There's been much said and written about the new $1.6 million 'cap' on Superannuation that was introduced by Treasurer Scott Morrison in the new federal budget.
Sounds draconian and somewhat limiting, right? But the truth is far, far more sanguine.
Firstly, remember that the policy has to be enacted by the federal parliament — never a certainty, judging by the fractious relationship the government has with the cross-bench senators, and an opposition whose job is to oppose.
But second, if this part of the budget does become law — and my bet is that it will — the impact is far, far less than it might seem at first.
So let's step through the issue.
(If your super balance is under $1.6 million, there's nothing for you to do — or to fear. Why not check out our dividend guide, instead, and work your way up to that magic $1.6m mark!)
Under current arrangements, if you retire and convert your Super from 'accumulation' to 'pension' mode (which just means you're not adding any more money, and you're happy to commit to taking out a set percentage each year), your earnings are totally tax free.
That's pretty sweet, but it's economically unsustainable and, the government argues, a misuse of the system for people who have millions in Super.
Hence the change.
Once it's enacted, you won't be able to move your entire balance into 'pension' mode, if that balance is over $1.6 million.
So let's say you're lucky, savvy and/or a high-earner, who has socked away $2.6 million in Super. The first $1.6 million of that would now go into the 'pension' part of your super and the earnings on that $1.6 million remain tax free. If you earn dividends that yield 5%, there's a cool $80,000 in tax-free earnings. So far so good.
The remaining $1 million would remain in the 'accumulation' account, and attracts a 15% tax on earnings. If you don't realise any capital gains (by selling shares) and earn, say, 5% in dividends, your taxable earnings would be $50,000. Take out $7,500 in tax, and you're left with $42,500 from that part of your Super.
Sure, that's $7,500 more tax than you'd pay under the old regime — but you're still $122,500 to the good, and your effective tax rate is just 5.8%. And even the 15% tax rate is very attractive compared to our personal income tax rates.
Oh, and if those dividends are fully franked — currently at 30% — you still get a refund from the ATO.
For those of you who want to see it in table form, here are those same assumptions, set side by side.
The sharp-eyed among you would note that you still get a very large tax refund. Yes, it falls — but you still get $45,000, courtesy of the tax man!
The usual vested interests are bleating, of course, worried that it might deter people from investing in Super. They're really worried about their fees and holidays in the French Riviera.
To paraphrase Warren Buffett, if you know anyone who won't put money in Super because they're worried about a tax rate of 5.8% (8.2% if you add in the franking credits then pay tax on them), send them my way. I'll happily take their burden.
