2015: Super changes ahead?

What’s in store for super in 2015? There’s a lot being considered by the Abbott Government.

Summary: Long-term savers have a number of issues to look forward to, or be worried about, although it is risky trying to predict how superannuation laws will change. A recommendation to ban borrowing in super is open for consultation, there’s increasing chatter calling for changes to superannuation taxes, another attempt to tax high-earning pension funds is likely and an increased focus on retirement income could come soon.

Key take-out: The Abbott Government’s promise of “no negative superannuation changes” in its first term could stop super changes from happening this year. But of course, politicians are capable of breaking promises.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

When it comes to predicting investment markets, I’m not a great crystal ball gazer. The riskier the asset class, the more I believe the “gazing” becomes “punting”.

It is similarly risky trying to predict how governments will change Australia’s superannuation laws. With so many bureaucrats, advisers and vested interests constantly in their ears, how are we to know which one they’ll listen to?

But it’s January. And I’m prepared to get into the new-year spirit (to a degree).

Here’s what we’ve got to look forward to, or be worried about, in the coming 12 months. Some of the following topics will come with predictions … others I’m not game.

First, a brief scene setter. In effect, 2014 was a year about implementation, rather than big new announcements, for the superannuation industry. Aspects of Stronger Super, MySuper and Super Stream were more in the phase of executives actually getting products and processes in place.

These are, predominantly, about reducing the costs of super for Australians, which largely came out of Jeremy Cooper’s Super System Review.

The lack of big picture changes in 2014 was partly because of the Abbott Government’s promise of “no negative superannuation changes” in its first term of office, which still has nearly two years to run. And it could be this promise that stops many of the following happening during the next two years.

That said, politicians are capable of not just selling a negative as a positive, but also breaking promises.

LRBAs

Possibly the first thing likely to be tackled – or not – is limited recourse borrowing arrangements, or LRBAs. These are the laws that govern borrowing within super, predominantly for self-managed super funds.

Use of LRBAs to buy leveraged property has increased in the last couple of years. While there was some hype that SMSFs were pricing out first-home buyers in the low end of the market, there was plenty of evidence to suggest first-home buyers were standing back for different reasons, including a preference to purchase an investment instead of a home.

The David Murray-chaired Financial System Inquiry recommended it be banned in its December final report. The Government immediately opened the idea up for consultation until the end of March.

I had a feeling, before the report came out, that if they were going to ban it, that they would have done so the day the FSI report was launched, like Paul Keating did in announcing a capital gains tax in the 1980s. Treasurer Joe Hockey didn’t do that. Was it because of “the promise”?

Higher superannuation taxes

You would also have to put this in the unlikely camp, at least for the first term, based on the promise. But there is increasing chatter that higher-income earners should pay more tax inside superannuation and lower-income earners should pay less.

This started with the on-again, off-again, on-again low-income superannuation contribution (LISC), which was going to refund up to $500 a year into super for those earning up to $37,000.

But the next phase of that is potentially taxing higher-income earners more for their super contributions and super earnings, with a continued discount for it being in super.

That could be, for instance, taxing someone on the 37% marginal tax rate a total of 22% for income and contributions in super (37% minus a 15% discount for super), which would be 7% higher than what they are currently taxed.

We already have this to a degree with the “Division 293” legislation, which taxes those on incomes of more than $300,000 an extra 15% on their contributions. But it could be extended.

Similarly, those on very low incomes could be taxed next to nothing on earnings or contributions to super.

Reduced non-concessional contributions (NCC) limits

While many could use the concessional contribution (CC) limits of $30,000 (under 50s) and $35,000 (over 50s), and might use some of their NCC limits, only the reasonably wealthy are able to max out their NCC limits of $180,000, or $540,000 under the three-year, pull-forward rule.

Many see this ability for the wealthy to load up in super as obscene. A reduction is not likely this term, but is something that is under consideration, thanks to many people in the government’s ears.

And like Division 293, there would be few tears for those who are able to make use of $180,000 a year into super in after-tax money.

Making super about retirement income

This is one possibility that could start happening soon.

There are a couple of things on the table here. On every super statement would come some wording around how much of an income stream your balance is likely to create (in dollars per year) in retirement. As you age, you can watch the projected income stream increase.

Also, the government is coming under pressure to force people to take their super as income streams, rather than withdrawing it, spending it, then relying on the government age pension. This could take the form of compulsory pensions (unlikely), or making it semi-automatic to have lump sums converted into pensions.

But there’s nothing, yet, in the way of imposing super pensions that looks likely to stick.

Account balance limits

The previous government tried to introduce legislation to tax pension funds that earned more than $100,000 a year at 15% on the income above that figure. They argued that it would only impact on super funds at around the $2 million mark and larger.

That particular plan couldn’t be implemented (at least not by the previous government). It hadn’t been thought through properly. But that doesn’t mean a future government wouldn’t try to raise the concept again.

For a long time, we had “reasonable benefit limits” that effectively allowed a tax-free amount, up to a certain limit. Above that limit, there was further tax to pay.

A government is likely to do it again in the future, as it seems increasingly accepted now that the ability to build untold wealth in super, that can never be taxed, is an unfair advantage to the super wealthy that was overkill by its architect, former treasurer Peter Costello.

Looking forward

The changes between 2007 and 2013 in superannuation were extraordinary. I hope it’s another quiet year in super.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Bruce Brammall Financial and the author of Debt Man Walking. E: bruce@brucebrammallfinancial.com.au

  • Former BHP Billiton chairman Don Argus and his wife Patricia are appealing an Australian Taxation Office decision about their self-managed superannuation fund, The Australian Financial Review reports.

According to the newspaper, the ATO wants to charge tax on nearly $1.2 million in income earned by the SMSF, but the couple says that income should be tax-free.

The couple says the ATO has “wrongly concluded” the super fund did not pay out the minimum cash amount required, leading to an “excessive” assessment.

  • Retirees who live longer will have lower budgets as their spending on entertainment and transport falls, although they tend to face increase medical and care costs, a report by the Association of Superannuation Funds of Australia found.

At a “modest” standard of spending, budgets for retirees aged 90 are about $1000 a year lower than budgets for those aged around 70. At a “comfortable” level of spending, budgets are about $5000 a year lower for older retirees. The reduction is similar for singles and couples, ASFA said.

There is a “very substantial” gap between the full age pension and a comfortable standard of living for older retirees, ASFA said.

As an increasing proportion of retirees are living to age 90 and beyond, governments will need “sound policies” to accommodate the cost of supporting older Australians, the report said.

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