Budget delivers a fix for now but problems for the future

A band-aid approach to superannuation is hurting retirement savings strategies and confidence in the sector.

It was a budget that certainly delivered on news that the Government was tightening its belt to deliver a budget surplus for 2012-13 and superannuation was certainly not immune from this pain.  Unfortunately though, as a result of the announced changes in tonight’s budget, we are likely to see confidence in the superannuation sector erode as the Government takes a narrow view to retirement savings policy for the sake of short-term popularity to endeavour to re-build public credibility of the Labor Party.

The measures about the additional contributions tax for individuals earning more than $300,000 made public a week ago started the bandwagon of criticism about a Government again using superannuation as a political football to kick a few financial goals.  Unfortunately, the news delivered within the budget extended beyond this measure, sending a clear message about discouraging Australians to save for retirement.

So, here’s delivering the news:

30% contributions tax rate for individuals with income of more than $300,000

From 1 July 2012, individuals with income greater than $300,000 have a 30% tax rate apply on concessional contributions, rather than the 15% flat tax rate currently available.

The definition of “income” will be quite broad providing a greater catchment area of individuals subject to the higher contributions tax rate.  This will include taxable income, concessional superannuation contributions (e.g. superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.

There was some concern that an effective tax rate of 108% could apply where an individual breached the concessional and non-concessional contribution cap (calculated as 30% contributions tax + 31.5% ECT concessional contributions + 46.5% ECT non-concessional contributions).  However, the Government has announced that the 30% tax rate will not apply to contributions that exceed the concessional cap.  This effectively means that the highest marginal tax rate (46.5%) will still apply to excessive contributions.

It is unclear how the ATO will collect this additional contributions tax and what additional reporting will be required by super funds, in particular with tax-free benefit payments.  If the super surcharge system was anything to go by, this could amount to another administrative disaster.  Measures could apply to allow the ATO to collect this additional tax under the compulsory release authority that applies for non-concessional contributions.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

Deferral on proposed extension of concessional contribution cap for over 50’s to 1 July 2014

With the transitional period for concessional contributions for those over 50 finishing at 30 June 2012, the Government back in May 2010 announced as part of their ‘fairer super’ package an extension of the concessional contribution cap where an individual’s super balance was less than $500,000.  A deferral of the start date to 1 July 2014, is effectively an acknowledgement by Government that this policy decision is administratively difficult and that currently inadequate systems and reporting exists to appropriately manage the extension to the cap.

As a result of this deferral, all taxpayers, regardless of age, will be subject to a concessional contributions cap of $25,000 for the 2012-13 and 2013-14 income years (remembering that the Government in the Mid Year Economic & Fiscal Outlook; MYEFO) announced a freezing of indexation in 2013-14).  When these measures are finally expected to commence in 2014-15, indexation of the concessional cap should occur to $30,000, meaning eligible individuals will be able to make concessional contributions up to $55,000 where 50 years of age an over.

Accordingly to Minister Shorten, deferring the start date to 1 July 2014 will allow implementation to occur in conjunction with changes to super fund reporting and systems that will be occurring under the SuperStream reforms.  With the ATO developing an online reporting facility to manage member super balance, this deferral will allow for sufficient time to provide access to for member to comprehensive account balance information.

This changes are going to have a significant impact on individuals salary sacrificing into superannuation, in particular those with transition to retirement strategies.

SMSF Auditor Registration

The SMSF Approved Auditor role has been subject to significant reform as a result of recommendations from the Cooper Review to address issues of competency in the sector.  Final details of the auditor registration along with the replacement rule for the accountant’s exemption are long overdue and have become a key source of frustration for the accounting industry.

The Government announced that it will provide $10.7m over 4 years to ASIC to develop and maintain an on-line registration system for auditors of self managed superannuation funds (SMSFs).  As part of the registration process, ASIC will develop a competency exam for SMSF auditors. ASIC will also be responsible for the de-registration of non-compliant auditors.  It is unclear whether the competency exam will apply to all approved auditors, or only to those who don’t meet minimum criteria such as number of funds audited each year?

Auditors may begin to register with ASIC from 31 January 2013.

In addition, a further $10.6m over 5 years (including $1.5m in capital funding in 2011-12) will be provided to the Tax Office to police registered auditors, check their compliance with competency standards set by ASIC and refer auditors to ASIC for enforcement action. The cost of this measure will be offset by increases in the SMSF levy and fees charged by ASIC for sitting the competency exam.

Still no word from Minister Shorten on the accountant’s exemption replacement.  

