The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has called for a universal increase in the concessional superannuation contributions limit (cap) to $50,000 a year for all individuals aged 50 plus, regardless of their super account balance, so they can plan a comfortable retirement. The call is contained in SPAA’s March submission to Treasury, Concessional superannuation contribution caps for individuals aged 50 and over.

SPAA has therefore rejected a Government proposal which from July 1, 2012 would allow individuals aged 50-plus to make up to $50,000 in concessional contributions per annum without incurring excess concessional contributions tax, but only if they have total superannuation balances below $500,000.

If the Government concludes that the annual cap can’t be lifted to $50,000 for everyone aged 50 plus, due to budget constraints, then SPAA recommends that non-concessional contributions be excluded from the mooted $500,000 threshold super balance. Given that only concessional contributions and fund investment earnings are subject to concessional tax treatment, SPAA believes only a member’s concessional contributions should count against the $500,000 threshold.

To maintain the integrity of the measures the Government is also proposing that SMSFs be required to include the member’s share of fund reserves in the member’s balance which is assessed against the $500,000 threshold.

While SPAA understands the Government’s desire to ensure the $500,000 balance threshold is not manipulated by the allocation of amounts to a fund reserve, any kind of simple apportionment of reserves between members disregards the contingent non-vested nature of reserves. In any event, the extent to which a SMSF member can use reserves to derive a tax benefit is largely counteracted by the requirement that reserve allocations be counted against the member’s concessional contribution cap.

Overall, SPAA believes an arbitrary and unindexed $500,000 balance threshold would be overly complex and impose unnecessary costs while discriminating against people who make voluntary non-concessional contributions from after-tax dollars.

Some people may also mistake the threshold figure of $500,000 as “adequate”. That is, it would seem reasonable to conclude that because the Government limits what you can contribute once you have saved $500,000, then that figure is somehow related to what is required to generate adequate levels of retirement income. Recent University of NSW research* shows someone on an average wage of $60,000 a year will need $1.2 million at retirement while someone on $80,000 will need $1.6 million – a sum in the vicinity of 20 times their incomes.

As an alternative to the $500,000 threshold, SPAA has recommended the concessional cap be increased from $25,000 to a suitably higher amount for all individuals over age 50 to give them the opportunity to contribute more to super in the years leading up to retirement.

SPAA fears using an arbitrary threshold superannuation balance of $500,000 will impose onerous reporting obligations and complexities experienced under the former Reasonable Benefit Limit (RBL) system. This appears contrary to the Cooper Review’s focus on improving the efficiency of the superannuation system. Based on the industry’s recent past experience with the RBL system, it is very likely that under the Government’s $500,000 threshold proposal, numerous details would have to be reported to the ATO on regular occasions. Where there’s incorrect processing or other errors, reporting amendments would require reporting/deletion of previously reported details. This would increase the administrative burden on the trustees as well as the ATO.

Having an arbitrary $500,000 account balance threshold which is unindexed may also result in an increase in the number of individuals inadvertently breaching the contribution caps.

Given the severe penalties which can apply to excess contributions and the increased risk of calculation errors, the likelihood of more individuals inadvertently breaching their contribution caps should be a serious concern.

*Australian Institute for Population Ageing Research (AIPAR) at the University of NSW, AIPAR Longevity Index

Andrea Slattery is the CEO of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).