Heffron | What will you tell clients who’d planned large non concessional contributions this year?

What will you tell clients who’d planned large non concessional contributions this year?

It has already been widely reported that last night’s budget saw a lifetime cap of $500,000 announced for non-concessional contributions.  There is a distinct element of retrospectivity in this measure in that contributions right back to 1 July 2007 will be counted in working out whether someone has exceeded the cap.  I imagine the Government will argue that this is not retrospective because those who had already exceeded the new limit at 3 May 2016 will not be penalised.

However, in my view that’s just not good enough.

What about those who:

  • are already well advanced in transferring a property into their SMSF in specie – which will result in non concessional contributions after budget night that quite possibly exceeds their new limit?
  • have entered into a contract with a 3rd party to purchase an asset such as a property and were intending to finance the purchase via contributions?
  • have entered into long term SMSF LRBA arrangements intending to repay the loan over time with new contributions?
  • have contributions “on the way” to their super fund (eg a bank transfer on Tuesday that doesn’t land in the bank account until Thursday) that cause them to exceed their $500,000 limit
  • don’t have easy access to their historical contribution data back to 2007 (TEN YEARS AGO), want to make contributions in 2016/17 and are actually permitted to do so under the current legislation
  • have regular non concessional contributions made to super and have already exceeded the $500,000 limit.

And it gets worse.

The trouble with budget night announcements that have immediate effect is that you never know whether they will actually happen as planned.  So what should we be telling these clients?

Remember 10 years ago when non concessional contributions were first limited in the 2006 Federal Budget?  The process was laughable:

Initially it was announced that these would be capped at $150,000 pa immediately from budget night.

Then the concept of bringing forward 3 years’ worth of contributions was introduced.

Then the short term cap (up to 1 July 2007) was raised to $1m.

And then those who had ignored all the warnings and made large contributions before December 2006 were allowed a temporary solution in any case.

So what was announced on budget night was completely different to what ended up happening.  How do clients make sensible decisions about long term superannuation matters in that environment?

Following the logic of 2006 should advisers be recommending:

Quickly get as much as possible into super and cross your fingers that the measure will be delayed (this would have worked well in 2006) or

Continue with your current plans (regardless of whether they will work in the new environment) and in fact some people might be forced to do this based on contracts they have already entered into with 3rd parties or

Assume the Government will legislate exactly what has been announced and adjust 2015/16 plans urgently as appropriate.

Obviously the vast majority of advisers and members will take Option (3).   Clients who do so to their detriment could be forgiven for being cynical if the measures are ultimately delayed.

However, it is worth remembering that these days, the only consequence of exceeding the non concessional contributions cap is that the excess plus a notional earnings amount is refunded (and the notional earnings amount is calculated harshly and taxed as assessable income).  For those with well advanced plans, Option (2) may well be palatable with the client accepting the risk that some additional tax might have to be paid and contributions refunded down the track.  The biggest challenge for people in this position will be the need to refund a large amount – if the contribution was in specie will the asset need to be sold?

But the point is serious decisions about super should not have to be made in such a pressure cooker environment.  This measure simply should NOT apply from budget night.