We do need to overlay these budget announcements with some of the More Super measures to increase SGC from 9% to 12%, introducing a $500 credit for low-income workers and abolishing the age limit for SGC payments, which were applauded by the industry.  However, many people looking to self-fund their retirement have been dealt a blow, and will challenge advisers as to the worth of individual’s building superannuation savings at the risk of the Government moving the goal posts again and again in the future.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

Wishlist or wishful thinking for a super budget?

Many people within the super industry have been moving uncomfortably in their chairs since the Government filtered out of news of an additional level of contributions tax on high income earners (greater than $300,000).  This nervousness is justified as it is again another example of going for an easy revenue grab when confidence and stability in the sector is vital.

I sometimes wonder whether the “sole purpose test” within superannuation law should apply equally to Government as much as it does to members and trustees – the Government seem more concerned about obtaining current day benefits (filling a black hole in the budget), than taking a longer term view to encourage retirement savings which ultimately should reduce a reliance on government support in retirement (Age Pension).   But, I digress…

I think wishing for any positive change is ambitious to say the least!!  However, here are a few items I’d like to see on Budget night:

  • Wouldn’t it be nice to see the Government commit to bringing the concessional contribution cap back to $50,000 for people aged 50 and above.  Whilst this is unlikely, the more worrying concern is the lack of news from Government about even extending the concessional contribution cap next year for those over 50 with account balances of $500,000 or less.  Is this destined for the scrap heap as well?  Haven’t super contributions fallen from grace over the past few years, with individuals 50+ only three years ago able to contribute $100,000 of concessional contributions.  This is soon to be just $25,000!
  • The collection of excess contributions tax has been a big financial windfall for the Government.  It would be pleasing to see the Government extend the ‘”once-off”refund up to $10,000 for excess concessional contributions to be available at any time;
  • We have yet to see draft regulations regarding many of the Stronger Super reforms impacting SMSFs.  One decision that should head for the scrap heap is the proposed prohibition of off-market share transfers.  One can only hope that the Government reconsiders their position on this one…

Transition to Retirement is always one area that appears to be an “easy target”.  The reduction in concessional contributions will certainly have an impact on the strategy benefit, but the reduced strategy benefit could be compounded further subject to any final decision they make on the proposed extension to concessional contributions.  One of the three measures considered in the consultation paper to determine the $500,000 account balance was to disallow to extension where a member has taken previous benefits.  This would include transition to retirement income streams.

Tell me what would you like to see (or not see) in this year’s Federal Budget?

In many instances, no news will be good news.  With growing skepticism of superannuation due to Government tinkering and poor investment markets, the budget provides a timely opportunity for Wayne Swan to show that he won’t raid the retirement “piggy bank” just to get his fix (surplus).

The SMSF Academy will be holding a free webinar on the 2012 Federal Budget and its impact on Self Managed Super Funds.  Full details can be found on The SMSF Academy website.

You can budget on a super surcharge!

The media was a buzz over the weekend regarding the proposed budget announcement to increase the contributions tax rate from 15% to 30% for individuals who earn more than $300,000 p.a.

In 1996, the Coalition Government introduced the super surcharge to help ‘fix the mess’ of the previous Labor Government. This time, it appears the Labor Government is introducing this to fix their own mess, as they continue their pursuit to deliver a budget surplus.

Building greater equality into tax concessions isn’t going to come with any major objection as the introduction of the additional tax rate will supposively only affect 1.2% of the population.

Interestingly from reading various media sources, the inclusion of tax-free benefit payments (pension & lump sums) post 60 could capture more people than anticipated if appropriate planning does not occur.  A simple recontribution strategy appears it could affect the calculation should the individual also be making concessional contributions.

It is highly likely the sector impacted the most by this additional contributions tax will be SMSFs. I think it would be a fair assumption that a large number of individuals with taxable incomes in excess of $300,000 are likely to only to be able to contribute $25,000 for 2012/13. This will either be due to the individuals:

  • being under age 50, or
  • the taxpayer is over 50 and their account balance will be greater than $500,000.

Whilst the maximum salary on which an employer has to pay compulsory super is 175,280 (2011/12), some employers may pay the SGC for an individual based upon their salary level.  For somebody earning $300,000, 9% SG contributions would be $27,000, meaning not only 30% contributions tax, but 46.5% excess contributions on amounts above $25,000.

With a broad income test that is likely to apply, there will be very little by way of strategy to avoid reaching the $300,000 threshold.  But, as always, the devil will be in the detail.

Budget night on 8 May 2012 is again shaping up to include further changes to superannuation…

Impact of the Federal Budget for SMSFs

Wayne Swan has handed down a ‘tough budget’ as the Labor Government strive to bring the economy back into surplus for 2012/13.

