The big super raid is on the way

The federal government hasn’t denied it is looking at attacking super … and everything is on the table.

PORTFOLIO POINT: A government attack on superannuation is almost inevitable. But only insiders know what will be targeted, so where to take cover is anyone’s guess.

That the federal government is going to raid superannuation to make a surplus of the current year’s budget is now considered a done deal.

How do we know this? Because none of the ideas floated in last 10 days or so have been denied.

Further, Bill Shorten is quoted as saying that “nothing is off the table” in regards to potential super changes to help the government get the budget into the black for FY2013.

It seems just a matter of what they’re going to steal from our super kitty. And they can steal pretty much anything they want. They have the power.

As I wrote last week (see SMSFs in the firing line), SMSFs could become a direct target. There are different rules for SMSFs.

Sure, it risks severely irritating hundreds of thousands of people. But think about the political numbers. SMSF trustees, in the main, are considerably wealthier than the average punter ... making them largely unlikely to be Labor voters. Making them angry isn’t going to cost the government too many votes.

However, the real issue for the government in getting the budget back to surplus is time.

Measures that come into effect from July 1, 2013, aren’t much good to the government. These need to be capable of being implemented as of whatever day the government announces it, or potentially backdated to July 1, 2012.

To get a budget back into surplus when the financial year is already one-quarter over (and counting) will require measures that can be switched on immediately, with revenue payable just as fast. Unlike so many other grand plans for super of the current government that have been delayed because of their complexity, such as the deferral of the rules surrounding in-specie transfers (An in-specie transfer), these will need be taxed immediately or by the metaphorical “yesterday”.

So, what could the government do? Honestly, it could literally do anything. That so many ideas have been floated is worrying.

Superannuation is “lightly taxed”. Taxing it a little more is still going to make it “lightly taxed”.

But if the theme of taxing the rich (and reducing government incentives to them), which has been a constant of this government, is to be continued then here are a few things to think about.

Lowering the penalty contributions tax threshold

In the most recent budget, the government announced that if you earn more than $300,000 a year you will now be taxed at 30% for your super contributions, instead of 15%.

Those earning $300,000-plus a year literally amount to a few per cent of the population. There were no tears shed – possibly not even by those earning more than that.

But what if it reduced the $300,000 salary bracket? The cries would be louder if they dropped it to, say, $180,000 a year. But those earning in excess of $180,000 a year have a marginal tax rate of 46.5% anyway, so a 30% tax rate for super contributions would still represent a 16.5% saving.

It would massively increase the number of people that it hit and could quickly raise revenue. And it could probably be backdated to July 1, 2012, without parliamentary support from the Greens and independents.

In fact, it is believed Caucus wanted the super penalty tax to cut in at $150,000 (like several other government benefits that have been removed for individuals or families that earn that amount of money) when initially discussed prior to this year’s budget. Superannuation Minister Bill Shorten successfully argued for it to be $300,000.

With negative reaction amounting to three parts of not very much, this would be an easy one to implement.

Neuter joint pension/contribution strategies

There is a perception in the mass media that transition to retirement/salary sacrifice strategies are only available to SMSFs. Not true.

They can be implemented by any super fund member who is still working that gets appropriate advice. If SMSFs are using it more, it’s because they take a greater interest in their super.

But there’s a vocal group that believe it’s a rort, practised only by the rich. Some of the people who can benefit most from these strategies are, by no stretch, wealthy. The ones that are benefiting from it are either doing a lot of research themselves, or paying for good advice from their financial advisers and/or accountants.

Cut the government co-contribution

It’s been pretty much neutered and replaced anyway, so why not just ditch it and save the money?

The government co-contribution used to be $1,500 under the previous Howard government, if you put in $1,000 and your income was below a certain level (around $30,000).

