Confusion to reign supreme as consultation paper released into extension of contribution caps for individuals aged 50 and over

Is there a need to further complicate the contribution cap laws?

The Minister for Financial Services & Superannuation, the Hon. Mr Bill Shorten has announced today the release of a Treasury consultation paper on concessional contributions caps for individuals aged 50 and over.  This paper is a result of the Fairer Super announcements in mid-2010 to extend the $50,000 transitional concessional contribution limit for those aged 50 or over with account balances of less than $500,000.

The purpose of this consultation paper is to outline the Government and Treasury’s preliminary views on this matter and to seek submissions on the design options for the workings of the concessional contribution cap for people aged 50 and over.

I have outlined below some key elements of the consultation paper:

  • The proposed changes if/when received Royal Assent would commence from 1 July 2012.
  • The $500,000 threshold will not index each year.
  • The cap will be based upon a rate of $25,000 over and above the indexed concessional contributions cap, currently at $25,000 (totaling $50,000).  Therefore, this contribution cap will index each year with AWOTE , however only in increments of $5,000.
  • The date to calculate a member’s total superannuation balance would be either:
    • 30 June in the year preceding the year in which contributions are made (this is unlikely due to timing of reporting to the ATO each year, that is, half the year or more will have gone before an assessment can be made on eligibility); or
    • 30 June two years prior to the end of financial year in which the contribution was made (i.e. FY 2013 would use FY2011 member balances)
  • All super entitlements will be counted, including memberships of accumulation funds, defined benefit schemes, untaxed and constitutionally protected funds and schemes.

Various options have been drafted regarding eligibility for those who have commenced drawing down benefits as either a pension or lump sum.  These options include:

  1. Extending eligibility to those who have commenced withdrawals and add those withdrawals to the account balance
  2. Extend eligibility to those who have commenced withdrawals but do not add withdrawals to the account balance; and
  3. Exclude those who have commenced withdrawals from eligibility

To best demonstrate the application of these options, let’s look at an example:

Option 1

Jack is 58 years of age and has a super balance of $510,000 as at 30 June 2012. He intends to start a transition to retirement income stream and withdraws the maximum 10% pension amount of $51,000 for the 2012/13 financial year.  Jack contributes $25,000 into super, with a further $10,000 of net earnings applied to 30 June 2012.  Jack’s closing member balance is $494,000 (i.e. $510k – $51K + $25k + $10k = $494k).  Even though Jack’s balance is under $500,000 at balance date 30/06/2013), for the purposes of qualifying for the higher concessional contribution cap, he would need to add-back the pension withdrawal.  This means he has a balance of $550,000, therefore being ineligible for the higher cap.  The same methodology applies whether the benefit paid is a lump sum or pension.

NB.  If this option is adopted, only benefits paid under hardship grounds would be excluded.

Option 2

Using the same example above, Jack would not be required to add back the $51,000 pension payment.  As a result he would be eligible for the higher cap.   Whilst this option reduces complexity, the government is concerned about the potential abuse of withdrawals to manipulate the eligibility for the contribution cap.

Option 3

Again using the same example, as Jack has decided to commence taking benefits from the fund as an income stream, he would simply become ineligible for the higher cap.  Whilst again trying to simplify the legislation, this would prejudice anybody with balances of less than $500k that have commenced pensions/taking benefits, including transition to retirement.

Is there scope for contribution splitting or reserving?

The consultation paper has outlined that any spouse contribution splitting would not be considered a draw down for the purposes of determining superannuation balances.  However, it is important to note that typically a spouse contribution split cannot take effect until after the end of the financial year (i.e. 1 July onwards), so appropriate planning needs to be considered here to take any advantage of this requirement.

The thought of this legislation potentially opens up the use of reserving strategies within SMSFs.  However, it has been noted that calculations of superannuation balances will include their share of unallocated fund reserves. Further details will be required to further understand the implications of this statement.

Specific issues for SMSFs

In addition to the unallocated reserves issue above, the paper discusses the need to value all fund assets to market value each year.  Funds that do not, simply would be ineligible to use the higher cap.  This view is consistent with the Cooper Review recommendations (supported by government) to have SMSFs value to market every year.

The introduction of this reform whilst trying to encourage individuals with low superannuation account balances is commendable, the cost/benefit analysis for some 275,000 people who will benefit just doesn’t add up.  In addition, I believe that it “flies in the face” of the Super System Review recommendations to try to deliver lower cost super solutions to individuals.  Not only will it require significant infrastructure upgrades (in particular the Australian Taxation Office), but the ongoing management of information with members to make sure breaches don’t occur.  We may see further spikes in excess contributions tax assessments!!

Surely to encourage people to save for their retirement, we don’t need to start introducing layers of complexity and using multiple years of information to determine simple eligibility for contributing for one’s retirement.

An extension to the $50,000 concessional contribution cap permanently for people aged 50 and over is the simplest and most common sense solution.  But I wonder if anybody is listening?

Click here access the consultation paper from the Treasury website.

Click here to read the Minister’s press release.


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