For self-managed super funds and the superannuation industry, it was a budget that certainly won’t bring any front-page new stories, good or bad (and that’s probably a good thing!).

Below are some of the budget announcements impacting Self-Managed Super Funds (and their members):

Changes to Excess Contributions Tax

The good news story of the night is the Government has heard the message loud and clear regarding the unfairness of Excess Contributions Tax (ECT).  Whilst not totally removing the penalty tax on excess contributions, the introduction of a ‘one-strike’ policy on excessive amounts up to $10,000 is a logical and positive step for those inadvertently caught by the timing of concessional contributions being paid into super by their employer.  Simply put, eligible individuals will have the option to have these contributions taken out of their super fund and assessed personally at their marginal tax rates (rather than incurring excess contributions tax).

The measure is only available for breaches in respect of 2011/12 or later years, and only for the first year, commencing from 2011/12, in which a breach occurs. It will be interesting to see the statistics of those impacted by these changes and whether it affects the ‘real issues’ raised by the super industry on excess contributions tax and the fairness of some individuals being taxed at 93%!!

Further extension to minimum pensions for 2011/12

With investment markets nowhere near recovered from the past few years of the global financial crisis (GFC), the Government has decided to extend the temporary reduction on the minimum percentage factors to be applied to account based pensions (including transition to retirement).  However, the 50% reduced amount currently available for 2010/11 (and the previous two years earlier) will become a 25% reduced percentage factor.

The table below explains how the minimum amounts will apply for 2011/12:

The Government has announced that the minimum pension factors will revert back to normal for the 2012/13 financial year.

Extension for concessional contributions for over 50’s

Nothing really new here… The Government has basically confirmed their decision to move forward with the extension for concessional contributions for those 50 and over with account balances of less than $500,000.  The decision has been made to set the allowable contribution at $25,000 above the concessional contribution limit (currently $25,000).  This allows for future indexation of this limit.  This information was already outlined in the consultation paper issued earlier this year by Treasury to work out how these rules will practical be administered.  To date, we are still awaiting further information from Treasury, but needless to say the submissions made were none too flattering on this policy decision and the administrative headaches it is going to create!!

This legislation will apply from 1 July 2012 (as previously outlined by Government).

Read my previous blog on the extension for concessional contributions.

Freezing indexation of super co-contributions

The Government will continue the freeze, for an additional year to 2012/13, the indexation applied on the income thresholds for qualification of super co-contribution amounts.

The co-contribution ‘matched amount’ from Government up to $1,000 is currently available for people with incomes of up to $31,920 (with the amount available phasing down for incomes up to $61,920). This thresholds will continue until the end of the 2012/13 financial year.

An increase in the SMSF Supervisory Levy

The Stronger Super reforms announced by the Government in December last year were designed to improve the operation, efficiency and integrity of the SMSF sector and increase community confidence.  As a result, additional funding has been allocated to both the Australian Taxation Office (ATO) and Australian Securities and Investment Commission (ASIC) to implement a range of measures recommended by the Cooper Review Panel (Super System Review).

Some of these measures included:

  • the introduction of administrative penalties that the ATO can apply in cases of non‑compliance by SMSF trustees;
  • the introduction of knowledge and competency requirements on SMSF service providers, including the registration of SMSF auditors;
  • tightened legislative restrictions on SMSF investment in collectables and personal use assets;
  • requiring SMSFs to value their assets at net market value and the ATO to publish valuation guidelines;
  • the appointment of the ATO to collect and publish data on the sector;
  • changes to the registration and rollover processes, and
  • illegal early release penalties to deter the use of SMSFs for illegal activity.
To pay for many of these reforms, it was the recommendation of the Cooper Review Panel to increase the Supervisory Levy for SMSFs.  This increase is to now occur, with an additional $30 per year (to $180) required to be paid each year.  With 450,000 Self-Managed Super Funds now in existence, this is expected to raise $47m over 4 years.  This increase will take effect for the 2010/11 financial year.
In addition, with the introduction of SMSF auditors to be registered with ASIC from 1 July 2012, the government expects to raise a further $1.8m over 4 years through registrations.  

In summary
I was pleased to see that some of my wish-list for change actually occurred within the budget.  Like all things, the devil will be in the detail once we see draft legislation.  Given that the Government is still talking about measures relating to Fairer Super from last year’s budget, I wonder if we could be waiting a while?
What are your thoughts on the budget impact for super funds?
(C) The SMSF Academy 2012
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