Super? Make that 'safety net'

Piece by piece the benefits of super are being wound back by the federal government.

PORTFOLIO POINT: The short-term future for super is looking increasingly grim. Lower your expectations for it to be a safety net. Here’s what’s changed.

It might be stating the bleeding obvious, but sometimes you need to take a step back to view the bigger picture. And what’s happening to super at the moment is very much jigsaw-puzzle like.

You simply can’t make sense of it looking at each piece being placed on the board that locks into another piece. The field of vision is far too small. On their own, they don’t add up to much.

Lift your head, go and make a cup of tea and approach the table again. Now, as you’re coming back from the kitchen '¦ what do you see?

Can you put the pieces together?

A little snip here. A marginal cut there. An increase down in this area. Delaying indexation over yonder.

Super under the Rudd and Gillard governments has pretty much only gone backwards. The pure number of cuts has been significant. And in the areas where it has been improved, it has been targeted at a select, low-income, audience.

Coincidence plus coincidence equals suspicion. Add two more coincidences and you could well be talking plots, maybe even conspiracies.

What was underplayed in last week’s MYEFO update (whose main aim is create a budget surplus in 2012-13), were three little pieces of the super puzzle. One I reported on last week (see the minimum drawdown extension section at the end of last week’s column).

The other two were given very little prominence. To be frank, they got one paragraph each in a media release from the minister, Bill Shorten. And those media releases didn’t explain what the announcements meant.

The government co-contribution

First, the government co-contribution is being halved, from $1000 to $500.

What Shorten’s press release said: “The government will reduce the matching rate and maximum payment of the voluntary superannuation co-contribution from July1, 2012, when the new LISC commences.” (We’ll come back to LISC in a moment.)

In the media release, there were no numbers, no examples. Nothing. It was left to industry to question to find out what it meant.

So, what does it mean?

Under the current government co-contribution scheme, people earning up to $31,920 could be matched, up to $1000, for after-tax contributions to super. This phases out by the time the salary earner earns $61,920.

The new rules: They will only match half of your payment, with a maximum of $500, on an income of up to $46,920.

But what this fails to note is that just a few years ago, the co-contribution was $1.50 per dollar contributed by a member, up to the limits of about $60,000. The Rudd government cut that to dollar for dollar. And the top end has now been cut, as well as the amount.

That is, there will be no direct government support under the co-contribution scheme, if you earn a dollar over $46,920.

Freezing of indexation for contribution limits

In the past few months, we have been led to believe that the government was considering raising the contributions limits. In particular, the concessional contributions (CC) limits.

This was based on comments made by Shorten that he didn’t believe $1 million was enough to retire on in a super fund. I’ve written often recently that it seemed likely that the current $25,000 CC limit could be lifted.

Wrong. Dead wrong. In fact, they’ve done the opposite. Indexation has been removed. The measly $25,000 limit was expected (with inflation forecasts) to have risen to $30,000 in the 2013-14 financial year.

Cancelled.

The media release: “The government will pause the indexation of the superannuation concessional contributions caps for one year in 2013-14, which will provide savings of $485 million over the forward estimates.” (Then into another promotion of LISC, which I’m coming to.)

If the CC limit had been lifted from $25,000 to $30,000, which was only to cover inflation since the limit was cut, the impact is a considerable reduction in the “real” money that Australians can put into super.

It wasn’t stated, but it is assumed that this will also flow through to non-concessional contributions (NCCs), which were expected to rise from $150,000 a year to $180,000 in the 2013-14 financial year.

Increase in the Superannuation Guarantee to 12%

Not announced last week, but now almost guaranteed to get through parliament, was the lift in the SG payments from 9% to 12% over the next decade or so.

Currently, if the only concessional contributions paid to your super account are the 9% SG paid by your employer, then you would have to earn about $277,777 before you would hit the $25,000 maximum threshold allowed for CC contributions.

The freezing of the CC limit at $25,000 means that increase from 9% to 12% means that you would now top out on SG contributions at $208,333 in today’s money.

No meat on the bones of the 50-50-500 rule

In a policy announcement (see Please explain, Mr Rudd), the Rudd Government seemed to have understood that its previous cuts to concessional contribution limits had gone too far.

Cutting the maximum concessional contribution from $100,000 to $50,000 and then to $25,000 would not allow a lot of over-50s enough time/ability to get a reasonable amount of money into super.

At the May 2010 budget, then PM Kevin Rudd relented. He announced what has become known as the 50-50-500 rule. Essentially, if you’re over 50, you would be able to contribute $50,000 to super each year, if you had less than $500,000 in your fund.

