(03) 9020 2905PORTFOLIO POINT: Contributions to SMSFs are down dramatically and your verdict is in – Labor’s attack on “wealthy” trustees is responsible. And you’re very angry. Here’s what you said in response to my request for information.
When the federal Labor government delivered its second budget, on May 12, 2009, it contained a set of changes specifically aimed to hurt you.
It wasn’t sold by then PM Kevin Rudd and Treasurer Wayne Swan as being aimed at SMSF trustees. Or that it was supposed to hurt anyone. But it was and it did.
Labor (or, perhaps, the kitchen cabinet) had made a politically dogmatic decision on superannuation. They believed wealthy Australians were being allowed to put too much concessionally taxed money in. Labor had already reintroduced means testing for a range of other government benefits and “rich” pre-retirees were simply next on that hit list.
Rudd’s and Swan’s sales pitch, however, was that it was needed to introduce “greater equity into the system by targeting reductions at those with relatively more private resources so the impact will be predominately on higher income earners”. Sounds cute and cuddly when it’s put that way.
The decision was to drastically cut the amount of money that Australians could get into super through concessional taxation. The strictly temporary limit of $100,000 for concessional contributions for the over-50s was cut in half. And the limit for everyone else, of $50,000, was also cut to $25,000.
Except that it wouldn’t just hit “higher-income earners”. As I warned in my columns at the time, Australians tend to back-end their super contributions. When the kids are out the door and the mortgage is paid off, super contributions tend to be pumped up.
In this column here (Jamie: pls point to June 3, 2009), we showed exactly this. While we used a person on an income of $100,000, the impact was likely to be felt for people on incomes as low as $70,000, depending on the financial arrangements of the household. The average wage is now more than $60,000. A wage of $70,000 or $80,000 is a long way from the claim by Mssrs Rudd and Swan that it would only hit people on an “obscene” salary.
The contribution cuts were too severe – they went too far. Rudd and Swan admitted as much just a year later.
After heavy lobbying, in the 2010 Budget, they decided to make an exception. If a member is older than 50, they can continue to put $50k a year into super if their balance is less than $500k. I covered this as the 50-50-500 rule on May 19 this year. We stilll have no more detail from the Government.
It’s now just gone a full financial year since the new, lower, concessional contribution limits were put in place.
Last week (Jamie: pls point to Aug 4, 2010 column), I reported on a survey conducted by SMSF service provider Multiport of its 1200 clients. The survey said that super contributions among those 1200 funds had fallen by 22% in actual terms between FY2009 and FY2010. I explained that, given the average wage had risen nearly 6% over a similar period, the real fall in contributions had been a staggering 28%.
If that had happened anywhere else in the superannuation sphere, the fall would be seen as a disaster. But given that it was exactly what Labor was trying to achieve – against “rich” or high-income earners, if not specifically SMSF members/trustees – the Gillard Government is unlikely to even blink. To use a highly loaded political phrase completely out-of-context, Labor’s policy warriors probably saw those figures and said to themselves: “Mission accomplished”.
I guess, if Kevin Rudd is still looking around for successful policy implementation during this reign, then he could put a big tick next to “LESS MONEY BEING PUT INTO SUPER”. (Wear it as a badge of honour if you like Kevin. I just wouldn’t suggest wearing it to any function of Eureka Report readers.)
Multiport’s hard facts and figures last week proved less money was being put into SMSF, beyond any doubt. But in the last seven days, Eureka Report readers have added a very personal side to how this policy has impacted, or hurt, your own retirement planning.
I asked this column’s readers to email me why their contributions dropped for FY2009-10.
It was a landslide. The primary reason was the cut in concessional contributions. Some made the point very forcefully, including colourful language more usually associated with Mark Latham. Eureka Report is a straight-talking journal, but even we had to blush.
I proferred my own seven reasons.
“Was it a tough year for personal finances? A tough year for profits in the small/medium business sector? Just exercising a little caution? Chose instead to retire some debt? A bit gun-shy, given the market returns of the two previous years? Or … was it political/legal? A result of Labor’s cuts to the contributions limits? Out of fear of government responses to Cooper or Henry?”
Your responses contained confirmation that all seven of those had collectively played a part. However, I’d missed two good ones that readers offered up.
The first was the pull-forward effect. Some said that when the 2009 Budget changes were announced, they shovelled money into super in the last seven weeks of FY20009, knowing they wouldn’t be able to use the same limits the following year (a strategy I’d recommended straight after the 2009 budget).
