What super changes will occur in the Federal Budget?


Budget night in May each year regularly throws up changes and challenges, and this one appears to be no different.

Retirement policy with an aging population continues to grow in importance, but it is an area that Governments can’t help themselves to fiddle with when endeavoring to “balance the budget”.

This year appears to be an interesting budget with the government already talking about a “tightening of the purse strings”.  This tightening will be expected to flow through to superannuation as well, but to-date the Government has remained tight-lipped on any details.

What we have heard is that the Government through Minister Bill Shorten has announced positive changes to address the unfairness of Excess Contributions Tax (ECT).  Whilst this is positive news, the real question is how far is the government going to go with this?  My suspicion is a change to the 93% tax rate, but not much else!!  Don’t expect it to be retrospective either, therefore meaning that clients who have already been issued assessments are stuck with them…

Listen to the webinar, “Dealing with Excess Contributions Tax

Below is my wish-list for Budget night:

  • An increase to $800,000 as an account balance to allow $50,000 of concessional contributions – whilst this legislation is complex and an administration nightmare (read my previous article), it appears we are going to have to live with it for the time being…  a key problem with the legislation is that the $500k limit suggests to Australian’s that this is an adequate super balance for retirement, when clearly it is not.
  • Abolition of age-based limits for super guarantee – individuals regardless for the length of time they work should receive super guarantee payments (9% SGC).  Let’s hope for some positive news beyond the proposed extensions to age 75.
  • Abolition of the work test to contribute beyond age 65 – I would like to see an ability for people to be able to continue to contribute into super to age 75 regardless of working status.  I have no problems in limiting the use of the ‘bring-forward’ rule to age 65, but the more we encourage retirement savings the less reliance on government through age pension.
  • Removal of the 10% rule for super contribution – wouldn’t it be great if regardless of the levels of employment income and source of contributions, that a member could receive either $25k or $50k of concessional contributions.  With “Reportable Employer Super Contributions” now also having to be factored in, this area is unnecessarily complex.
  • Further extension to the 50% reduction for minimum pensions – We have now had 3 years of minimum pensions at half the normal pension percentages that apply for account based pensions.  Unfortunately, I don’t think we are out of the financial doldrums yet, and further pension relief appears warranted.

Any potential “bombshells”?

It is worth remembering that the Government is sitting on many of the recommendations prepared for them from the Henry Review.  These recommendations include the introduction of a flat 7.5% rate of taxation across both accumulation and pension phase.  Would the government be so bold to introduce something like this?

The only thing we know for sure is that the Government has made a commitment to return the budget to surplus by 2012/13.  This will mean difficult changes that will impact all Australians.  Superannuation seems like the easy tax grab – just look at the halving of the contribution caps 2 years ago fill the coffers!!

I look forward to providing a full wrap of the budget impact for SMSF on Wednesday.

Have you visited the new SMSF Academy website?

Reflecting on the year that was 2010…


Tis’ the season to reflect on what has been a big year for self-managed super funds and the financial services industry as a whole.

The year started with a bang, with Phase Three of the Super System Review on Structure including Self Managed Super Funds.  This phase of the review was arguably the most debated with industry funds and the retail sector pushing for mandatory education of trustees, amongst other things.  The statistical summary ordered by the Chair of the Review, Mr Jeremy Cooper seemed to lay to rest many of the myths around people abusing the privilege of an SMSF.  The final recommendations noted that the SMSF industry was robust and in fairly good shape.

With the final recommendations handed to government on 30 June 2010, the question remained when the government would look to action any of these recommendations (I say “any” instead of “many”, given the handling of the Henry Tax Review, where the government announced to implement 2 out of 138 recommendations).

It is good to see however, the industry and regulator starting to already address some of these key recommendations, including the introduction of the ATO member verification system to rollover monies from an APRA regulated fund.  We are also seeing industry recognition of the need to increase competency requirements for advisors, accountants and auditors within this specialist superannuation field (and hence my decision to create The SMSF Academy).

NB. Minister Shorten is expected to announce this week their response to the Super System Review recommendations.

From the Ripoll Enquiry came the announcement of the Future of Financial Advice reforms.  FoFA as it is now more commonly known, also integrated some of the key recommendations from the Cooper Review, including the removal of the Accountant’s Exemption.  The basis for these reforms are to improve the trust and confidence of investors (including SMSF trustees) in the financial planning sector, and are designed to tackle conflicts of interest that threaten the quality of financial advice provided.

