Enemy of the SMSF people

An otherwise fine, upstanding Australian citizen is pushing for changes that would hurt DIY funds.

PORTFOLIO POINT: Lies, damned lies and statistics. Selective quoting of stats won’t make ACOSS a friend of SMSF trustees.

Today I’m going to declare an “enemy” of self-managed super funds. This doesn’t happen often, but sometimes, some people or some organisations start proposing changes that would so fundamentally impact on your interests I feel compelled to say something.

Sadly, the enemy we need to out today is a fine, upstanding, Australian citizen that fights, generally, for good. And that makes it all the harder. (I feel like I’m asking the police to haul away my grandmother.)

But if this fine, upstanding citizen gets its way a majority of Eureka Report readers will be out of pocket. Lots. Potentially tens of thousands of dollars. And your retirements would be significantly poorer as a result.

The “enemy” is '¦ the Australian Council of Social Service (ACOSS).

I know what you’re thinking: 'You’re can’t seriously be declaring ACOSS an enemy, can you?’

Well, yes I am. And, even though no interest group ever gets everything they want from any government, if they got any of the main points on their wish-list, you’d be impacted and super’s value as a wealth-creation tool would be significantly diminished.

In a government submission (most of which was released last year, but given media airplay again this week), ACOSS has requested:

  • Termination of the transition to retirement (TTR) and salary sacrifice, specifically where they allow super members to increase their super balance, which they claim is a “rort”.
  • Maximum tax-advantaged personal concessional contributions of $8000 a year.
  • Superannuation guarantee contributions made by an employer be taxed at marginal tax rates.
  • Tax benefits from super contributions (employer or personal) be capped at $2000 a year.

The comments used to support the recommendations include:

“Of the $15 billion in tax breaks on superannuation contributions in 2008, almost 20% went to the top 2% of income earners (those over $150,000) and almost 50% went to the top 12%.”

“This is wasteful as well as unfair since higher income earners are likely to save for retirement without tax breaks, and are unlikely to rely on the age pension in any event.”

“The problem is that the people who best understand the system are the high earners and their advisers who benefit from it the most.”

“Employers already know their employees’ marginal tax rates and already deduct tax (at their marginal rate).”

The beginning, and just the beginning, of a response to those comments would include:

  • The highest-income earner’s ability to contribute money into super is heavily restricted by concessional contribution limits, which put a comparatively low ceiling on what they can contribute, relative to what they earn, and relative to the proportion of total income that lower-income earners could contribute of their income.
  • Is ACOSS suggesting that average and higher income earners who might wish to put away for their retirement should receive absolutely no help or encouragement to become self-sufficient?
  • It is open to everyone to get advice. Should those who seek advice to improve their financial situation be penalised?
  • No, employers do not know their employees’ marginal tax rates. They only know what marginal tax rate might apply to the income the employer pays (which might be more, or less, than the employee’s actual marginal tax rate, depending on what other investments the employee has made for their future) the employee.

But don’t take my word for it. Thankfully, some balancing arguments to ACOSS’s claims are at hand. (Although it’s possible that ACOSS’s comments were rehashed in the media because the following research had been released.)

Corporate super specialist Mercer, which advises and runs super funds predominantly for larger businesses (which encompass lower and higher-paid workers), last week published research that detailed the level of retirement support provided to people on various salaries.

They combined the super tax concessions with the level of support provided by the government age pension. Add these two together and what does it show?

According to Mercer’s modelling, the benefits, in dollar terms, are reasonably evenly distributed across the income spectrum (the income spectrum went from $34,000 to $296,000 over a working lifetime). It was remarkably flat across most income levels at around $400,000.

That is, roughly the same dollar figure will be received when super and government age pensions are paid. At lower incomes, the benefit was predominantly via the government pension. Those on higher salaries benefited more from super tax concessions.

Mercer took into account the proposed low income superannuation contribution (LISC), which will essentially refund the 15% super tax paid for those on incomes of up to $37,000 a year, plus the increase in the SG rate to 12%.

That fairly flat benefit of $400,000 figure alone is one thing. But Mercer then provided stats to show what that figure meant in terms of income tax paid by people on those tax rates.

At $34,000 a year (about half the average national salary), the level of super and age pension benefits received would be approximately 206.9% of what was paid in income tax by the individual. When LISC was taken into account, this rose to 214.7%.

For a person earning $45,000 (about 75% of the average national salary of $68,000) for their working life, the benefit would be about 138.5% of their total income taxes.