That announcement was about 19 months ago. There has been NO further explanation of how this would work, even though it is due to come into force on July 1 next year, when the over-50s CC contribution rate is due to fall from $50,000 a year to the same $25,000 that the under-50s have.

The good news is that, again, in a one-line statement in the announcements last week, Shorten committed to the 50-50-500 rule being implemented. The bad news is, there is still no detail. They are still negotiating on how to implement the strategy.

The detail needs to be provided quickly. Super members need time both this financial year and next to plan their contributions.

The Low Income Super Contribution (LISC)

Under LISC, anyone earning below about $37,000 a year will have their 15% contributions tax reimbursed back into their super accounts. This was announced earlier this year.

The current rules mean that for, EVERYONE, 15% of CC super contributions (SG and salary sacrifice) is lost to the contributions tax.

The government will now refund, up to $500, the contributions tax paid by those earning up to $37,000 a year. That means that if you earn $30,000, you would normally have a net $2295 paid into your super account ($2700 less 15%). But you will now have the full $2700 paid into their super fund.

What does it all mean?

What we’re watching is a slow and subtle shift away from superannuation being a vehicle to encourage most people to save for their retirement to a system that is designed to be a safety net. Not unlike the government age pension.

The government – backed particularly by the report tabled by former Treasury Secretary Ken Henry – believes concessions are unfairly used by the “top end of town”, where they really should be aimed at below-average income earners.

So '¦ how do you “beat” these recently announced rules?

It’s becoming increasingly difficult to do. But it is becoming close to essential, in order to make the most of super, to put away as much as you can (up to your CC limits in particular) in super, as early as you can, no matter how painful.

That will mean putting extra into super earlier than you necessarily wanted to. For many people, the time to start loading up on super is when the mortgage is largely paid down and the expense of kids is predominantly off your hands. But you’re going to have to start earlier than that. Don’t waste your CC limits while you can.

Unless, of course, you believe that the current government is also going to attack the tax-free status of super ... in which case, the ball game will completely change, instead of just watching sands shift.

  • Hall & Wilcox Lawyers agrees with a decision by the ATO to accept that SMSF trust deed clauses can prevent excess contributions. The tax office withdrew a tax alert made in March that questioned the validity of clauses that allow trustees to return sums that have been paid into the fund, such as excess contributions, and said there were some deed clauses that might stop a payment to the trustee from forming part of the fund. The ATO will, however, make sure these clauses can’t be used to avoid excess contributions from being counted against the caps. In an update, Hall & Wilcox said trustees now had to make sure the relevant clause was effective in their deed.
  • Pausing the indexation of concessional contribution caps will have unexpected flow-on effects for SMSFs, (see today’s column by Bruce Brammall, above) says Michael Lorimer, chairman of the Small Independent Superannuation Funds Association (SISFA). In its “mini-budget”, the government said it would freeze indexing during 2013-14 to help get the budget back into surplus. Lorimer says non-concessional caps won’t move either when they would have risen from $150,000 pa to $180,000 pa and from $450,000 to $540,000 under the three-year bring forward rule. “SMSFs’ ability to accelerate non-concessional contributions is going to be put on ice for at least a year, and possibly longer.” He says there’s also nothing stopping future governments tampering with super when they want to plug a revenue gap now.
  • RaboDirect last week launched an online SMSF that will let trustees choose the level of administration and reporting they personally have to undertake for the fund. SMSF administration provider Cavendish will host the support services such as compliance, administration and reporting requirements. RaboDirect investments manager Tim Hewson says the system will be a user pays one as the bank is seeking to “empower” investors via the investment platform.
  • Over half of the enquiries about purchasing offices in a new Melbourne block have come from SMSF trustees, as more and more take advantage of clearer rules around borrowing to buy property. About 200 inquiries into office suites at the Bourke Street development, 140 East, have been made, and sales agent Tom Tuxworth says at least two suites have been sold to individuals who intend to lease it to their businesses. One was to a person associated with Perth-based BaoSteel, for $1.6 million, and another was associated with a medical consulting firm, who paid $1.7 million. Tuxworth says this is becoming much more common as trustees are becoming aware of their ability to buy property, and suspect that the opportunity won’t be available for long. Philip La Greca, director of SMSF administration provider Multiport, says owner-occupiers are allowed in solely business real property. Had the suite included an adjoining space that could have a non-business use, it wouldn’t be permitted.

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.

  • Superannuation Q&A, click here.