The six big questions on superannuation

PORTFOLIO POINT: The superannuation landscape was changed once again in the recent federal budget, and it’s no wonder many readers are confused. Here’s the answers to the top six topics on your collective minds.

This week I’m taking the time to canvass with you the six key themes that overwhelmed my inbox in the six weeks since the federal budget in early May.

What has struck me most in those intervening weeks has been how many investors are still confused about changes in this area. But in another way it is hardly a surprise since this crucial area is over-complicated by endless government additions and subtractions to the superannuation regime '¦ not to mention those that are announced but never come to pass or are deferred.

So, here goes. I’ve tried to present a representative sample of the type of questions I have been getting from our subscribers and once you have digested the answers presented below you will be well on your way to being up to speed on super in 2012.

Non-concessional contribution (NCC) limits
Q: Can the bring-forward rule to contribute $450,000 be reactivated every three years provided the member is still under 65 years of age?
Q: Once I am aged 60 and start drawing a pension from my superannuation fund, am I able to make non-concessional contributions?
Q: Will the $450K apply if I will not be working in future financial years?
Q: In June 2011, I made a non-concessional contribution to super of $450,000, which allowed for three years of this type of contribution. I am not sure when this resets, but in what year can I make another contribution of at least $150,000.

Answer: The annual limit for non-concessional contributions is $150,000. Under the pull-forward rule, you can do up to $450,000, or three years’ worth of contributions, in one go. Obviously, as the name suggests, a contribution of $450,000 will cover you for the year in which the contribution is made and the following two financial years. That is, if you made it tomorrow (21 June, 2012), it would mean that you couldn’t make further NCCs until 1 July, 2014.

And yes, you can continue to do that every three years until you turn 65, although as you approach age 65, there are certain things to consider to manage getting in as much as possible.

There are few restrictions on making NCCs until you turn 65 – and you certainly don’t need to be working. Once you turn 65, it becomes a little trickier, as you need to meet the work test in a given financial year and you can only then do $150,000 in a single year. That is, over-65s can’t use the pull-forward rules.

Turning on a pension from your super fund at age 55 or 60 is similarly no barrier to making NCCs. It goes into an “accumulation” fund in your super account until you turn that into a pension also.

In regards to the $450k NCC made in June 2011, your first opportunity would be 1 July, 2013. Your $450k NCC contribution covered FY2010-11, FY2011-12 and FY2012-13. The FY2013-14 year starts on 1 July, 2013, so that should be when you can make another non-concessional contribution. But speak to your financial adviser and/or accountant about your situation, as tripping these limits can cause horrendous tax consequences (see this column).

In-specie transfers
Q: What is the position with the sale of listed shares to a SMSF? Can this be done via an off-market transfer?
Q: Can we get more information on the “in-specie” changes?
Q: How likely is it legislation will be passed before the end of the financial year regarding transfer of shares from personal to my SMSF?
Q: What is the current process for in-specie transfer of shares?

Answer: I’ve done a few columns on in-specie transfers in recent months. Please see columns here and here. But the bad news is, the time has all but run out to do it under the current rules.

In-specie transfers were, simply, open to abuse. The government believed too many people were using the rules to defraud the Tax Office, both from a capital gains tax and contributions perspective.

From 1 July – even though we don’t have any legislation from Treasury yet – you will still be able to make in-specie transfers, but they are going to have to go through some sort of brokerage process. Instead of you, as trustee deciding when the “transfer” was made, it will be made the day it is processed through the brokerage. The legislation is likely to be backdated to 1 July.

If you’re really keen to do it right now, you will need to find out which share registry the company’s shares are managed by (generally Computershare or Link Market Services) and fill out their standard transfer form. But you’ll pretty much need to do it today, as 30 June is the cut-off.

Will the government reintroduce the taxation of super pensions?
Q: How attractive is it to governments to look at taxing superannuation pension or earnings being taxed after a pension has been started?
Q: What is the chance of taxation happening again for pensions?
Q: Has the government indicated it may tax pensions in the future or tax the income on assets used to support pensions?
Q: Currently, super benefits are tax free when in the pension phase. Will the government give a guarantee that they will not tax super benefits in the future?

Answer: Despite all of the changes in recent years, which have overwhelmingly left superannuation worse as a vehicle than it was, super is still a great way to invest for your retirement. And it would remain so while the great beauty of super – tax-free income from pension funds after the age of 60 – remained.

I said that if the tax-free nature of superannuation was removed, then that could be a game changer.

The industry fears this government might do it. Given the negative changes made to super under the Rudd and Gillard governments, anything is possible. Labor has wound back much of the sweeteners that were introduced by John Howard and Peter Costello in 2007.

And the more that people shovel into super, the bigger the tax hole that “tax-free pensions” creates for a government.

There hasn’t been any official talk of reintroducing taxes on pensions so far. But you can put as a certainty that Treasury has run the numbers on what taxing pensions again would look like. It doesn’t appear imminent.

