By: Daniel Butler, Director
One of the most disturbing aspects of the $500k lifetime non-concessional contribution (NCC) cap announced in the 3 May 2016 Federal Budget is that it catches prior NCC’s made since 1 July 2007. The Government denies this proposal is retrospective. We outline below a range of reasons why the Government should remove the retroactive application of this cap as soon as possible.
For those interested in the retrospectivity discussion, in our prior article, please click here.
Carve outs to the $500k cap
The list of carve outs already announced to the $500k lifetime cap highlights the need for greater flexibility. Broadly, the carve outs announced since the Budget include:
- pre-budget contracts entered into by super funds can be funded without adverse lifetime cap implications;
- SMSFs with limited recourse borrowing arrangements in place pre-budget can be funded without adverse lifetime cap implications up to 31 January 2017;
- personal injury settlement moneys; and
- the CGT cap amount, which was expressly noted in the Budget.
Hopefully, the following ‘real life’ issues will also be considered:
- Global financial crisis (‘GFC’) — many taxpayers who have previously contributed more than $500k by way of NCCs have lost more than 50% on their investments as a result of the GFC.
- Divorce — taxpayers may have previously reached their $500,000 NCC cap and subsequently transferred or forfeited all or part of their super balance as part of their property settlement with their former spouse. It is not clear how members can then rebuild their balance for their retirement.
- Fraud — many SMSFs and members have been the subject to fraudsters or other scams where a considerable sum has been lost by a myriad of unscrupulous operators of investment arrangements since mid-2007.
- Foreign superannuation funds (‘FSF’) — in its announced form, the $500k lifetime NCC cap applies in relation to transfers to Australian super funds. Since the Budget, we understand from numerous sources that there has been a significant decline in such transfers. Many may leave their foreign super money overseas due to the lifetime cap and associated costs, complexity and uncertainty. This would be unfortunate, as FSF transfers to Australia should result in greater investment and growth in Australia.
Lifetime contribution cap and the CGT cap
One aspect where the retroactive application really hurts, highlighting one of the key problems with retroactive legislation is where a person made a choice based on the law at the time who is now worse off due to a subsequent (and unforeseen) change of law.
Many members, for example, had to make a choice pre-budget on whether they used up their capital gains tax (‘CGT’) cap or their NCC cap. (Broadly, the CGT cap is where someone who realised a capital gain from an active asset in respect of a small business and has chosen to roll some or all of that amount into their superannuation fund. This relief is available under division 152 and s 292-100 of the Income Tax Assessment Act 1997 (Cth). The CGT cap has always been a lifetime cap.)
However, many made the decision not to use up their CGT cap as they considered their NCC cap would be refreshed every three years (under the bring forward rule if they were under 65 years or $180,000 each financial year for those who have attained 65). On the other hand, if they had chosen to use up their CGT cap, they would have reduced their lifetime CGT cap limit.
Accordingly, many wanted to preserve their CGT cap and chose to use their NCC cap instead.
The new $500k lifetime NCC proposal, if it continues to be retroactive, will adversely impact those who previously chose to use their NCC cap.
Thus, if the Government wishes to proceed with retroactive application, an appropriate carve out to ensure these taxpayers are not disadvantaged should be introduced.
Naturally, the difficulty that will arise with carve outs, is the complexity that will arise in administering them.
Ascertaining a person’s lifetime NCC position
The $500k lifetime NCC proposal is also giving rise to the practical difficulty of knowing what each person’s cap is.
The Budget Superannuation Fact Sheet 04 stated:
From 7:30 pm (AEST) on 3 May 2016, the Government will introduce a $500,000 lifetime cap on non-concessional contributions taking into account all non-concessional contributions made since 1 July 2007. This is the date from which the Australian Taxation Office has reliable contribution records.
The phrase ‘reliable contribution records’ is questionable for a number of reasons. The ATO have noted that some manual calculations are involved. The ATO also have confirmed that records will include those lodged in respect of the FY2015 but not yet for FY2016. Further, ATO records depend on the accuracy of the information. The following examples may result in issues in this regard:
- some taxpayers undertook a contribution reserving strategy making two concessional contributions in the same financial year, with one contribution being allocated early in the second financial year;
- some taxpayers claimed a deduction where a person satisfied the substantially self-employed person test (where they, broadly, had less than 10% of their income from employee activities) and query whether the ATO records have correctly reflected the concessional versus non-concessional amounts; and
- the excess contribution tax system gave rise to numerous other issues that may have an impact.
Thus no one should rely on the ATO’s prior contribution records without an examination and cross-checking of the ATO records with the taxpayer’s prior source documentation and information.
Advisers should therefore recommend that each client who wishes to establish what their prior NCC position is and what they might have remaining that they should not simply rely on the ATO records. Certainly, the ATO’s records would be a useful starting point for someone to undertake an examination of the person’s prior tax returns, super records, etc, to check these against the ATO’s records. Until this type of examination has been undertaken, the adviser should notify the client of the risk that the ATO’s records may not be accurate or complete.
Invariably, this examination and confirmation has to be undertaken by an accountant with specialist expertise who may need input from a superannuation/tax adviser or lawyer who practises in this field. This process could therefore prove an expensive exercise and in some cases cost more than thousands of dollars. Naturally, this cost does not reflect the cost to the ATO of producing this data.
Not surprisingly, the ATO has confirmed that requests for taxpayer contribution records will require considerably more resources to manage. Moreover, the time taken by the ATO to turn around these requests is taking considerably longer than previously expected.
Where to now…who knows?
Since the initial announcement on 3 May 2016, the $500k lifetime cap proposal has created great uncertainty. This uncertainty is increased with many wondering what will eventually be finalised as law (given the composition of the Senate and Labor opposing the retroactive application of the cap).
Already more than four months of uncertainty has passed and the Government has only promised draft legislation by 31 January 2017. The above outlines a number of reasons why the retroactive application of the lifetime cap should be removed as soon as practicable.