The new super ball game

Happy new financial year, everyone. Everything’s been reset. Tax-free thresholds, contributions limits, etc. And a new ball game awaits.

Not since 2007 has superannuation had such a significant day. There has never been such a flurry of law coming into force.

As at midnight last night, superannuation changed. (So did investing, but far less significantly.) Most of the changes that kicked in overnight are aimed at retirement savings.

It will, over time, lead to a stronger super industry, bigger superannuation balances and lower fees through more competition.

They won’t benefit everyone. In fact, if you’re already operating a self-managed super fund, the benefits to you won’t exist in some areas, as you’ll already be in control of some of the aspects aimed at by the new legislation. You will benefit, but the majority of the changes are not aimed at helping you.

Let’s start by listing the main ones:

• Increase in the Superannuation Guarantee.
• New MySuper funds coming into effect.
• Increase in the concessional contributions limits.
• First payments of the $500 superannuation guarantee tax rebate.
• New Future of Financial Advice (FoFA) reforms and “best interests” duty.

Most of the bills enacting these changes were finally passed through the Parliament in the second half of last week.

And there was something else that happened last week that might loom larger over superannuation. The man who said before the 2007 election that superannuation would change “not one jot, not one tittle”, Kevin Rudd, resumed his prime ministerial duties.

Following that utterance, superannuation got a major makeover. Contribution rates were completely smashed by Rudd’s government, then further negatively impacted by his successor.

Superannuation is not top of his hit list with garnering voter support, so we might have to wait a while to see what he’s got in store this time for the upcoming election.

Superannuation Guarantee increase

The Superannuation Guarantee (SG) levy increased from 9% to 9.25%. While this will benefit most employees, the real benefit will come in future years, as it slowly lifts from 9% to 12% by 2020.

For most self-employed, this means nothing. You’re in control of your super. And you’re generally putting in what you can afford, or the maximum. In any case, unless you’re paying yourself a salary (on which you have to pay SG), it doesn’t impact on you.

For those who are receiving superannuation in excess of the award – apparently more than 40% of the population – this might also mean nothing. Your employer doesn’t have to increase your super, though they might.

But for employees, this is the start of what should be a considerable improvement to your post-retirement situation. Unless you’re retiring in the next year, in which case it might buy a bottle of wine or two.

MySuper funds come into force

The most significant recommendation of Jeremy Cooper’s review into the superannuation system was MySuper.

MySuper is to become the default superannuation fund for employees who don’t nominate a super fund. Yes, you can still choose to have your super paid into any super fund you choose. But if you join an employer and you don’t choose one, your employer will have to name a MySuper default fund.

It is designed to be ultra-low cost, even lower than most industry funds.

If you have a SMSF, there’s no impact. If you have chosen your existing super fund deliberately, there’s no impact. If you want to continue using your existing super fund, there’s also no impact.

It’s designed for a portion of the 80% of people who are sitting in default “balanced” funds that the government believes aren’t engaged with their super.

And I can safely say that if there are any Eureka Report readers in that boat, it wouldn’t be more than a handful.

Note: Interestingly, there seems to be some confusion on behalf of some financial advice firms who were operating in the “corporate super” arena. As late as last week, they were under the impression that an accidental injustice had been done and that the government had, by mistake, impacted on how they conducted business. No, guys, it was no accident. This legislation was aimed, absolutely specifically, at closing down your industry.

Concessional contributions increase

A real positive with some impact for ER readers. If you’re aged over 60, then you get an increase in your concessional contributions limit from $25,000 to $35,000 for this current year.

I’ve covered this recently in detail. See this column (Contributions capers: Another year, another change).

First refunds of contributions tax

The rules regarding the refunds of contributions tax (15%) for super contributions for those earning less than $37,000 a year actually started a year ago, on July 1, 2012.

However, clearly, they couldn’t be paid until after the end of the FY13 year.

Many of your should keep in mind, therefore, when you come to do your income tax return for FY13 that those who earn less than $37,000 a year will have refunded up to $500 of the contributions tax charged on your concessional contributions.

There are restrictions, but if you can legitimately lower your income below $37,000 with a few extra small deductions, then it could be worth $500 to your super fund.

FoFA and “best interests” duty

Yes, it seems a little silly to have to force financial advisers to operate under a “best interests” duty. Shouldn’t they have been doing that already?

Yes, they should have. And most of them undoubtedly were/are. But there are bad eggs in every industry (lawyers, doctors, teachers, brokers, etc), and financial advice is no exception.

Best interests will lead to many things. One of which is that advisers will be almost forced to choose cheaper products that suit clients’ needs, where one exists.

The products that advisers can choose from is actually restricted by their licensees – even those who are reasonably, if not totally, independent. Licensees will come under increased pressure to dramatically open up their “approved product lists” as a result.

Competitive pressure will either kill off expensive platforms and funds, or see significant cuts to fees.

The main concern with some of the above is that the Coalition has signalled that it may unwind parts of this change, should it win the upcoming election.

The increase to the SG limits looks likely to be delayed by a couple of years, and the contributions tax refund is to be ditched also.

Far less certain, though still possible, is that the Coalition has been far less keen on the FoFA regulations. It’s considered likely they would stay.

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

• AMP Capital has announced it is launching a new website to educate self-managed superannuation fund (SMSF) investors on investing in infrastructure and non-residential property. “Investing in real assets such as property and infrastructure can provide opportunities to access predictable and regular income while diversifying the SMSF investments by accessing unique investment opportunities,” said Craig Keary, AMP Capital’s director of retail and corporate business.
• The SMSF Professionals’ Association of Australia (SPAA) chief executive Andrea Slattery says the current methodology used to measure superannuation tax concessions is “fatally flawed”, and “misinforms the debate around retirement income policy”. “Measuring the concessions as tax expenditure using a comprehensive income benchmark is misleading and biased against concessions because any derivation from income being taxed at a taxpayer’s marginal tax rate is regarded as a cost to government revenue,” Slattery said. “This ignores superannuation’s primary purpose, providing retirement income and decreasing reliance on the Government for retirement income support,” she said.
• Endowment bonds provide self-funded retirees with the certainty of a steady stream of income and should appeal to the SMSF market, says Endowment Bond Exchange (EBX) chief executive Stephen Duchesne. “We see endowment bonds potentially being used to guarantee an annual income for basic living essentials like housing, electricity and food,” Duchesne reportedly said. He also said that pre-purchasing income would give pensioners the option to have exposure to more racy investments.