The old saying of, “lies, damn lies, and statistics”, should be amended to include a fourth category of political announcements about superannuation policies. For evidence of this you need look no further than the superannuation policies put forward by the Coalition and Labor.
Scott Morrison when announcing the policy estimated it would affect only 1 per cent of superannuation members. Although technically correct when the effect of the policy is compared to all superannuation pension members, when related to SMSFs it is considerably higher.
Class Limited, after reviewing the data held by the more than 100,000 super funds it services, estimates that 13.5 per cent of SMSFs have at least one member that will be affected by the new policy.
The Labor party has been even looser with the truth with regard to its policy that places a tax on superannuation pension accounts. Under the claim of a fairer super plan, Labor’s policy is stated being, “reforming the exemption for earnings on superannuation balances that exceed $1.5 million”.
When you get into the fine print of the policy, rather than a change in tax treatment of superannuation pensions based on pension account balances, the change is based on income earned on superannuation pension accounts.
Excess earnings taxed
Under the proposal, a person who earns more than $75,000 in income on their superannuation pension accounts will have the excess earnings taxed at 15 per cent. The $75,000 income amount, on the basis of a superannuation account with a balance of $1.5 million, equates to a return of 5 per cent.
According to superannuation industry benchmarks, the average return for the super industry over the past 10 years on a balanced portfolio is 6.44 per cent. Applying this earning rate to the $75,000 income limit means people with a pension account balance of approximately $1,165,000 will be paying the new tax.
Given that the 6.44 per cent is an industry average, and member balances in SMSFs are higher, the number of SMSFs that would be affected should Labor win the federal election will be a lot higher than the 13.5 per cent affected if the Coalition wins.
When it comes to assessing which of the two competing superannuation policies will be easier to administer, basing the limit on a superannuation balance rather than on income earned is better. For a member who has superannuation pension accounts with different funds, the task of calculating which super fund pays the extra tax would be a logistics nightmare.
SMSFs will be worse off ‘whoever wins’ election
So what does this really mean for advisers? We need to start speaking to clients with SMSFs and advise them that, no matter who wins the federal election, they can expect that the current tax benefits applying to superannuation pension accounts will reduce.
This opens up an opportunity for strategy-focused advisers to add value for their SMSF clients. When we last had Reasonable Benefit Limits, because whether that is what both the Coalition and Labor are looking to reintroduce, a popular strategy to reduce the impact of the higher tax on superannuation was splitting up to 85 per cent of a member’s superannuation contribution with their spouse.
This will mean where one member of a couple receives large employer sponsored superannuation contributions, and is also maximising their salary sacrifice contributions; by splitting the contributions with a nonworking spouse with little to no superannuation will reduce the number of clients that will be affected by these policies.
If the Coalition is elected and their policy becomes law, the segregation of investment assets between accumulation accounts and pension accounts should also become an effective strategy in reducing the tax impact for clients.
