Super: What the Coalition will do

If anyone was in any doubt that superannuation is a political football, then Thursday last week should have ended that.

The Coalition’s budget-in-reply confirmed that, no matter how much “fairer” the government might believe it has made super, the opposition disagrees and has its knife ready to carve some changes. Click here to see Alan Kohler and James Kirby discuss the budget reply.

If the Coalition wins the September 14 election, we now have confirmation that the low-income superannuation contribution (LISC) will go. We also know that the increase in the superannuation guarantee (SG) will stay at 9.25% for at least two years longer than planned, as the whole timeframe for the increase from 9% to 12% gets pushed back.

These will impact on the retirement savings of almost everyone, but I’ll come back to that. And don’t hold your breath waiting for the government’s recently announced Council of Superannuation Custodians to come into existence.

The council is designed to make it harder to change the super rules down the track and, in theory, that’s what we all want. But no incoming government is going to allow itself to get locked into that deal.

When Tony Abbott replied to the budget, we got our clearest understanding yet of how our retirement savings are likely to be impacted, if there is a change of government.

First, don’t hold out any false hopes that concessional contribution limits are on their way back to $50,000 any time soon. Abbott made it reasonably clear that he didn’t believe the budget would be in any shape to make improvements to much, let alone super, in his first term.

Regardless of your politics, current polling suggests that the Coalition will be in government from mid-September. So how would the Coalition’s super plans impact on you?

Deferring the SG increase

Under current legislation, the SG levy is due to be increased from 9% to 12% between now and 2019-2020.

On July 1, it makes the first move in that direction, when employers will have to increase the super payments for employees from 9% to 9.25%. On July 1, 2014, it was to increase to 9.5%. Every year thereafter, it would increase by 0.5% until it hit 12% on July 1, 2019.

Table 1: Increases to the SG levy

Abbott said an incoming Coalition government will freeze the increase after the first one by two years “because this money comes largely from business, not from government, and our economy needs encouragement as mining investment starts to wane and new sources of growth are needed”.

Super Minister Bill Shorten attacked the decision, claiming it would cost those already in the workforce an average $20,000 at retirement.

For employees, however, it will have some impact on your own super planning, particularly for those who make salary sacrifice arrangements.

A person earning a salary of $100,000 will move from having SG payments of $9,000 each year to $9,250. If they are making further salary sacrifice contributions up to the $25,000 concessional contributions limit, they will need to adjust their salary sacrifice arrangements to the tune of about $20.83 a month, or $4.80 a week.

If that person is aged 60 and over during the 2013-4 financial year, they will have a concessional contribution limit of $35,000. Adjusting your salary sacrifice arrangement to take into account this new limit can be done with a letter to your employer now.

For anyone considering changing their salary sacrifice arrangements, please take into account my advice in earlier columns (Don’t make the ultimate super sacrifice and Salary sacrificing traps).

Salary sacrifice needs to be constantly reviewed, usually in about April each year, to make sure you’re not going to bump over the top of the concessional contributions limit and potentially face tax of up to 46.5% on your contributions.

For the self-employed, it’s also an indication that you need to lift your own concessional contributions, if you’re not at the limit already. While the self-employed are not required to make super contributions for themselves (unless they are also an employee of their business), not making super contributions to yourself risks you falling behind in retirement.

Ditching the LISC

The low-income superannuation contribution is designed to be a payment of up to $500 into super for those earning less than $37,000 a year.

In essence, if someone earns $37,000 a year, they will have had paid $3,330 (9%) into super by their employer as a superannuation guarantee payment. The 15% contributions tax on that sum is $499.50. The LISC payment is designed to repay the SG tax paid.

A Coalition government has said they will ditch LISC, citing that it was to be paid for by the Mining Resource Rent Tax (MRRT), which has not raised the revenue it was designed to do.

This will have a clear impact on the superannuation balances of lower-paid workers, increasingly so for those who earn close to $37,000. The only way to fix this would be to make further contributions.

NDIS levy – increasing super’s attractiveness

Both sides of politics have now backed the National Disability Insurance Scheme, to be known as DisabilityCare Australia, and there seems to be agreement that it will be funded via an increase in the Medicare Levy from 1.5% to 2%.

That will effectively increase the marginal tax rates for most Australians. The top one will now be 47%, being an income tax rate of 45%, plus 2% for the Medicare Levy.

That makes superannuation, with a maximum tax rate of 15%, marginally more attractive, both as a place to contribute savings and for the ongoing taxation.

It will lift most of the other marginal tax rates also. Note that the Medicare Levy is only payable once your income hits $19,404 for most employees, but higher for those who qualify for the senior Australians tax offset ($30,685) or the pensioner tax offset ($30,451).

The new pension tax

There was no mention of the new tax on earnings above $100,000 in super funds in Tony Abbott’s speech.

However, it deserves a mention today, because it’s looking increasingly unlikely to go ahead.

Not only has the Gillard Government suggested that it will now take the tax to the election, but the super industry has shot down the tax as being completely unworkable. Much like the 50-50-500 concept (see this column, Please explain, Mr Rudd), which was also canned because of difficulties in administration.

The strongest arguments are the following. The Tax Office will not be able to tax efficiently, because reporting deadlines for super funds are simply too long. SMSFs, in particular, do not have to report until near the end of the following financial year.

Plus, multiple accounts will pose an enormous problem. Even if the ATO can determine that an individual’s super accounts, combined, have met the $100,000 requirement for the 15% tax to be imposed, how do they determine which super account is going to pay what? And what if the funds have since been rolled, in their entirety, to another super fund, or have been cashed in?

In any case, there are currently more questions as to how it would work than there are obvious answers to.

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