This week has seen the first meeting of the advisory panel to tackle the FoFA reforms.  It will be interesting to see how much we actually hear on some of the key issues, with the panel members being asked to keep discussions strictly confidential.

It was pleasing to see recently a common sense approach by the Accounting Professional and Ethics Standards Board (APESB) to defer the introduction of APES230.  This standard was to impose fee-for-service only for financial planners that were members of a professional accounting body (CPA, ICAA, NIA) from 1 July 2011.  This has now been deferred, subject to the direction of FoFA.

Australia’s Future Tax System review, chaired by Dr Ken Henry turned into arguably the “fizzer of the year”.  From a super perspective though, the government announced some important reforms around a ‘fairer super system‘, including the progressive increase of super guarantee contributions to 12%.  The catch here of course for the super industry is we are never forever entwined with the resources sector and the super profits tax.

As a result of these key announcements, the Federal Budget was a low-key affair, with reiteration of the many announcements about a fairer super system the week before.

The year also saw a federal election.  Whilst there was no change to government, there was a promotion for the very well-regarded Minister Chris Bowen into the key portfolio of immigration from his superannuation and financial services post.  There was some trepidation about the appointment of former Secretary of the Australian Worker’s Union (AWU) and Australian Super (industry fund) director, Mr. Bill Shorten.  Time will ultimately dictate the legacy he leaves behind on the superannuation and financial services sector.

I commented earlier this year in a meeting with Jeremy Cooper, that 2010 was going to be the ‘year of the gear’ with SMSFs.  He tended to agree… Limited Recourse Borrowing inside a SMSF has certainly started to take hold, predominantly from two key factors,

  1. the reduction in the concessional contribution caps; and
  2. our country’s love affair with property.

The date, 7 July 2010 is now an important one as we saw the introduction of section 67A & B into the SIS Act, with s.67(4A) being repealed.  These changes have certainly had an impact on how these arrangement are now structured, with only a single acquirable asset being able to be held on trust.  The issue of personal guarantees was resolved with them now being allowed, and on a positive note, the ability to refinance will certainly make the lending market far more competitive.

I actually think 2011 will continue to be ‘gearing heaven’ for SMSFs and limited recourse borrowing arrangements.

In addition to the SIS Act changes to limited recourse borrowing, the government also announced reforms to make these arrangements a financial product and allow only those advisers with a derivatives license to be able to recommend such arrangements.  There were many submissions made to Treasury about concerns with the draft regulations, from professional bodies, banks and other financial services institutions and businesses.  When an election was called, this fell off the radar, but I suspect will resurface again into the new year.

The ATO continued to deliver more rulings and interpretive decisions in the area of SMSFs, including the issuing of:

  • TR2010/1 – super contributions,
  • SMSFR2010/2 – addressing the issues about remaining a SMSF through the appointment of an Enduring Power of Attorney; and
  • many ATOIDs covering limited recourse borrowing arrangements

Excess contributions tax continues to be the ‘white elephant in the room’ for government.  With the halving of the contribution caps last financial year, there is expected to be more than 100,000 excess contribution tax assessment notices issued by the ATO. for FY2010.  Lobbying on this issue to date appears to have fallen on deaf ears…

Personally, 2010 also presented a change in direction for me as I now focus on the delivery of The SMSF Academy to provide education and training to both trustees and advisors.  We are achieving small but significant milestones with its development, with the website to be up and running in mid-February 2011.  We intend to have our first monthly SMSF eCPD update in February 2011 as well.  Click here to register your interest to keep up to date with future developments.

A reminder that if you haven’t completed either or trustee or advisor surveys, then we encourage you to do so by 4pm this Friday.  The winner will  be announced next Monday.

2011 looks to be as exciting and challenging as 2010… I look forward to continuing to deliver my views and strategies regarding issues affecting SMSFs.

Has the fight for the superannuation pie just begun?


With a now re-elected Labor Government (and new Minister), the coming term is expected to see much debate and likely implementation of recommendations covered in both the Australian Tax System Review (Henry Review) and Super System Review (Cooper Review).

