PORTFOLIO POINT: An election looks imminent. Labor’s “super plan” is taking shape. Here’s what you need to know.

The dust is slowly settling on Labor’s blueprint for superannuation.

None of it has been legislated and if Gillard doesn’t retain government at the next election, it will probably largely amount to naught.

So, it’s seeming like less of a blueprint with pillars and more a cobbling together of a few ideas from mutually exclusive inquiries (Ripoll, Henry and Cooper), with some original thoughts thrown in. But let’s assume for a minute that it’s being “coordinated”.

Where is superannuation headed under Labor and what should you be considering in your planning to make the most out of where it’s headed?

The truth is that, if these plans discussed below come into effect, the foundations of super will have undergone a change almost as major as what occurred in 2007, although not with a big bang start date like we had back then. Some of 2007 will have actually been dismantled. Some means testing has been introduced, along with some reverse means testing.

Employees will be getting a better go of things, while the self-employed and employers will be juggling with rules that will impact both positively and negatively.

So where is Labor headed with superannuation? The main prongs – more like a bag of skewers – of Labor’s super plans are:

• Means testing: Reduced concessional contributions limits (2009 Budget)
• A reverse means-test – the 50-50-500 rule – for those over 50 without much super (2010 Budget)
• Changes to licencing requirements of advisers, both tax and financial (Ripoll and Cooper).
• Banning of  commissions in super from 2012 (Ripoll) and insurance inside super (Cooper)
• Superannuation Guarantee to rise from 9% to 12% (new policy)
• Reduced super concessional contribution taxes for those earning less than $37k (Henry)
• Decrease the company tax rate from 30% to 29% (diluted from Henry)
• Introduce ultra-low cost MySuper as a vehicle for those disengaged from their super (Cooper).
• Streamlined operation of super (Cooper)
• SMSFs: Remove exemptions for ownership of inhouse financial assets and exotic assets.

The list is not exhaustive, but we’ll stick with these.

Some of the above won’t necessarily have a huge direct impact on SMSF trustees or even managed fund super, but will have more of an impact on the industry’s hierarchy and professionals. Those include higher professional requirements for advisers to the industry, the streamlining of super’s back office and the banning of commissions for super and investments from mid 2012.

The remainder, however, is and will have larger impacts on super in general and SMSFs in particular.

Reduced concessional limits

Concessional contributions limits were cut in the 2009 Budget. The main concessional limit was $50,000, which was reduced to $25,000. The temporary limit of $100,000 for those over 50 until 2011-12 was cut to $50,000.

Prior to 2007, superannuation was a rush to the finish line. In the last 10 years before retirement, Australians loaded up their super. The timing made sense, in that by that stage, most people had booted out the kids and had paid off the mortgage.

Costello’s changes were designed to get people to put money into super from an earlier age, but give older Australians a five-year transition period. The Rudd Government then cut those limits by about 80% from what older Australians would have been able to put into super under the pre-2007 rules.

This is a means test designed to try to stop the “wealthy” from getting too much into tax-free income streams on retirement.

The 50-50-500 rule

At this year’s Budget, the government made a small backdown to the above. Those who are over 50 will be able to put in up to $50k into super through concessional contributions if they have less than $500k in super.

This is a reverse means test. For a full discussion on this topic, please see my recent column (“Please explain Mr Rudd” 19/5/10)

This rule – no solid detail of which has been provided – will create many new strategies to get around the laws. The importance of super spouse splitting could become a major tool again.

What it does suggest, however, is that the Labor Goverment believes $500,000 is a “reasonable” amount to have in super, which is less than the old reasonable benefit limit that was scrapped in 2007.

Changes to licencing requirements for super professionals

Advisers, accountants and auditors face more stringent standards, to be phased in over the next few years. Some of those were covered in Bernie Ripoll’s report last year.

But more recently, Cooper has recommended an end to accountants exemption from having an Australian Financial Services Licence in order to give advice about the set up of SMSFs. Okay, financial advisers have conflicts and they’ve been well, and endlessly, covered. But when it comes to conflicts, accountants recommending the startup of a SMSF must run up there with Eddie McGuire calling Collingwood home games. There’s a minimum of $1200 a year and as much as $3000-$4000 a year in accounting and possibly audit fees coming in the door for eternity.

Commission bans

Ripoll recommended the banning of commission on insurance and super products from 2012, while Cooper has recommended removing commissions on insurance in super, whether it’s managed fund super or SMSF.

The first seems likely to go ahead, but only if Labor wins back government. The Coalition have said it’s not a done deal. Banning insurance commissions inside super will only exacerbate Australians’ underinsurance problem. Neither party has responded to this one.

Increasing the Superannuation Guarantee

The passing of the MRRT has allowed New PM Julia Gillard to confirm the intention to go ahead with lifting the SG levy from 9% to 12%.

If you’re a salary earner with less than 10 years to retirement, the difference will be marginal. For those with longer periods to retirement … it’ll be a progressive thing. It’s really designed to kick in for the kids.

But one thing to note is the impact this will have on the $25k concessional limit. Currently, you need to earn $277,777 before 9% of SG equals $25. At 12%, you’ll top out on employer contributions at a salary of just $208,333.

Cut contribution taxes for those earning less than $37,000

I’m not sure where the Coalition sits on this one, but Henry’s recommendation is to give a rebate of up to $500 to cover the contribution taxes for those earning up to approximately $37,000 a year.

At $37,000 a year, your SG contributions will be $3330, on which $499.50 will be lost in contributions tax at 15%. Henry has proposed to remove this. Essentially, another reverse means test.

Cut company taxes

The original plan to cut them from 30% to 28% has been dumped in favour of a 29% company tax rate.

What does this have to do with super? Small business people are often weighing up how to pay themselves. A salary? Director’s drawings? How much super to put away?

A change to the tax rate changes the numbers on how things are paid and whether it’s at a marginal tax rate, as a dividend from the company or super. It will change the way you’ll crunch the numbers in your own business.

Cooper’s MySuper

Lowering the cost of super is, obviously, a great idea. No issue here. Little likely to impact on those Eureka Report readers who have SMSFs, unless fees are reduced to the point where it would make running your own SMSF ridiculous, which seems unlikely.

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While we’re here … my main criticism of Cooper last week – arguing against his base assumption that Australians “shouldn’t have to be interested” in their superannuation – has obviously drawn its own criticism. Let me state it more simply. Australians should be encouraged to take an interest in their own superannuation. Teaching Australians about their superannuation is a good portion of what I, and most financial advisers, do for a living. Mine extends to my media work, including this column. People who don’t care about super walk in my door every day. In 15 minutes, I can get them to care enough about super to spur them into action. It’s not hard and it does make a difference. The government has a responsibility to try.

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Streamlined operation of super

The second main thrust of Cooper’s report was actually the streamlining of super in Australia. Super Minister Chris Bowen described current super back office as like stepping back into 1982. When it comes to paperwork, half of what super funds get away with should be illegal. Good riddance to it and hello to millions of dollars staying in super.

In house assets and exotics

Cooper’s report, if adopted by the Government, will ban Australians from further investment in exotic assets and in-house assets (loans and investments in related parties).

The surprise to come out of Cooper was that he’d initially indicated he give existing SMSFs 10 years to get out, in his preliminary report, but cut his recommendation to five years in his final report.

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