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
If we take the aim of super as being to move the middle income earners from receiving the age pension at retirement, the goal of caps and other rules should be aimed at having a middle income couple end up with say 20% more than the threshold where they can get a part age pension – ie say $1.2m. If caps and other rules/requirements are set with that goal in mind then super will get the best chance of acheiving its goal.
People can save for retirement outside the super system, so a lower cap doesn’t stop people from saving. Super is used for saving purely because the tax rate is lower. People on average incomes don’t have $50,000 they can contribute each year, so the higher cap just allows wealthier people to be able to put their savings into super where its taxed less, instead of saving in the own name.
In contrast, a system for the $50k if under $500k proposal seems likely to be complex. The SPAA article above highlights some of these complexities. There’s no point bringing in a system which costs everyone $100 so we avoid a tax concession for the wealthy which would cost everyone $90.
The first step when looking at caps, and SG rates, then is what works for most middle income earners over their lifetime so they are not reliant on the age pension. The next step is to work out how much of a tax bonus is given to the wealthy, compare that to the costs of any mechanism to counter that bonus, and then go with whatever costs the masses less.