For someone earning $68,000 a year for their working life, the value would be about 64.5%.

A very high income earner (starting on the average salary, but finishing on about $296,000) will receive about 20.7% of their income taxes back in the form of super and age pension benefits.

There was one further example. The worker had rapid income rises in the first part of their career, but levelled off for the second part of their career. They received about $500,000 in super and age pension benefits. But this was also the lowest, at 16.8%, of total income taxes paid.

ACOSS’s rehashed statistics claiming that half of all super benefits go to the top 12% of earners might be true.

But it’s only a small portion of the story. Higher income earners might get, if ever, a tiny amount of support through the age pension.

Mercer’s research is not the full story. However, it’s certainly more comprehensive in showing the total benefits received.

ACOSS seems to fail to note that the government has already made a number of changes to reduce super benefits available to higher income earners, and raise them for lower-income earners. These include:

  • Reducing the $100,000 concessional contribution limit for the over 50s to $50,000.
  • Cutting the $50,000 limit for everyone else to $25,000.
  • Freezing the indexation for contribution limits.
  • Raising the Superannuation Guarantee from 9% to 12%.
  • LISC, which will mean lower income will essentially pay no contributions tax until they earn more than $37,000.

The transition to retirement and salary sacrifice rules have the potential to benefit almost everyone (see Super's magic years to read about them). And people on less than average salaries can benefit from them significantly. But they will need advice, for which ACOSS seems to be suggesting they should be punished.

In a recent column (see Super? Make that 'safety net'), I outlined my fear that super was going to be reduced to nothing but a safety net to support the age pension. The incessant reduction in attractiveness of super seems to show that’s the case.

ACOSS’s budget wish-list of proposed changes is based on flimsy, predictable, statistics that show just one part of the story.

  • Financial advisers must start warning SMSF trustees what could go wrong if they choose a particular strategy, in order to protect themselves from increased super liability and compliance issues. Heather Grey, partner at law firm DLA Piper Australia, said at the 2012 SMSF Professionals' Association (SPAA) national conference that more and more clients are saying their adviser hadn’t told them of consequences, such as huge tax bills and funds being made non-compliant. "Contribution strategies are a real pressure point for advisers. The problem is that clients are really not in a position to understand the ins and outs of these contributions," Gray said. "Because of the sudden-death way in which they operate, we are seeing a lot more of this type of liability arising." As such, advisers need to be more careful than ever about following procedures and having systems in place to ensure the advice they’re giving is as full as possible.

  • SMSF trustees are sinking their funds’ assets into cash, but this will have prevented them from capitalising on big gains in January. A survey by SPAA and Russell Investment found that risk reduction, not cost or return, is now a primary reason for asset allocation and the number of trustees who think equities are too volatile doubled to 33% in 2011, from 17% the year before. However, Chant West’s latest survey on superannuation fund returns shows that the median large growth fund was up 2.5% in January – losses for 2011 were 1.9%. Chant West director, Warren Chant, said the strong performance was due to positive economic data from the US and signs of the recession in Europe alleviating. “Despite the positive news in 2012 to date, and the fact that growth funds have returned a healthy 29% since listed markets bottomed in late February 2009, it’s sobering to think that they still need another 7% to get back to their pre-GFC (October 2007) highs.”
  • Legislation on auditor registration and the exemption for accountants working with SMSFs will come within the next two weeks, Financial Services Minister Bill Shorten says. He was speaking to the SPAA national conference on Friday and promised that the regulation, flagged in April last year, replacing the exemption with something akin to a limited financial service license will be released by the end of next week . Shorten also repeated his commitment to increasing contribution caps from $25,000 to $50,000 for super balances under $500,000, dashing hopes that the government may become more flexible in that area, and said the start date of the Future of Financial Advice reforms could be pushed back to give people more time to adjust.
  • SPAA announced at the conference that Andrew Hamilton will replace Andrea Slattery as chairperson, as the advocate group moves to a new two-year term limit for the role. Hamilton’s term will end in February 2014, but in that time he said he wants to provide cohesive representation for all professionals that work with SMSFs. "SPAA can influence policies that affect the operation of the superannuation industry, and drive improved educational standards for professionals and advisers that will benefit the public while representing the needs of our members" he said. Slattery said her successor’s knowledge of SMSF industry, product design, understanding of compliance and technical knowledge would serve him well.

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 advised to consult your financial adviser.

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

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