If you have been trying to follow the Federal government’s changes to superannuation over the last few months, we would forgive you for having a headache. There has been an awful lot of flip-flopping. (Flip flop is the American term for what we call thongs. But if you google ‘thongs” looking for a photo to go with your blog, you get an entirely different set of images…)

One of the most contentious areas of change concerns non-concessional contributions into super. A non-concessional contribution is one that is not taxed as it enters the fund. Consistent with that, the member who makes the contribution does not get a tax deduction for the contribution (hence the term ‘non-concessional).’ In contrast, concessional contributions do provide a tax benefit for the person making them. For example, the money that employers contribute into super under the Superannuation Guarantee Charge is a concessional contribution because the employer gets a tax deduction for the contribution. The contribution is then taxed in the hands of the super fund. This is a general principle: if contributions are taxed as they arrive in a fund, the person making the contribution can usually claim a tax deduction for them.

So, if there is no immediate tax benefit, why would you make a non-concessional contribution? The main reason is that a super fund is a lower-tax environment in which to invest the money used to make the contribution. Earnings within a super fund are taxed at just 15% on income (rent, dividends or interest) and just 10% on capital gains for assets held for more than 12 months. And that is while the fund is in accumulation mode. Once the fund commences paying a pension (which in most cases means when the member turns 60), earnings are not taxed at all. From the point of view of tax, super is super.

Imagine you inherit $300,000. You have a well-paid job and pay marginal income tax at a rate of 37%. If you invest the $300,000 in your own name, then the earnings on the investment will be taxed at (at least) 37%. Let’s say you bought shares and they provided a 4% dividend yield. That’s $12,000 of dividends a year. This would give rise to tax of $4,440 a year at a rate of 37%. If the shares also rose in value by 10% and you sold them after 366 days (that is, just over a year), then half of the $30,000 capital gain would be taxed at your marginal tax rate. This would be another $5,550. Total tax is $9,990.

Now let’s imagine you establish a self-managed super fund and make a non-concessional contribution of $300,000 into it. The SMSF makes the exact same investment. The $12,000 in dividends give rise to tax of just $1,800 (tax rate is 15%). The capital gains are taxed at 10% – which is another $3,000. The total tax is now $4,800. This is less than half what you would pay in your own hands.

Now let’s say that you establish the SMSF and start paying a private ‘pension’ to yourself out of it. You can do this most efficiently if you have already turned 60 – and you don’t even need to have retired to start taking a pension from your fund. Again, the SMSF makes the exact same investments. However, now there is absolutely no tax paid at all on either the dividends or the capital gains. Making the non-concessional contribution saves you almost $10,000 a year in tax, in this example.

The May 2016 Budget

In May 2016, Treasurer Morrison announced what many saw as a substantial change to non-concessional contributions. Under the rules that applied before the Budget, a member could essentially contribute $540,000 in non-concessional contributions into a super fund every three years. They could do this until they turned 65. There was no absolute limit: as long as the person did not exceed $540,000 in the three year period, they could repeat this every three years until they turned 65.

This was changed on Budget night. From that night, the Treasurer proposed a lifetime limit on non-concessional contributions of $500,000 – and non-concessional contributions that had already been made were included in the limit. This is why many people argued that the changes were ‘retrospective.’

This met with a lot of resistance, especially within the Coalition. And then the Coalition barely won the election. To cut a long story short, last week the Government announced a change to its most recent change. That is, the Government flip-flopped. They announced that there would now be an annual limit of $100,000 of non-concessional contributions per member. This would again be allowed to be smoothed over three years, such that the limit is effectively $300,000 per member per three years. And the changes take effect on 1 July 2017, meaning that the limit for the current financial year is now back to $180,000.

These contributions can only be made while the member’s super balance is less than $1.6 million. Once this limit is reached, no more non-concessional contributions can be made.

This limit of $1.6 million is about twice the threshold for the aged pension assets test. $1.6 million is becoming something of a marker. It is also the limit on the superannuation assets which can be dedicated towards a superannuation pension such that the fund does not pay tax on its earnings.

From the overall policy perspective it looks like the Government is saying that it will offer maximum encouragement to people to acquire superannuation assets, until those assets reach a level that is twice the assets threshold for the aged pension ($1.6 million). Super benefits of this size will mean that the member stays away from the aged pension – which is why the Government encourages super in the first place. But once the super assets rise to the level where the aged pension is off the table, the tax incentives fall away.

That said, most people have much less than $1.6 million in super. This means that non-concessional contributions remain a very good idea for most people. This is especially the case if you receive a lump sum amount, such as an inheritance or the sale of an asset such as your family home. So, if you are thinking about making a non-concessional contribution, make sure that you come to see us and we can show you whether and how you can invest that money in the most tax-effective manner possible.