Rebuilding super savings made harder

PORTFOLIO POINT: Savers with less than $500,000 will not be eligible for higher contribution limits as previously promised by the government.

Australian investors – especially savers who are close to retirement – have been hit with a negative surprise in this year’s federal budget as a promised exception to the new contribution caps has been deferred by two years.

In last year’s budget, a move to re-impose limits on the amounts individuals could contribute to superannuation was to be softened by an exception for those with lower balances. The original plan was that the dollar limit for contributions for those under 50 would be $25,000 per annum, and for those over 50 it would be $50,000. (However, there would be exceptions to the ruling, allowing those with less than $500,000 to exceed the limits.)

But in a move that will cause consternation in financial planning circles, the government has said it is now going to 'defer the measures by two years’ – the exceptions ruling was supposed to start on July 1 this year; it will now start on July 1, 2014. In essence, the changes mean older taxpayers saving for retirement will be restricted to a maximum superannuation contribution of $25,000 for two more years.

Some financial planners had been suspicious the measure might be in jeopardy when there were no details released over the last year, but the delay will still be a major disappointment to the financial planning sector.

The measure will be very unpopular because it inhibits the rebuilding of superannuation balances by those who have been hit by very poor returns during the GFC period.

In one conciliatory measure, Treasury suggests: “In 2014-15 (the year the exception is due to be revived) the general cap is likely to increase to $30,000 through indexation, and the higher cap would then commence at $50,000. I.e. Those within the sub-$500,000 level of DIY funds could contribute the higher limit $30,000 plus the extra $25,000 that will be allowed at the time to make up $55,000.”

The move is one of the big savings made in the budget – even though the money will come from a relatively narrow base. Treasury says the move will provide savings of $1.5 billion over the forward estimates period.

A range of related measures in the budget will also affect those preparing for retirement and people in retirement; the measures include:

• The budget papers confirmed the first serious roll-back of Howard/Costello-era largesse for superannuation savers by significantly reducing the tax advantages of superannuation for high income employees. From July 1 this year, for individuals earning an income greater than $300,000 the tax concession on their contributions will be reduced from 30% to 15%.

• The government will introduce a 'means test’ for the net medical expenses tax offset from July 1. The measure will directly affect those with single incomes above $84,000 or couples earning more than $168,000.

• The government will phase out the mature age worker tax offset from July 2012 for workers born after July 1, 1957.

• Standard workplace tax deductions: The announcement of this measure was welcome last year, but now it has been scrapped (this is a major $2 billion saving for the government).

• In a similar abandonment of a much-publicised measure, the government last year said there would be a 50% discount on the tax paid for interest income. With the national savings rate at a 30-year high, the government has decided not to proceed with the measure, which it says would not have a significant impact on savings behaviour.

• In relation to the administration of DIY super funds, the government – following recommendations in the recent Cooper Review – will create an online registration system for the auditors of DIY super funds. This will include a competency examination.

• Older Australians enjoying health insurance rebates on alternative therapies, such as naturopathy and homeopathy, have been put on notice. The budget papers suggest the government is undertaking a review of natural therapies, which can currently be claimed in health insurance. The review will be led by the nation’s chief medical officer in order to examine whether they are suitable.

In conclusion, the government has hit hard at high-income savers within the Australian investment community through the cutting of super tax benefits to approximately 180,000 high income earners and the postponement of the 'exception’ to contribution limits for those with savings of less than $500,000. Both measures will be very unpopular, particularly among financial planners and wealth advisors.