Whilst the Cooper Review Panel found the SMSF sector to be in ‘good shape’, this view didn’t appear to be held by Dr Ken Henry, Secretary to the Treasury, who recently stated in the Treasury “red book” to the government:

“The superannuation system is increasingly leaking revenue, with Self-Managed Super Funds now the tax minimisation vehicle of choice. Better enforcement and acceptance of the Cooper recommendations are part of a solution to plug some structural holes.”

Whilst those within the SMSF industry were scathing of the views held in this report, it is a challenge that will continue to face the SMSF sector, as the public offer funds (industry and retail super funds) appear to now have the sector “in the gun” in what is a fight to retain its territory within a trillion-dollar industry (expected to grow to $7 trillion by 2028).  For many years the industry funds and retail superannuation sectors have been at “war” over fees and performance, only to see the SMSF sector rise (almost by stealth) through better delivery on both of these fronts (as confirmed within the Super System Review).

To put some perspective around the threat that the growth of the SMSF industry is providing public-offer funds, you only need to consider the topic of a presentation held recently at a Super Ratings (public-offer super fund) conference:

“IF SMSFs ARE A JOKE THEN WHY AREN’T WE LAUGHING?”

SMSFs continue to grow at an extraordinary rate. We can simply make way, or we can fight back. One of the best marketing strategists working in Australia reveals the power of brand. And provides a roadmap so you can harness this power to stop SMSFs in their tracks, and build long-term strength and equity in your brand.

Just like the bully in the school yard, it appears the public-offer funds are ready to pick a fight with the SMSF industry….

What will they be targeting?

Whilst the Cooper Review was positive with many aspects of its findings on the SMSF industry, there is a need to improve professionalism at the ‘book ends’ of the sector being those providing the advice and those professionals auditing SMSFs.  Whilst the public-offer funds pushed for compulsory trustee education, the Review Panel was able to realise that the proper protections for consumers lied within the service providers in the industry.  However, it would not be surprising to see the issue continue to present itself into the future, with first ‘cab off the rank’ being compulsory education for trustees who breach their fund’s compliance obligations.

Providing a unified voice…

The SMSF industry is unique…  It is a sector that covers many professions, such as accountants, lawyers, financial planners, actuaries, etc…  Within these professions there are multiple bodies covering its members (e.g. the accounting industry has CPA, ICAA, NTAA, and NIA).  There continues to be ‘territorial battles’ within the professions on issues such as advice.  This is no more prevalent than the current debate on the future of the accountant’s exemption to provide SMSF advice (future of financial advice reforms).

How you get a “unified voice” for the SMSF sector is its biggest challenge… whilst SPAA has representation across varying professions, it is far from representing the industry as a whole.  It presents as a key issue over the coming term of government as the battle for the superannuation pie intensifies…

Policies to come now we’ve got a Labor Government


It took 17 long days and we’ve now finally seen the announcement of the Australian Labor Party (“ALP”) appointed to government and Julia Gillard as Prime Minister.

With the ALP “moving forward”, we wait with bated breath to see what will be the focus of government with superannuation and financial services reform.  We know that the independents will play a big role in the future of some of the more significant policy decisions such as the proposed progressive increase to 12% of Superannuation Guarantee Contributions (as this was linked to the Minerals Resource Rent Tax (MRRT)).

From the perspective of the Self Managed Super Fund industry, what can we expect to see that will impact the over the next term:

Announcements from the last Federal Budget

There were no real surprises in the last Federal Budget regarding superannuation, as most of the proposed changes formed part of the release of information from the Henry Tax Review.

Refer to my previous blogs for further details on these proposed changes:

Super System Review (Cooper Review)

The Cooper Review was seen as a real positive for the SMSF industry as it showed as a whole to be in fairly good shape.  Many (not all) of the recommendations appeared to have universal approval from within industry. To some extent, I feel this Review has been seen as an opportunity to develop the SMSF industry into its own specialist profession and remove the shackles of its past which regularly included smear campaigns from the industry and retail sectors.  Comments of all SMSFs being full of artwork, racehorses and holiday homes quickly were shown to be unfounded.

