another super con: Over-50s contributions cap removed.
Yet again the Government has taken the opportunity to announce another ‘not quite right’ policy in relation to superannuation, as part of the 2011 Federal Budget.
The over-50s concessional contributions cap is to be ‘indexed’ rather than having it remain at $50,000 for perpetuity as was originally intended when the Government announced the policy last year (as part of its response to the Henry Tax Review).
Indexing is definitely just and fair when making rules involving financial thresholds, but why does this Government have an aversion to indexing super thresholds, and when they do apply indexation, why does the Government have to make it as complicated as possible?
The original announcement, in May 2010, stated that Australians aged 50 or over could retain the $50,000 cap for concessional (before-tax) contributions, subject to satisfying certain conditions. At that stage, the $50,000 cap was not to be indexed (!). The major condition applying to the retention of the $50,000 cap for over-50s is that your superannuation account balance is less than $500,000. The Government is currently consulting with the super industry about the mechanics of the $500,000 threshold.
The new $50,000 cap is to take effect from July 2012, when the old $50,000 transitional cap will no longer be in operation.
In the 2011 Federal Budget, the Government announced that the new $50,000 concessional cap would be increasing in line with the under-50s concessional contributions cap, rather than freezing the over-50s cap forever, as announced the previous year.
Good news it may be, but the nature of the ‘indexation’ used by the Government for this policy measure means that the under-50s cap will shrink over time in proportion to the under-50s cap. From July 2012, the over-50s cap will always be $25,000 more than the under-50s cap.
For example, let’s assume that the under-50 concessional cap is still $25,000 from July 2012. The over-50s cap for eligible Australians will be $25,000 more, that is $50,000. That’s double the under-50s cap. In 10 years’ time, let’s say the under-50s cap has increased to $40,000. The over-50s cap will then be $65,000, which is about two-thirds of the under-50s cap. Over time, the over-50s cap shrinks in real terms due to the nature of indexation used by the Government.
Yet another super con involving the contributions caps.
Background: Until 30 June 2012, the concessional contributions cap for over-50s is $50,000, regardless of size of account balance.
For 1 July 2012, the cap for over-50s will be at least $50,000 (subject to indexation) if account balance is less than $500,000 (laws are not yet passed for this measure). If account balance is over $500,000 then concessional cap will be $25,000 or whatever the indexed amount is at July 2012.
Image by Eric Wüstenhagen.