It is budget time again and the usual speculation abounds about changes to superannuation. For some reason, governments can’t seem to resist the temptation to play around with super. My guess is that it comes from those boffins in Treasury who just see super as a huge tax break that needs to be closed. They conveniently ignore the fact that if some taxpayers were not incentivised to save for their own retirement, they would just put more pressure on government to extend financial support through the aged pension.
What could change?
Speculation focuses on four areas:
- increasing the tax rate on investment earnings (currently 15% in accumulation);
- increasing the tax rate on concessional contributions for those earning over $300,000 a year (from 15% to 30%);
- killing the co-contribution (which is already scheduled to reduce to a maximum of $500 from 1 July); and
- cancelling the higher $50,000 concessional contributions cap limit for those over 50 (effectively, giving everyone the same limit of $25,000).
I have no insight into this speculation except to say that I think it is unlikely that the Government will want to feel the wrath of the electorate and change the tax rate on investment earnings. We’ll find out at 7.30pm on Tuesday 8 May.
The rumour that worries me is the suggestion that the Government might cancel the higher concessional cap limit of $50,000 for those over 50. Fifteen months later and less than two months before it is due to come into effect, we still don’t know how this is going to apply. What we do know is that the higher cap will only be available to those over 50 and with superannuation account balances under $500,000. How and when this is measured is still unknown.
In February 2011, Treasury issued a consultation paper outlining how the concessional contribution caps for people over 50 could operate and invited feedback. The Government had announced way back in May 2010 that the higher cap of $50,000 would only be available from 1 July 2012 to those with super balances under $500,000. Submissions were due by 25 March 2011, and since then, it has largely been radio silence from Bill Shorten’s office apart from “further consultations on compliance cost issues” in late November.
What are the issues on the $50,000 cap?
Issue 1 – Who is eligible to access the higher cap?
An option was to make any person who had started drawing down on their super ineligible for the higher cap, for example, an individual who had started a Transition to Retirement Pension (TTR). Effectively, a person who had started a TTR would be limited to the $25,000 cap.
Issue 2 – Assuming those who have started withdrawals are eligible, how do withdrawals impact their account balance?
An option is to exclude withdrawals although this is most unlikely. The question is: does the ATO base eligibility on drawdowns/withdrawals made in 2012/13, in the last two years, since the policy was announced in May 2010, or from the date of introduction of the legislation?
For example, if your super account balance was $520,000 on 30 June 2012, and you commenced a TTR in 2012/13 and withdrew the maximum of $52,000, and your total contributions and investment earnings in 2012/13 were $20,000, your account balance as at 30 June 2013 would be $488,000.
$520,000 – $52,000 + $20,000 = $488,000
For the purpose of calculating the cap for fiscal 2013/14, your account balance would be deemed to be the balance at the end of the 2012/13 financial year, plus withdrawals during the preceding year, and this would equal $540,00.
$488,000 + $52,000 = $540,000
Hence, you would be restricted to the $25,000 cap in the 2013/14 financial year.
If the look back period for withdrawals is two years, this could impact those who have already commenced a TTR and have an account balance around $500,000.
Issue 3 – Who assesses eligibility around the member’s account balance?
A self-assessment model where the individual determines whether they are eligible, or the ATO provides an online superannuation account balance facility. The latter may have additional compliance costs for SMSFs.
Issue 4 – Date on which the account balance is assessed?
Two options were proposed: the account balance on the day immediately preceding the start of the financial year (i.e. 30 June 2012); or the administratively easier date of the end of the financial year two years prior to the financial year in which contributions are to be made (i.e. 30 June 2011 for the 2012/13 financial year).
Issue 5 – How is the super account balance calculated?
Withdrawal benefit (most likely), or the ‘family law methodology’. SMSFs who have unallocated reserves will need to include the member’s share of the reserve in the account balance.
What you need to act on
Treasury is clearly seeking to close loopholes. If this policy survives the budget, there may be an opportunity if the date of the account balance assessment is at the end of the financial year two years prior to the financial year in which the contribution is made (issue 4). It is very unlikely that withdrawals are going to be excluded from the calculation of the member’s account budget. Stay tuned for the budget.
And given some of the other speculated changes, this budget may yet have a big impact on your super. We will give you a full wrap of any changes that impact SMSFs in the Switzer Super Report following the budget.
One certainty – the caps won’t be any more generous than they are today, so if you are 50 or over this year, you have until 30 June to make those concessional contributions (employer, salary sacrifice and self-employed) of up to $50,000.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
Also in the Switzer Super Report:
- Peter Switzer: Is the stock market about to trip up?
- George Boubouras: Six foreign shares to diversify your SMSF portfolio
- Tony Negline: Federal budget preview: make contributions now
- Rudi Filapek-Vandyck: The broker wrap: four stock buys