That got reduced by the Rudd and Gillard governments to $1,000, then $500. On top of this, indexation of the limit was frozen and the top level at which it cut out massively reduced. And then the low income superannuation contribution (LISC) rebate (see next) of contributions tax for those earning up to $37,000 a year was introduced. Many don’t understand why the government co-contribution was left in place when LISC was introduced. And it’s a reasonable cost to the government.

Delay LISC

The LISC of up to $500 a year could also be delayed until next financial year, like the delay to the 50-50-500 rule. This has been postponed until July 1, 2014.

This is unlikely, given the government’s moves have been to support lower income workers with super and penalise higher-income earners.

Increase the income tax rate for superannuation

Superannuation income is taxed at 15%, which is lower than the 19% marginal tax rate for those earning more than $18,200 a year. Concessional contributions are considered income to a super fund.

By raising the income tax rate for super from 15% to 16% or 17% would bear immediate fruit for a government needing cash.

Very unpopular, but given the increase in that lowest of marginal tax rates, it is an option.

Cut the concessional contributions limit

With the 50-50-500 rule delayed for two years, why wouldn’t the government consider cutting the concessional contributions limit from $25,000 to $20,000?

They’ve already cut it from $100,000 to $50,000 to $25,000. What’s another cut?

This would be hugely unpopular. But, arguably, it would again only hit the wealthy. Or those who get good advice about super contributions.

Reviewing the tax breaks for geared SMSF property

I’ve written extensively on geared property for SMSFs in super, including how you can turn your SMSF into a tax-free fund now by using negative gearing to soak up contributions and income taxes inside your SMSF.

Directly-held and geared investment property is only available to SMSFs and not APRA-regulated funds. And it’s an increasingly popular strategy. If the government wants to attack SMSFs directly, then limiting the benefits of negative gearing for property would be a good target. I don’t believe it would be simple – and much grandfathering would be necessary – but it could be done.

Start taxing pensions for the over-60s

This could happen, but it would be massively unpopular. Plenty have argued that this centrepiece of former Treasurer Peter Costello’s 2007 super changes was unsustainable.

But taxing super pensions again? Seriously?

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.

Graph for The big super raid is on the way

  • The SMSF Professionals Association of Australia has levelled criticism at a proposal excluding self-managed funds from a new portability agreement between Australia and New Zealand. Proposed legislation would allow retirement savings to be transferred to Australian Prudential Regulation Authority (APRA)-regulated funds, but not SMSFs. SPAA described the proposal as “discriminatory and counter-productive”, as well as “unneeded and unwarranted”. CEO Andrea Slattery said regulatory obligations made SMSFs a suitable destination for NZ retirement savings, and exempting them “could significantly reduce the effectiveness” of the trans-Tasman scheme.
  • Rules relating to the deductibility of superannuation contributions have been confirmed by a recent case before the Australian Administrative Tribunal. Andrew Fraser, a retired TAFE teacher, took on the Australian Taxation Office over roughly $16,000 of personal super contributions he made in 2007 that he claimed were deductible, even though he worked for all but 50 days of the tax year. Fraser argued that the “year of income” referred to in the legislation could also mean part of a year, on the principal of totem pro parte. However the AAT disagreed, and affirmed the ATO’s decision, noting the rules on being an ‘eligible person’ refer to the income year as a whole.
  • Retirement adequacy for working Australians is at its lowest level since the GFC, according to recent research from AMP. Overall retirement adequacy fell below 70%, to 69.4%, while projected retirement savings fell below $500,000. AMP, which has recently launched an aggressive push into self-managed super administration, said consumer caution was impacting investor behaviour and reducing voluntary contributions.
  • There is no argument for moving regulatory control from the ATO to APRA, according to the Small Independent Superannuation Funds Association. SISFA director Rob Jeremiah said DIYs were audited every year and only 2% were breaching the requirements, potentially less. “This means that at least 98% of SMSF funds are not contravening their governance requirements and that there is no argument to make for moving control from the ATO to APRA or to make any further regulatory adjustments,” he said. SISFA said there was “no room for a cash grab” aimed at SMSFs by the government.

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