The other was actually more of a positive. The Government’s GFC fiscal stimulus package contained a bonus 50% depreciation allowance for small and medium businesses to encourage investment. A few readers said they took advantage of this tax bonus, leaving them less money to put into super and less reason to, as profits were reduced as a result of the spending and subsequent tax deductions. (I should have known this, as I also used this and my super contributions probably suffered as a result).
Unequivocally, you declared that you had no choice but to cut your contributions. An overwhelming majority were forced to cut by half.
*****
DS: “My super contributions have halved because the Labor Party reduced the allowable contributions from $100,000 to $50,000 … Prior to this I was fortunate to be able to salary sacrifice the majority of my salary. Have had to change the strategy, and now have a margin loan and pay that off outside super … Can some lobbying be done to get this changed if there are lots of similar responses? I believe this is really very short sighted on the part of the Government.”
GE: “Reduced deductible contribution limit + decided to reduce business debt levels”
JW: “My reason for reducing contributions relate to Labor Party tax policy. I view super as a tax strategy and I contribute up to my age-related limit. The tax advantages are balanced by the loss of freedom to access my money. (But now) I am favouring negative gearing over super. I figure … that with interest rates of 6.5% and paying the top marginal rate, the effective interest on borrowings is 3.3% which is not much higher than inflation.I know this isn’t contributing to national savings but it’s Mr Swan who has developed the flawed policy.”
KB: “I halved my contributions from $100,000 (2009) to $50,000 (2010) purely because the Government changed the limit. If I had been able to, I would have contributed $100,000.”
K: “In my case (I am 57) it was the government’s mindless halving of tax-deductible contributions that did it. From $100,000 to $50,000. It’s that simple. Annoying, and electorally stupid. (Please come back, Peter Costello.)”
*****
I received about 75 emails in total. The reduced concessional contributions would have been listed as the primary or secondary reason in 80-90% of those emails.
But it wasn’t the only reason. Many cited the economic slowdown’s impact on business profitability. The recession that wasn’t, but you still felt anyway.
*****
GC: “It is a direct result do the recession we did not have … We could not get bank finance for projects. Sales slumped. Creditors clamped down. Expenses continue to accumulate.”
NO: “Prime reason for our lowering of contributions last year was economic: there just wasn’t as much money sloshing around.”
T: “A combination of triggers. Our own business has suffered a 15% drop in turnover for the year ended June ’09 and a further 15% drop to June ’10. To top that, July 2010 has been our worst month over the past five years … a decision was made to not salary sacrifice but to retire debt we have outside of our SMSF.”
DP: “We are in small business in the bush and the debtors have blown out somewhat, due to the combined effects of commodity prices, drought & water policy. With accrual accounting this makes cash flow difficult.”
*****
Labor has had a super agenda. They gave three separate inquiries (Ripoll, Cooper and Henry) the power to look into super. Super Minister Chris Bowen said his aim from those inquiries was to create “stable policy” that would not have to be changed by governments of either persuasion, for several years. Click here (Jamie: August 12, 2009).
Cuts to concessional contributions and the lowering of the government co-contributions had already been put in place before those comments were made. And the Coalition has said that it’s likely to overturn or not support most of the changes proposed by Ripoll and Cooper. Stable policy is extremely unlikely.
I’m tired of saying it and you’re probably tired of hearing it: Governments can’t help themselves when it comes to fiddling with super. But it’s less of an issue when super is “improved”. The last three years have increased the potential problems of legislative risk.
*****
M: “Bruce, too much govt interference/changes and as a result I no longer trust the end result.”
MK: “The government has proposed further changes to the super system and there are a number of reviews going on at present that would create an element of uncertainty for investors and superannuants alike.”
CL: “Given the propensity of the government to screw things up (esp. the most recent changes and bizarre limits) I am containing my exposure to those risks.”
*****
Some of your responses were well-written essays in their own right and I thank you very much for the time you took to write to me. One response was nearly 900 words long. Others were short. Only two, I think, were from trustees who said that they maintained or increased their super contributions.
Labor might have achieved its aim. And it’s plain to see who has born the cost. You.
Several people asked if there was any lobbying that could be done to have this changed. In short, that’s unlikely.
Part of the problem is that – with all policies that were essentially a form of means-testing – the government is taking a calculated risk that the “richest” 10% or 20% of the population never have and never will vote for Labor. (If that is the case, then the Coalition probably feels the same about the poorest 10% or 20%.)
I can’t do much, but pass on the opinions. I’ll make sure that Super Minister Chris Bowen and his political opponent Luke Hartsuyker (or their staff) get copies of both last week’s and this week’s columns.
I actually thought that super might have been a bigger issue in the 2010 election. As Alan Kohler pointed out on Monday, it’s barely rated a mention. But there’s certainly no harm in letting your local member know that you contribute to super. And you vote.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.