(03) 9020 2905PORTFOLIO POINT: Some flesh has been added to the skeleton of the 50-50-500 rule for super contributions. And it looks like generating higher fees for SMSF advisers.
Accountants and financial advisers could be excused if they started inadvertently rubbing their hands together. Greater complexity in anything financial means more work for professionals.
Not only in having to explain how changes operate, but in implementation and, let’s be fair, coming up with new strategies to combat the changes to make the most of the rules for their clients.
And care of some details finally emerging of one of the final decisions of former Prime Minister Kevin Rudd, get ready to welcome some more complexity being added back into super.
A brief recap. The Rudd Government cut concessional contribution limits for super from $100,000 to $50,000 (the temporary limit for the over 50s) and from $50,000 to $25,000 for everyone else. On June 30, 2012, the temporary limit is due to be removed and all Australians would have the same, indexed, concessional contribution limit of $25,000.
There was an outcry, largely around the fact that when Australians turn 50 is usually when they can afford to make super contributions, as the mortgage has probably been paid down and the kids are off their hands, or nearly so. What about those who haven’t had the opportunity to contribute much to super because of those significant financial anchors.
In early May last year, the Rudd Government responded to those criticisms by announcing a partial backdown. I tagged it the 50-50-500 rule. That is, people over 50 would be able to contribute $50,000 in concessional contributions if their balance was below $500,000.
From day one, the policy had raised more questions than it answered. You can read some of those queries industry was raising here (May 19, 2010) in the column I wrote at the time.
Now, a consultation paper has been produced by Treasury to try to give some indication of where the thinking is headed and to try to get some feedback.
(If you wish to download the consultation paper, you can do it here, http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1977 and you can make a submission by sending an email to over50supercap@treasury.gov.au .)
It is proposed that the new cap will be at $25,000 above the indexed $25,000 cap for everyone else. So, as indexation takes the concessional contribution limit from $25,000 to $30,000 and beyond, the cap for the over 50s will rise with it to $55,000, etc.
However, it is proposed that the $500,000 limit – which essentially reintroduces the old, despised, “reasonable benefits limit” – will not be indexed.
This is crazy. In 10 years from now, the value of the $500,000 limit will, in essence, be the equivalent of $372,000, assuming a constant 3% inflation rate. Limits like this simply have to be indexed, or the figure becomes worthless over time. Even the RBL was indexed!
But the real complexity will come from what they are considering counting and not counting as going towards that limit.
The consultation paper has raised three possibilities.
The first is that any drawdowns (predominantly pensions) that are paid out would have to be added back for the purpose of determining the limit. So, if your super fund was valued at $450,000, but you’d taken out $100,000 worth of pensions in previous years, then you would be ineligible. And they’d index the pension stream, however, to AWOTE so what gets added back is likely to be more like $115,000 or more.
Treasury admits the difficulty in this one is in records being maintained for each member’s super pension withdrawals. It will add a significant layer of reporting by super funds and the ATO.
Option two is to not worry about the level of pensions paid. That is, if the super fund was at $470,000 after a pension of $50,000 was paid, then the member would qualify to contribute another $50,000 in concessional contributions. In flat, or slightly falling markets, you could continue to contribute $50,000 for several years after you might have otherwise been able to.
Option three is to exclude everyone who has commenced withdrawals from being eligible. Yes, anyone who has drawn money from their super fund would be ineligible. What about someone on a transition to retirement (TTR) income stream, but who only has $250,000 in super? This suggestion seems to be being put forward because it is the most simple as it would lead to considerable exclusions from the offer.
Another issue posing some problems for the people trying to derive the rules is at what date does the balance get assessed for eligibility? There are two possibilities. One is June 30 on the year before the contributions are being made, which is fairly straightforward, but would create difficulties in reporting.
The second is June 30 of the financial year two before the contribution is being made. That would mean that if you are talking about making a contribution from, say, July 1, 2012, they would take your balance at June 30, 2010, to determine whether you are under $500,000. This one is easier to administer, but could lead to people having gone considerably over the $500,000 limit in the meantime and still being eligible.
For instance, if your balance on June 30, 2010, was $490,000, you could not only put in a $50,000 concessional contribution during FY2011, but you could also potentially put in up to $450,000 in non-concessional contributions (by using the three-year pull forward arrangements. With a bit of growth, your super fund could be worth nearly $1.1 million ($490,000, plus $50,000, plus $450,000, plus, say, 10% growth for the year) during the year in which you are going to be able to contribute another $50,000.
They are also considering banning money being rolled into accounts that don’t hve tax file numbers, as this could be one way to potentially not get caught for some time.
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Some more interesting figures from SMSF service provider Multiport have been produced exclusively for Eureka Report, which show a downward trend in the dollar value of pensions being paid out of SMSFs.
The figures compare the amount paid out from super via pensions versus the level of contributions made into funds.
Multiport, which administers approximately 1350 SMSFs, showed us the quantum of falls in contributions that have occurred since the government cut the concessional contributions limit for those over 50 from $100,000 to $50,000. See previous columns on the collapse of contributions here (August 4, 2010) and here (August 11, 2010).
While that trend continues, there is also a clear trend of pension payments falling over the last two years. Comparing the pensions drawn down from SMSFs in the December quarters of 2008, 2009 and 2010 shows a gradual fall. The same applies to pensions taken in the June and September quarters for 2009 compared to 2010.
The only exception was the March 2010 quarter. About $110 million was pulled as pensions from SMSFs, compared with about $22 million the previous year. Apart from that, each quarter showed a drop from the previous year.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.