The one recommendation from that won’t see light of day is recommendation 8.14 of the final report, which proposed to ban SMSFs from owing collectibles.  The Australian Artists Association (AAA) in conjunction with the SMSF Professionals Association (SPAA) lobbied successfully throughout the election campaign for collectibles to continue to be able to be held by a SMSF.  There will however be strict guidelines that must be adopted for such investments to be held within a Fund.  Read the SPAA media release for further details.

http://thedunnthing.com/2010/07/05/self-managed-super-solutions-final-report-of-cooper-review-released/

We appear to be heading to a period of strong debate on tax reform, with the ALP agreeing to the demands of the independents to have a public review of the Henry Tax Review proposals before 30 June 2011.  It was also part of the Coalition’s election promise to also give consideration to the 138 recommendations of the Tax Review.

Add to the agenda, the Future of Financial Advice (FoFA) reforms and you can begin to see the next term of government is going to be a busy one across the superannuation and the financial services industry.  The question is whether we will see implemented change or just simply more debate with no real substance or solutions?

It appears highly likely that Minister Chris Bowen will be promoted from his current portfolio of Financial Services, Superannuation & Corporate Law.   This unknown must certainly put some fear into the financial services industry as it appeared to have a very good working relationship with him.   Stepping into the unknown with a new Minister will always present its challenges.

So on that note, let the games begin…

Has the budget made contribution splitting a powerful strategy again?


Further to the recommendations of the Henry Tax Review, the government has formally announced a range of superannuation initiatives in tonight’s budget including:

  • increasing the super guarantee (SG) rate from 9% to 12% (over the next 10 years)
  • providing a contribution of up to $500 for workers with incomes up to $37,000
  • extend the super guarantee age to 75 years (from 70)
  • allow for concessional contributions of up to $50,000 for those over 50 where their account balance is less than $500,000

‘Doubling’ of the concessional cap

There is an effective ‘doubling’ of the concessional contribution limit to $50,000 for those over 50 years of age with an account balance of less than $500,000 from 1 July 2012.  This is expected to provide greater flexibility for those nearing retirement by continuing with a separate higher concessional contributions cap.

The government view is that this will allow individuals to ‘catch up’ on their superannuation contributions at the stage in their lives when they are most able to do so. It will particularly benefit those who have had periods outside the workforce.

At first glance, there appear to be two strategies that may have application to take advantage of the larger concessional contribution amount.  These are:

  1. Contribution splitting with spouses; and
  2. Using SMSF Reserves

1. Contribution splitting with spouses

For a single income family (or predominantly so), it is quite clear as a strategy to consider the use of contribution splitting to allow for the main ‘breadwinner’ to keep their balance under the threshold and allow for them to continue maximising their concessional contributions to $50,000 each year (where over 50).

I can understand the gesture by government to assist parents (typically women) who have been out of the work force to ‘catch up’ on their retirement savings.  However, the reality in many cases would be that this person would typically not have a capacity to earn an amount to make a $50,000 concessional contribution work (after factoring in tax-free thresholds, etc.). The reverse however would typically apply to the primary income producer of the household.

Structured correctly, this strategy over a 10 year period could create an additional after-tax amount of $212,500 into super with concessional contributions (without factoring any fund earnings on this money).  I’ll provide a worked example of this soon.

I believe this strategy needs to be considered immediately for clients under this $500k threshold, especially those getting ‘close to the mark’.  You would anticipate a valuation at 30 June each year to be the determining factor to make larger contributions for the financial year ahead.  An important note with contribution splitting is that this can’t be split until after year end (1 July), so careful planning will be required (in particular with salary sacrifice amounts)!!

2. Fund Reserves

The ability to ‘park’ income generated by the fund into an investment reserve is available within an SMSF environment and would allow for the members balance not to reach the $500,000 threshold and allow them to maximise contributions of up to $50,000 each year.

Once a member has reached this figure using concessional and non-concessional contributions, the fund could look to make allocations from the reserves back to the members in a ‘fair and reasonable’ manner. Furthermore, consideration would need to be given to staying within the 5% of the member’s balance when allocating from the reserves.

Refer to blog, “10 things you need to know about using SMSF reserves” for more details.

This measure will take effect from 1 July 2012 when the existing transitional concessional contributions cap was due to fall to $25,000.  The Government will consult with the superannuation industry on the operation of the $500,000 threshold.

Strategy Ideas?

I love to hear from reader about any further super strategies you think may be available as a result of these budget announcements?

(C) The SMSF Academy 2012
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