It's all about the super cut

PORTFOLIO POINT: It’s not about the economy. Cut-down contribution limits are responsible for Eureka readers’ slumping super deposits.

I guess I shouldn’t be surprised that an economist got superannuation wrong, or at least half wrong. Economics is, after all, the “dismal science”.

But perhaps the economist was just talking to, or considering, the wrong people. If they were talking to Eureka Report’s readers, then they’d have clearly got a different set of answers, or come to a different set of conclusions.

In last week’s column, I wrote about some data mining by the Financial Services Council of APRA figures.

The economist said: “the economy” was to blame. Slower employment growth and lower real wages were “in part” to blame for a cliff-like fall in contributions to super funds.

So, I asked you if you had reduced your contributions and, if so, why?

The response was deafening in its one-sidedness. In the dozens of responses I received, the vast majority (approximately 85%) said that the single biggest reason for contributing less in the September quarter of 2012 to the previous quarter, or previous comparable period, was that the government had cut the concessional contribution limit for the over 50s from $50,000 to $25,000.

Honestly, I thought as much, but I wanted to find out from you.

Now, I need to add a note of fairness here. APRA’s figures, from where the findings were extracted, most likely did not include SMSF data. (SMSFs are regulated by the Australian Tax Office.) And the FSC has less interest in SMSFs than it does in APRA-regulated funds.

However, it’s not only SMSF members/trustees that are going to be impacted by the halving of the concessional contributions limit and the two-year delay to the 50-50-500 rule.

That is, members of APRA-regulated funds also have the same $25,000 concessional contribution limit. And they, too, are impacted by those cuts.

There is a fundamental wealth difference between SMSF members and APRA fund members. The average SMSF member balance is north of $400,000. The average APRA fund balance is south of $100,000.

But for the FSC’s report to not mention, not even in passing, the cut in the concessional contributions limit seemed, to me, to be missing a pretty important new factor that occurred for the first time in the September quarter.

It seemed you agreed, and here’s some of your responses:

“My contribution to the SMSF has dropped 50% to $25,000 this year thanks to the government’s stupid decision to prevent us from accumulating enough in super to remain totally financially independent for our (hopefully) lengthy retirement. Being already retired, I am not in a position to make further undeducted contributions.”

“(There were) two reasons for reduced contributions. The first, a reduction in allowable deductible contributions, and the second, the introduction of 30% ingoing tax on contributions for those earning more than $300,000 per annum.”

“The cutting of contributions limits from $50K to $25K has effectively stuffed my short-term retirement plans. At age 57, my plan was to sacrifice to the $50K limit in conjunction with SGC. As my current balance is about $300K I will most likely have to work on five-six more years. Ahh well ...”

“I have halved super contributions in line with the reduction in limit. My wife has reduced due to the limit cut, plus change in tax rates.”

“I’ve dropped my super contributions due to the $25k limitation. Just at the point where the mortgage is under control and the kids’ education is nearly finished, I was finally in a position to accelerate my super in preparation for retirement. Now I can’t!”

This is a point I’m particularly heavy on as being a reason the cuts for the over 50s is so harsh. But let’s get back to readers’ responses ...

“Last year I contributed $50k to my SMSF. This year I am limited to $25k and very annoyed and confused about what the government is up to? They seem to have an unspoken agenda.”

“My wife and I, both in our 50s and leading up to retirement, have both cut back our concessional super contributions in line with the reduction of the concessional limits. From what I have observed in the workplace, and from talking to others, this would be very common.”

“I managed to get $50K into my super fund in 2011-12. Now, I have had no choice but to cut back to the $25K limit. I am employed through my own company. My wife has contributed to her public service super fund and separately salary sacrificed up to her age limits. We’ll invest outside of super instead.”

“I was planning to retire within next two years but have been adversely affected by the federal Labor government’s decision to restrict concessional contributions. It would appear unfair and unreasonable for the government to curtail the ability of working people to plan for their retirement and force them to rely on the government pension in the future.”

“Aged 67, I’d be pinning my ears back if I could. I’m putting in what’s tax-effective anyway.”

Two financial advisers/accountants also spoke on behalf of their clients.

“Reduced limits saw many of my clients cut back on concessional contributions.”

“For myself and many of my SMSF clients, the reduction in contribution limits has been the overriding reason for reduced contributions.”

While the overwhelming majority listed the cut from $50k to $25k as their primary reason, there were other reasons cited. And they included:

“The biggest reason for my reductions was due to a large amount of accumulated losses in my family trust, which is where my wife and I generate our income. Since now we can offset new capital gains against those losses it negates the need to make super contributions to reduce our taxable incomes.”

“We are self-employed and ... are not contributing this year due to the uncertainties surrounding the Labour government’s grab for more tax revenue. The legislative risk and the lack of confidence/trust in the asset markets are our main concerns.”

“Because of the poor returns from super funds. Quite simple really.”

And that last one certainly sounds like a response from an APRA-regulated fund member.

There is no doubt that economic factors do play a part. And APRA super fund members are the majority, which is where the stats were drawn from.

But to ignore government policy restricting the amount of money that can go, tax effectively, into super? Seriously?

Thanks for another year of incredible feedback from you all, as Eureka Report readers. You are a very responsive audience and you let me know when I simply get things wrong. And thank you for that. But all writers appreciate being told when they’re inspiring or writing well. So, I’d like to thank you even more for those of you who’ve take the time to tell me that also.

Read some of the responses from Eureka Report subscribers here.

I hope you have a wonderful Christmas. And may the recent improvement in equity markets be a windfall to you all!

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 Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The Australian Taxation Office has released its latest quarterly statistical update on the state of self-managed super funds in Australia. Covering the period to September 2012, the ATO found there were 7,685 net establishments of funds in the quarter – a strong increase historically but less than in the prior four quarters and off a peak above 10,000 in the September 2011 quarter. There were a total of 488,576 self-managed funds at the end of the quarter with 932,198 members (slightly less than two members per fund). The number of funds established in the 2011-12 financial year was the highest in five years, with more than 36,000 funds created.
• Listed shares have returned to the forefront of SMSF asset allocation, according to the latest statistics from the Australian Taxation Office. The ATO found that 30.9% of DIY fund assets were invested in listed shares in the September 2012 quarter, and 29.4% in cash and term deposits. This compares with 30.1% for cash and term deposits in the previous quarter, and 29.5% in listed shares. The ATO found cash and shares have been swapping back and forth as the most held assets in SMSFs for the past several years. Non-residential real property was next in asset allocations, followed by unlisted trusts.
• Growth in SMSF residential property investment has not increased significantly in the years since the introduction of Limited Recourse Borrowing Agreements. Cavendish Superannuation SMSF specialist mentor and educator David Busoli says residential investment has only increased from 3.3% to 3.5% of fund assets in the period from June 2008 to September 2012. “Given the amount of recent press attention focused on the rise of residential property investment it is interesting to note,” he writes.
• The annual parliamentary hearing with the Commissioner of Taxation has reported complaints to the Ombudsman about the ATO are at decade-long highs. The report found there were 2,717 complaints about the ATO in the year, for a 4.7% annual increase, and the highest for 10 years. ATO complaints comprised 12% of all complaints received by the Ombudsman in the year. However, the acting Ombudsman found there had been a comparable decrease in complaints in the first few months of the current year.