Transferring your super to others
Q: How can you move super from yours to your spouse’s super fund?
Q: Is super transferable to other family members (i.e., not your partner)?

Answer: Yes, you can transfer some of your superannuation to a spouse, but there are serious limitations. (And I’m not talking about divorces here. They have their own rules and will often be determined by the courts.)

You can split the concessional contributions that are made for one partner to the other partner’s account. Concessional contributions are the amounts of up to $25,000 for the under-50s and $50,000 for the over-50s for this year.

Your respective super funds will have to allow this to happen and the transfer can only be done up to the end of the following financial year. That is, concessional contributions made in the year to 30 June, 2012, can potentially be split with a spouse if done before 30 June, 2013.

What gets moved is 85% of the concessional contributions – that is, they are still taxed 15% at the first super fund. A $20,000 concessional contribution will lose $3,000 in the first fund, so $17,000 could potentially be split with the spouse.

You can’t split NCCs with your spouse. And, no, you can’t split contributions with anyone but your spouse.

For a longer column dealing with the ways that couples can build better super together, see this column.

Contributions to super when you’re not working
Q: Can a non-working person contribute to their SMSF?
Q: Can a housewife having investment income contribute to their SMSF?

Answer: These questions are, to a certain extent, related to the first questions answered above. If you are under age 65, you don’t need to be working to contribute to super. There are few restrictions on putting money into super, as either concessional or non-concessional contributions, until after you turn 65.

And a “housewife” earning only investment income can not only put money into super, but could potentially get a tax-deduction for doing so as a concessional contribution. But it might make more sense to make non-concessional contributions instead. Anyone considering making contributions in this position is best advised to speak to their financial adviser or their accountant about their individual tax position.

The death of the 50-50-500 rule
Q: Can you please explain the 50-50-500 rule and the next two years again?
Q: Can you put in more than $25k if I’m over 55 and my SMSF fund has more than $500k after 1 July?

Answer: The 50-50-500 rule has been iced. It might even be dead. The government had promised since May 2010 that it would continue to allow those who were over 50 years of age, with less than $500,000 in super, to be able to continue to have the higher concessional contributions limit of $50,000 a year.

But they broke that promise at the budget this year. For one of my columns on what was supposed to be happening from 1 July, see here.

At this year’s budget, the government said it was delaying introducing of the 50-50-500 rule by two years, to 1 July, 2014.

That is, from 1 July 2012, everyone who is eligible to make concessional contributions to super will have the same limit of $25,000. That’s irrespective of how much, or how little, you have in your super fund.

And there you have it. There’s a response to a good portion of those that Eureka Report subscribers have sent in over the last few weeks. I hope these answer most of your lingering queries on superannuation.

Legislation surrounding off-market transfers into SMSFs, set to take effect from July 1, may be delayed. Cavendish Superannuation head of education David Busoli wrote that Treasury officials last week had confirmed there would be a deferral, however when Eureka Report sought confirmation from Superannuation Minister Bill Shorten, his office would only say: “There has been consultation with industry on how best to implement a range of SMSF measures.” While the status of the legislation remains officially unclear, Busoli said a deferral “was not surprising given that no legislation exists but it will quell the speculation surrounding the proposed changes”. It has been expected for some time that off-market transfers into SMSFs would be banned from July 1 where a trading market exists. The draft requirement for SMSFs to value assets at Net Market Value each year is causing problems at a practical and legal level, according to SMSF Academy head Aaron Dunn. Under existing superannuation law, net market value is not a concept that is really considered, Dunn writes. “Market Value is already defined within the SIS Act, so requiring net market value is only going to add additional costs, in particular when dealing with real property, collectables and other assets where an underlying market does not exist.” The anticipated change is part of a raft of regulatory reforms, much of which stems from 2010 Super System Review recommendations. Self-managed super funds are subject to the lowest fees in the superannuation sector, new data from the Australian Taxation Office has revealed. The most recent Self-Managed Super Fund Statistical Report from the ATO has found almost 40% of SMSFs have a fee base of just 0.25%. Fees have been trending downward over the past three years as well, and the average fees have fallen from 0.95% per fund in 2008, to 0.67% in 2009 and 0.65% in 2010. SMSF Professionals Association of Australia (SPAA) chief Andrea Slattery says the figures confirm self-managed funds as cost effective. A recent court case has shown SMSFs do have legal recourse in the event of fraud or theft, a topic in the limelight recently following the hearings into Trio Capital’s collapse. “In the wake of the Trio/Astarra scam, there has been a misconception that SMSF trustees are swimming outside the flags when they lose their superannuation savings because of fraud or theft,” SPAA CEO Andrea Slatterly says. “A recent court settlement, in which an elderly woman got back most of her life savings of $1 million she lost in the Trio/Astarra fraud, is positive proof that SMSF trustees do have legal recourse when these tragic events occur.” Several comments made to the Parliamentary Joint Committee looking into Trio suggested stronger protections be put in place, or warnings given on lack of protection, for theft or fraud from SMSFs.

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 highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.