Please explain, Mr Rudd

PORTFOLIO POINT: Detail is desperately required from the Rudd government on its extension of the new contribution rules for the over-50s.

Following a major news event – even a tragedy – it’s usually only a matter of days before the first jokes start doing the rounds, often variations of already familiar lines. Towards the end of last year the subject was Tiger Woods.

Similarly, when a government announces a new financial policy, the boffins are usually at work on it within minutes, devising new strategies to best exploit the rules for clients or looking for loopholes.

It’s usually about minimising tax. Beating the tax system is innately Australian (and Greek, too, as it turns out). Kerry Packer, the patron saint of not-paying-more-tax-than-you-have-to, legitimised it as an Australian sport.

But the financial boffins are seriously confused by the latest announced change to superannuation. The lack of detail has people’s minds running wild. Including mine.

The government has announced Australians who are over the age of 50 can contribute up to $50,000 to super if their account is below $500,000. (Let’s call it the 50-50-500 rule.)

The Rudd government has bent to pressure regarding the cutting of the concessional contributions cap from the 2012-13 financial year. At that time, the current $50,000 limit for those over the age of 50 was due to fall to $25,000.

The first disturbing thing about this new rule is that the government has essentially declared that $500,000 in super is a “reasonable” sum. (We hope this is not the beginning of the reintroduction of a “reasonable benefits limit”. But it seems that Labor believes this is “reasonable” and it’s less than the old amount, which was discarded three years ago.)

While the proposed law seems fairly straightforward, it’s certainly not. The confusion lies in how the 50-50-500 rule will mingle with the rest of super’s laws. And industry is now waiting for some meat to be put on the bones.

Market movements

Super balances fluctuate; it’s not necessarily just market movements that cause this to happen, but let’s start there anyway.

Your super balance could be above $500,000 one day and under it the next. Or, if the 2007–09 stockmarket slide was to repeat itself, it could be $1 million one day and $450,000 just 17 months later.

Given Labor’s previous decision to halve the compulsory transition to retirement pension limit (from 4% to 2%), it would seem that the likely answer to this one would be to allow the former $1 million pension fund member to contribute $50,000 until they got back above $500,000.

But that’s where the obvious ends and the tough questions begin.

Transition to retirement pensions

What happens if it’s a pension that causes a member to fall back below $500,000? If a member with $520,000 took a 10% transition to retirement pension, they’d be down to $468,000. Would they be eligible to use the $50,000 limit?

If so, this could become an almost perpetual way to put in $50,000 a year, if there was low or little growth in markets. Take out 10%, put in $50,000, knowing, of course, that the $50,000, as a concessional contribution, would only go in as $42,500 because of contributions tax.

If this were to be the case, this could potentially apply to a large number of people in or around the $500,000 mark who are on a transition to retirement pension. And potentially something to start planning three-to-five years out.

Further, if it was the case, fund managers and advisers will be all over it with ways to help clients reduce their overall tax through super and regular employment/earnings.

Retirement that isn’t

Let’s take it another step. What happens if you’re over 60 and have “retired”. You could take out enough money from super to get you below the $500,000, just because you can, and then recontribute up to $50,000 when you came back out of retirement.

For those near the limit, it might make plenty of sense to pull out $100,000 from super and have it earning money outside super, in order to be able to have that $50,000 taxed concessionally in super as income, rather than in their personal names at up to 46.5%.

To take it to an extreme, in rare circumstances it might make sense for someone with a $1 million balance to pull out $600,000, in order to get back under $500,000 to be able to achieve the higher concessional contribution balance.

Spouse splitting rules

These rules have been largely sidelined since the removal of the reasonable benefits limits in 2007: there was less need to split contributions when there was no ceiling to worry about. They are now back at the forefront of most strategies.

If a couple has a $400,000 and a $100,000 super balance between them, the person with the higher balance could use the spouse contribution splitting rules to make sure they got in $50,000 concessionally each and every year, with the super contribution forwarded directly to the partner with the lower balance.

If this is the case, spouse splitting could become super’s most important strategy. It could be used very effectively to get both members of a couple to $500,000 (while creating mountains of work for accountants and advisers).

Pensions and no contributions

A self-employed member with a balance of, say, $580,000 could take a TTR pension for two years to get themselves under the limit. Because everyone who is eligible would still be able to make contributions of $25,000, this would make less sense. But it’s still potentially something that could be considered.

The above list is not exhaustive, but is a selection of the sort of strategies that are currently being investigated to make the most of the proposals. The government has announced it will consult on the process, which means we might not have answers for quite some time.

I’ll try to keep you updated with tidbits on super policies ahead of the election.

Tony Abbott has declared he’ll make the next election a referendum on the “great big new tax” that is the Resources Super Profits Tax, and his decision would have flow-on effects to superannuation law.

If the RSPT is to be canned or reversed by the coalition, a flow-on is that the increase in the superannuation guarantee from 9% to 12% would also be chopped.

This might be bad news for workers, but business is unlikely to be booing.

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