A fix for super limits

PORTFOLIO POINT: The government is coming around to the idea that concessional contributions limits need to be changed.

The way things are going, one day it may become just too hard to get money into super. If people are limited to $25,000 a year, there is a good chance many will give up on super as a long-term savings tool and divert their money elsewhere (a topic explored by Scott Francis earlier this week – see Eight reasons to invest outside super).

I have pointed out before that the halving of concessional contribution limits – from $100,000 to $50,000 and eventually to $25,000 for the over 50s and from $50,000 to $25,000 for the under 50s – will make it very difficult for many to get a worthwhile sum in retirement.

If you are currently 40 years old, you can get a maximum of a further $625,000 into super in concessional contributions before you turn 65 (although that figure is indexed). Depending on what you earn, that might not even allow for very much salary sacrificing at all.

And that’s only if you put in the maximum of $25,000 a year, EVERY year.

The current rules are particularly harsh on people in their 40s. Not only do they have lower limits to contend with but they won’t get the benefit of superannuation guarantee contributions in the order of 12% that younger generations will have.

There is some conjecture about whether the move to cut the concessional contributions limits was based on revenue leakage or was purely philosophical.

The “philosophical” argument is that Treasury and the government believe that super should be means tested; and that once you have $500,000 in super, you have enough. Any further savings should be outside super where you will pay full tax.

But there are growing signs that the government – and particularly Superannuation Minister Bill Shorten – thinks the cuts made when Kevin Rudd was Prime Minister went too far.

If he’s not saying so publicly, Shorten is certainly letting his thoughts be known to some industry members.

Shorten has been heard to say that he does not believe that even $1 million is enough super to retire on (Eureka Report’s Robert Gottliebsen has suggested that for some couples $2 million is a more realistic figure). But if that really is Shorten’s view then there would have to be upwards pressure from inside the government on contribution limits.

And, if that were to occur, there would be a huge sigh of relief amongst the industry. Proper, orderly planning for a superannuation-based retirement could resume. People wouldn’t be forced to put money into super in their 40s when they, arguably, should be directing that money towards other things.

However, even if it is more about revenue leakage than it is philosophical, then a few more “tweaks” to the system could or should be considered.

One suggestion that is hard to argue with – partly because it already exists elsewhere in the same legislation – has been put forward by SISFA, the Small Independent Superannuation Funds Association, the oldest SMSF lobby group in Australia. (SISFA has had some significant wins on government policy over the years, including tax-free super pensions – the idea adopted by former Treasurer Peter Costello.)

In SISFA’s submission, yet to be put to the government, is a proposal relating to the concessional contributions limits. While it argues that the eventual limit should be much higher than (probably double) the proposed $25,000 limit for everyone, if that’s not going to happen then some form of averaging should be introduced.

Currently, you have a $25,000 concessional contribution limit. If you can’t contribute $25,000 in a given year, that’s tough. You’ve got another limit of $25,000 for the following year. And if you can’t use it in year two, tough again. The same goes in year three.

However, SISFA’s Andrew Cullinan says that some thought should be given to using averaging provisions – such as already exists for non-concessional contributions with the $450,000 pull-forward provisions – to allow more flexibility.

Let’s look at the example of a small businesswoman.

She earns enough money from her business in year one to make a concessional contribution of $25,000. However, in years two to four, the economy is lean and she needs every cent she can pull out of the business just to pay the mortgage. In year five, however, business bounces back and she is able to contribute her maximum $25,000.

Unfortunately, she is only able to contribute $50,000 over the five years.

Someone who is working as an employee, however, might be able to do the $25,000 in year one through a combination of the 9% SG contributions and the rest being salary sacrifice. As an employee, they must have at least 9% of their salary paid in during years two to four, even if times are personally bad in their household, then could potentially contribute up to the $25,000 limit again in years four and five.

It’s actually a common situation.

By introducing, for example, a rolling five-year contribution system for concessional contributions, it would allow people to potentially make larger contributions during years when they are able to, to make up for years when they couldn’t.

-Rolling five-year concessional contribution limits
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Constant contributions	$25,000	$25,000	$25,000	$25,000	$25,000	$125,000
Salaried (earning $100k)	$25,000	$9,000	$9,000	$25,000	$25,000	$93,000
Self-employed (3 bad years)	$25,000	$0	$0	$0	$25,000	$50,000
Rolling 5-year limits	$25,000	$0	$0	$75,000	$25,000	$125,000

If a rolling limit were applied, a few bad years could be made up for. Certainly, if the government is going to continue to keep these extremely low CC limits, then an adjustment of this sort – given they already do it elsewhere – seems only reasonable.

Or, here’s another option: a lifetime limit. A 40-year-old could put whatever amount the government deems “enough”, whenever they could afford it or it made sense for them from a tax perspective (with some indexation for rising limits later on).

You could put it in at the start, or the end, but that’s your limit. Doesn’t that make more sense?

The good news is that it looks like some sanity on contribution limits might prevail. Eventually. If enough pressure is applied.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

• Superannuation Q&A, click here.

National Seniors Australia (NSA) says 285,000 self-funded retirees have been forgotten by the carbon tax compensation measures and some will be forced to start taking a pension. The package will compensate pensioners and Commonwealth Seniors Health Card holders, but eligibility for the latter cuts out at $50,000 for singles and $80,000 for couples. NSA chief executive Michael O’Neill says retirees wouldn’t be falling through the gaps if the income test for the health card had been indexed to inflation when it was introduced in 2001. The tax office is starting to ask questions of 100 of the wealthiest SMSFs, which have average balances of about $40 million, and is planning to increase surveillance of the highest capitalised funds. The taxman suspects that some funds are using tax avoidance strategies that could be copied by the wider industry. The assistant commissioner for superannuation, Stuart Forsyth, says the level of risk attached to individual funds would depend on whether they were meeting their SMSF obligations, whether the tax return was filed on time and how much tax was paid. ASIC is warning DIY super trustees to be wary of promoters pushing US property investments. Senior executive leader Delia Rickard said ASIC had received “a number” of complaints about spruikers trying to attract Australian investors. She said people needed to be aware of the legal and taxation issues, as well as the property management problems that arise when investing in foreign real estate. Rickard also said if the deal being offered was that good investors should question why locals weren’t taking up the opportunity. SMSFs may be barred from buying or selling assets off-market from related parties if the government accepts the Stronger Super recommendation to prevent undervaluations and risks involved with backdating transactions. The move would mean assets such as rare collectibles would have to be independently valued, but add extra brokerage costs in the case of shares owned outside the fund by the trustee. The SMSF Professionals Association of Australia said guidelines rather than legislation would be a better route. A quick reminder for all trustees that the SMSF levy has risen from $150 to $180 for 2010-11. The tax office is reminding trustees that the levy should be paid when they lodge their returns. The increase in the levy is being used to fund the Stronger Super reforms.