Federal Budget changes compound superannuation confusion
The dust has well and truly settled on the Federal Budget but, as Liz Westover writes, the Government needs to accept that its actions have served to confuse Australians and harked back to the days of the superannuation surcharge.
As the dust settles over another Federal Budget, a review of a number of superannuation measures and their real impact is warranted.
Going into Budget lockup on 8 May, I was certain that some aspects of superannuation would be addressed by the Government (as they inevitably are), and naturally, I was not surprised.
There were two measures announced by Treasurer Wayne Swan this year that caused a big stir within the superannuation industry.
Details on the first issue, around the introduction (or some say, “reintroduction”) of a higher tax rate on superannuation contributions for those people earning more than $300,000, were released prior to budget night, so it provided no great surprise.
The other announcement on the deferral of the higher concessional contribution cap for those over 50 came on the night.
The question a lot of people will be asking is: why do some of these measures matter? Why should the average working Australian saving for retirement care?
Unfortunately, while some of the measures seem to impact only a small group of people, the ramifications will be felt by all Australians who contribute to super.
Higher tax rate on contributions from very high income earners
Interestingly, the Government refers to this measure as a “reduction” of tax concessions, rather than an increase in the tax rate!
In reality, the Government announced an additional 15 per cent tax would apply on contributions to superannuation made by those people with incomes of more than $300,000.
The definition of income is a little confusing and includes taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
If all this adds up to greater than $300,000, then a 30 per cent tax rate applies to all of your super contributions.
However, if it is only your super contributions that cause you to go over the $300,000 threshold, then the 30 per cent tax rate will only apply to those contributions which exceed the threshold.
Fortunately, the additional 15 per cent tax rate will not apply to any contributions that are otherwise subjected to excess contributions tax.
The rationale for this is that these people have not received any tax concession on excess contributions to which a reduced tax concession would apply.
The new rules are not straight-forward and show all the hallmarks of another confusing super regime that is reminiscent of the old surcharge days.
In all likelihood, there will not be a lot of public concern for very high income earners caught up in these measures, so why then have so many people come out criticising it?
This measure is somewhat concerning for the entire Australian public for two reasons.
Firstly, the Government should be ensuring that those who can afford to fund their own retirement are able do so, in order to lower the reliance on aged pension down the track.
While this decision could offer the Government short-term savings, it may have a detrimental impact long-term if it results in more pressure on public funding because more people require the aged pension.
The second concern relates to the costs of administering such a complicated regime.
Previous attempts at similar measures (a superannuation surcharge tax was imposed on high income earners for superannuation contributions made between 20 August 1995 and 30 June 2005) were administrative nightmares, costing vast amounts of money for regulators and superannuation funds.
This is where everyone pays. Those administration costs will be dispersed across the greater membership and consumer base, and not just imposed on the very high income earners. This affects everyone’s superannuation savings.
Deferral of higher concessional contributions cap
The other big announcement on Budget night involved the deferral of the higher concessional contributions cap for those aged over 50 with super balances of less than $500,000.
Effectively what this means is that for the next two years all Australians, including those over 50, will only be able to contribute $25,000 to superannuation per year.
Those over the age of 50 were expecting the $50,000 cap would continue to apply to them, albeit where their super balances were less than $500,000.
This measure is quite disappointing, particularly as it leaves many people doubting whether the higher concessional contributions cap, now set to come into effect on 1 July 2014, will actually take place.
Aside from the obvious concerns – that individuals nearing retirement may struggle to save enough – many people will now find themselves at a greater risk of contributing too much super, and facing the excess contributions tax.
When the rules keep changing, many people have to keep changing their retirement saving plans, and it’s not surprising if they find they can’t keep up. It is likely that there will be an increase in the number of excess contributions tax assessments being issued by the ATO as a result of this announcement.
Funding for regulators
Some of the other announcements likely to impact on retirement savings were included under the banner of extra funding for various regulators across the superannuation and financial services sectors.
The Government announced it would provide additional funding to regulators and government departments to implement a number of new reforms in the superannuation and financial services industries.
While this sounds like a sensible approach given the vast amount of reform these industries are undergoing, the fine print in the Budget included an increase to the fees and levies required within superannuation and financial advisory services. (The Government was clearly a lot quieter about announcing this.)
The reality is that all the funding to the regulators is on a cost-recovery basis, and it is ultimately the consumers who will be paying for it, either directly or as costs passed on by service providers.
For example, funding for the implementation of SuperStream is to be recouped via a temporary levy on Australian Prudential Regulation Authority-regulated super funds (which will ultimately be passed on to members).
Funding for the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office for self-managed super fund (SMSF) auditor registration is to be paid for with an increase in the SMSF levy and fees for auditors; and funding to ASIC for the implementation of the Future of Financial Advice reforms is to be paid for by increases (in some cases by as much as 420 per cent) in Australian Financial Services Licence (AFSL) application and annual lodgement fees.
This final measure is particularly concerning if accountants are soon to fall under the AFSL regime, as part of the proposed replacement to the accountants’ exemption.
As is always the case, it is only when these measures are implemented that will we see their actual impact.
The behavioural impact of these measures, which are often intangible calculations at this time, will likely be significant – confidence will be eroded, and further disengagement of people with their super should be expected.
The goal of superannuation is to help people save for a comfortable retirement.
The Government should be encouraging this to mitigate the long-term impact of government support of Australians in retirement. Constant meddling with super laws sadly seems to be a government imperative.
Liz Westover is head of superannuation at the Institute of Chartered Accountants in Australia.
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