Louise Biti reviews superannuation in 2011, looks ahead to how potential legislative changes will affect advice strategies in 2012, and concludes that legislation is likely to have a greater impact on super this year than investment markets.
The continued volatility in markets has reduced the growth of superannuation and made many clients nervous. But changes in proposed and passed legislation may have a greater impact on how superannuation is used going forward.
Despite the volatility and reduced levels of personal contributions, the total invested in superannuation continues to increase. The value of superannuation, including self-managed super funds (SMSFs), has grown to an estimated $1.34 trillion. This represents an increase of 10.9 per cent during the 2010–11 financial year.
This article provides a recap of the major legislative changes announced in 2011 that will affect superannuation. It is based on announcements made up to December 31, 2011, and may be subject to further change.
Co-contribution
The co-contribution issue has been one of the biggest losers for 2011, with concessions cut twice to help fund alternative Government policy and balance budgets.
Despite these cuts, co-contribution still remains the most effective strategy for building super, but the application is significantly limited.
Current rules match eligible contributions on a dollar-for-dollar basis up to a maximum of $1000. Legislation has been passed to freeze the eligibility thresholds, to reduce the number of eligible clients over time. But with a need to further tighten Government budgets, this measure took another hit with an announcement that from July 1, 2012, the matching rate will be reduced from 100 per cent to 50 per cent, with a maximum co-contribution of $500. This reduces the eligibility cut-off limit to an adjusted taxable income (ATI) of $46,920.
The proposed changes are outlined in the table below.
| 2011–12 | 2012–13 | |
| Maximum co-contribution | $1000 | $500 |
| Matching rate | 100% | 50% |
| Lower income threshold | $31,920 | $31,920 |
| Cut-off threshold | $61,920 | $46,920 |
Over a three-year period, the halving of the co-contribution rate is expected to save the Government more than $1.023 billion. This is a lot of money that will no longer make its way into clients’ superannuation accounts.
| Advice strategies | Make the most of co-contribution while you can. Identify clients with ATI less than $61,920 and encourage them to make personal contributions to superannuation before July 1, 2012 to take advantage of the 100% contribution. Review contribution strategies for clients with ATI of $46,920 < $61,920 as they may no longer be eligible for the co-contribution after June 30, 2012. |
Contribution caps
With less than six months until the end of the transitional concessional contribution cap, we are no closer to a resolution on how the $500,000 limit will be administered.
Under current legislation all clients revert to a $25,000 concessional contribution cap from July 1, 2012, but the Government has proposed allowing the higher $50,000 cap (standard cap plus $25,000) to continue to be used by clients over age 50 – only if they have a superannuation balance of $500,000 or less.
While a consultation paper has been released, no resolution has been found due to the issues raised around the administrative complexity of how to measure and track the $500,000 balance. Further consultation is to be undertaken.
To add further injury, it is proposed that the indexation rates be frozen for a year; so we are unlikely to see indexation in any caps (other than the small business capital gains tax cap) until at least July 1, 2014.
The only positive is that clients who breach concessional contribution caps may receive a one-off opportunity to have contributions refunded, provided the excess is not more than $10,000.
| Advice strategies | Keep an eye on the changes to concessional contribution caps. Identify clients age 50 or over and keep them updated.Before July 1, review contribution limits for all clients aged 50 or over to ensure they do not exceed the applicable cap. At this stage it is uncertain whether strategies (such as super splitting or withdrawal strategies) reduce a client’s balance to under $500,000 will be effective. |
Contribution tax refund
The low-income super contribution measure was originally announced in the 2010 Budget to refund up to $500 contributions tax for a person earning up to $37,000 (ATI) from July 1, 2012. The $500 refund equates to the 15 per cent contributions tax payable on 9 per cent superannuation guarantee (SG) for a person earning $37,000.
This measure has not even been passed in legislation and changes have already been announced. It is now intended to apply only to clients who earn at least 10 per cent of income from employment or business activities (the same rule as for co-contribution).
| Advice strategies | Clients who earn less than 10% of total assessable income from business activities or employment (and are therefore eligible for tax deductions on personal super contributions) will not be eligible for this refund. From July 1, 2012 salary sacrifice might be worth considering for clients with ATI less than $37,000, but only after taking advantage of the co-contribution. The co-contribution still provides a greater advantage where available. |
Deductions for TPD insurance
From July 1, 2011 the premiums for total and permanent disability (TPD) insurance inside super may not be fully deductible.
The premiums are only deductible to the extent that the insurance definition of TPD meets the SIS definition of permanent incapacity. The SIS definition (Regulation 6.01) applies where the trustee is reasonably satisfied that the member is unlikely, because of ill health (physical or mental), to engage in gainful employment for which the member is reasonably qualified by education, training or experience. This may be closely aligned to the “any occupation” definition of TPD policies.
| Advice strategies | SMSF clients with TPD insurance inside superannuation should review the tax deductions to determine tax deductibility. Any occupation policies may be more tax effective than own occupation policies, but this should be considered in line with client needs. |
SMSF rules for collectables
These rules have not been clarified to ensure that SMSFs can still invest in collectables, but the requirements for use and storage are more restrictive to ensure that no personal use occurs. The new rules are effective as legislation and apply from June 30, 2011.
| Advice strategies | New purchases cannot be leased to a related party or stored in the private residence of a related party. The assets should be stored externally and insured. Storage decisions should be documented in trustee minutes. Clients with existing assets need to review their use and storage to comply with the new rules by July 1, 2016. |
Super borrowing rules
And finally a winner? Some of the uncertainty around limited recourse borrowing arrangements (LRBAs) in superannuation may become clearer if the draft ruling SMSFR 2011/D11 (issued on September 14, 2011) is finalised.
This ruling takes a more commonsense approach to the rules around “single acquirable assets” and the ability to improve an asset that is subject to an LRBA. In brief, the changes proposed are:
Single acquirable asset – An asset that is registered on more than one title can still meet the definition of a single asset provided its physical characteristics identify it as a single asset and the titles cannot be sold separately.
Improvements – Assets that are subject to an LRBA can be improved as long as the improvement does not fundamentally change the character of the asset and is not paid for with borrowed money.
While these are positive changes, the complexities in this area are still significant and the future of LRBAs remains uncertain.
| Advice strategies | If the draft ruling is finalised, it may lead to an increased interest in SMSF borrowing. However, this area may still be subject to a full review in the near future, as recommended in the Cooper Review. The draft ruling has been issued for consultation and then a final ruling will be released. Advisers and clients should be careful about acting on the draft ruling as this could be subject to change. |
The year ahead
Superannuation continues to be an important strategy for clients, but the low contribution caps limit the opportunities for clients to build adequate retirement savings through superannuation alone. Clients need to consider other tax-effective savings outside superannuation, such as insurance bonds or growth investments.
The Government has also proposed to increase the superannuation guarantee limit to 12 per cent, in incremental stages from July 1, 2013. This will put increasing pressure on the contribution caps and may breed complacency in clients, particularly with MySuper options, which discourage member involvement in the decisions around how to invest superannuation.
The year of 2012 may prove to be a challenging one for superannuation.
Louise Biti is a director of Strategy Steps, a provider of financial planning strategies.
