The leaders super stuff up

One of the great problems with superannuation's complexity is that the chief idiots-in-charge don't actually understand what it is they're making rules about.

Superannuation has tripped up many on the campaign trail over the years.

Who could forget Julie Bishop's superannuation 'gotcha' moment in 2016? She had no idea how a transition-to-retirement pension worked when asked by Neil Mitchell.

But was smart enough to admit she was clueless.

This time, two high-profile twits have called themselves out at the same time.

And they're big names! Prime Minister Scott Morrison and his would-be successor, Bill Shorten.

The former doesn't appear to understand the superannuation laws he put into place. The latter doesn't appear to understand the ramifications of the policy he's taking to the election.

I'm not having a go at Bill's answer to the PM's question on this occasion — he didn't answer the question — but for the policy that Labor is proposing.

The moment happened at the leader's debate at the Press Club last week.

ScoMo popped a superannuation question at Bill.

Here is an edited version of ScoMo's question (because the question, as he asked it, would have you scratching your heads):

"I would like to know (regarding) self-employed Australians...that when they make their superannuation contributions, self-employed people, these are tradies, these are people running home-based businesses...they will not get access to the tax deductions for their superannuation contributions that wage earners get. Labor is changing that policy. What I would like to know is why Bill Shorten wants to target those individuals, those self-employed Australians and how much revenue will he be raising from that increase in tax on those Australians."

Yep, okay, even the edited version of the question doesn't make sense. But I'll explain why it's stupid below. He's talking about the '10 per cent rule' if his question made you go "say, what?"

Bill's answer was ... actually nothing to do with the question, so I won't bore you with the verbatim response. Essentially, he said, superannuation would continue to be taxed at 'preferential rates'.

He didn't answer the question. Maybe because ScoMo's question didn't make sense. Or maybe because Bill didn't understand the question.

If he did understand what ScoMo was trying to ask, then this was his national, televised, platform to grandstand about his policy.

Nope. Pretty sure he didn't understand his own policy. Which is cool, because, you know, ScoMo's question held him up to be a superannuation idiot also.

So, let's look at a 'gotcha' moment, neatly captured in one minute and 30 seconds, about superannuation, on this campaign trail, showing neither leader actually understands what they're talking about.

What prompted ScoMo's question?

The background. That is, what were they trying to argue about, but didn't understand?

As of 1 July, 2017, the Coalition removed a rule (that was almost unanimously considered archaic), called the '10 per cent rule'.

That rule stated that if you earned more than 10 per cent of your income from being an employee, that you could not claim a tax deduction for personal super contributions. Effectively, if that was you, you could only make contributions through your employer, via salary sacrifice.

Why was this archaic and lacking sense in the modern working world? Take someone like a tradesman, who is largely self-employed. Most of the year, he's got his own business and runs his own show, but sometimes, when work is slow, he takes a short-term employment contract. He earned $80,000 being self-employed and $20,000 for a couple of months work as an employee. (Or someone who is a part-time teacher, but earns most of their money through self-employment, selling widgets, or through doing music gigs. Or thousands of other examples.)

He has earned 20 per cent of his income for the year as an employee (which is more than 10 per cent). Therefore, if he wants to contribute to super, and get the tax benefit for it, of being taxed at 15 per cent, the only way he can do that is via salary sacrifice through the company who employed him for six weeks or so.

What if that was at the start of the year, when he didn't know how much he was going to earn? What if it was part-way through the year, after not getting any self-employed work for the first six months and he was playing catch up with the credit card bills, etc.?

The rule was never a problem for the truly self-employed. They can make contributions to super at any time during the financial year.

It was also a problem for many employees. If their employer didn't offer salary sacrifice, which employers are not required to do, they could not make extra tax-advantaged contributions. And if they wanted to do end-of-year tax planning and make a last-minute contribution to super, they were also stuffed.

It was also, most obviously, a problem for people who are a bit of both (bitzers). Major problem.

They often would get Superannuation Guarantee contributions, using the example above, of $1900 (9.5 per cent of $20,000 of salary), for the year they earned as an employee, but couldn't necessarily make any further contributions (unless they treated themselves as employees of their own company, which is simply not possible for many) on the remaining $80,000 of income.

The removal of the 10 per cent rule was rounded applauded, as it freed up true employees and part-employees, to make super contributions that suited them, when it suited them.

To restate: the change of rule was of least value to the truly self-employed and wealthy.

It means that those who failed the 10 per cent rule could put money into super and claim a tax deduction, at a time that suited them during the financial year.

Labor's policy

The ALP wants to reintroduce the '10 per cent rule'. This will mean that thousands of Australians (the PM estimated 800,000, but I have no idea if that is even vaguely correct) who either have bastard bosses, who don't offer salary sacrifice, or who are 'bitzer' workers, earning from both self-employment and employment, who can't make super contributions when it suits them.

Why is it a 'double-gotcha!' moment?

Because neither leader understands anything about this policy. Very clearly.

ScoMo's question didn't make sense. And Bill's answer showed he didn't want to answer the question, because he didn't understand the policy (which has anyone who knows anything about superannuation dumbfounded, anyway). Specifically, from ScoMo...

He asked why the "self-employed...will not get access to the tax deductions for their superannuation contributions that wage earners get."

That's idiotic. The self-employed will. They do. What he should've asked (but he doesn't understand it), is "why won't those who are partly self-employed get tax deductions, Bill?"

The truly self-employed do get to make tax-deductible contributions. They actually get the best deal out of tax deductions for super and always have. They can make deductible contributions at a time of their choosing. But even more so, if they don't want to make super contributions, they don't have to, which is not an option that employees, or part-employees get a choice about.

Salaried employees, unfortunately, also have huge restrictions. They can only make extra contributions, where they can do so, via salary sacrifice.

He's missed the point. Or, more likely, doesn't understand it. It's the "bitzers" who are screwed here.

And as for Bill Shorten... well, he didn't answer the question. Simply, he didn't understand it. (That's actually okay, because neither ScoMo nor the media adviser who prepared the question understand what they were asking anyway.)

The policy to reintroduce the 10 per cent rule simply doesn't make sense if you want people who are caught betwixt (which is tradespeople and the underemployed who work half and half more than most) to be able to save for their retirement.

It's not going to be the top-end-of-town who are likely most hurt by a change of rule here. They will get their super contributions in, to the maximum, don't you worry about that.

It is likely to be middle-income earners and lower-income earners.

I cannot recall reading an opinion of anyone in the last 2-3 years who believes that reintroducing the 10 per cent rule would make sense from a public policy perspective.

Labor supported the policy when the Coalition introduced it. But nothing I've seen from them, or anyone else, has made any sense at all as to why it should be abandoned, if you're trying to look after low- and middle-income earners.

Should leaders know the intricacies of superannuation policy?

Should we hang out ScoMo and Bill because they don't have a clue of what they're talking about when it comes to superannuation?

No. We shouldn't. And certainly not me. As I said in this column during Julie Bishop's 'gotcha' moment, leaders shouldn't need to know the intricate policy detail on superannuation.

Sadly, intelligent debate about superannuation had a fleeting moment in the sun...and anyone who understood why the question was being asked, was simply left dumbfounded by a stupid question and a non-answer.

But if our political leaders, who are generally smart individuals, ever want to know why people don't understand superannuation rules and therefore don't trust super... they simply need to look internally.

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 managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.