Understanding the latest changes to the superannuation guarantee

Graeme Colley examines the superannuation guarantee changes made in the Budget and what they mean for clients.

This year’s Budget seemed to come and go without the usual fanfare. Perhaps our reaction to the Budget was subdued by the Government’s release of the Henry Tax Review just over a week before.

Having had some time to digest the proposals it begs the question of how clients may be affected and what advice opportunities will arise from the proposals.

Here we will have a look at the proposal to retain the higher concessional contributions cap for those 50 and older beyond the cut-off date of 1 July, 2012, and the gradual increase in the Superannuation Guarantee rate from 9 to 12 per cent by 2020.

Retain higher concessional contributions cap

The proposal in response to the Henry Tax Review and confirmed in the Budget papers is to retain the higher concessional contribution cap for anyone who qualifies and is 50 or older.

This will extend the $50,000 concessional contribution cap for those who qualify and have less than $500,000 in super.

Advisers are understandably concerned about how the $500,000 threshold will be determined and are thinking about the use of strategies to assist clients in retaining the higher concessional cap.

The Government has signalled it will consult with the industry on the calculation of a member’s superannuation balance.

Until we see the outcomes of the consultation let’s consider a few scenarios and how the current rules could be used effectively to remain under the $500,000 member balance threshold.

Of course, these are speculative and provided as an exercise to consider the possible impacts on clients.

Calculating the $500,000 aggregate account balance

The most important issue seems to relate to the timing of the $500,000 cap and whether the member’s account balance(s) will be determined at the beginning or end of the financial year or on some other basis, such as some type of average or every time a contribution is made to the fund.

If we were to use a fairly rational approach then it would seem practical that the beginning of the year would be the most sensible. If that was used then it would signal that for the coming financial year anyone aged 50 or over could have concessional contributions of $50,000 made to the fund if their balance was less than $500,000.

Where it was not then the maximum concessional contribution would be limited to $25,000.

Whether the $500,000 balance is determined at a particular time of the year will still create problems in relation to the reporting of the amount to the Australian Taxation Office (ATO).

That assumes that the ATO will be responsible for collecting the information and letting members know the aggregate balance in all superannuation funds to which they belong. Under current reporting arrangements, larger funds are not required to provide information relating to contributions for a tax year until the end of October in the next tax year.

In the case of smaller funds the balance is not reported until much later.

Therefore, it will be well into the next financial year before the ATO and the member will know the balance and the amount of concessional contributions that can be made to the fund. This may impact on salary sacrifice arrangements and the manner in which the concessional contributions are made to the fund.

Valuing a member’s balance in a super fund has always been an issue and the accounting standards provide general guidance on what values should be included in the accounts to represent the affairs of the fund.

While there may be some variation in the methods used to value assets between the larger superannuation funds there is no requirement for the smaller funds to meet these standards.

This may mean that depending on the type of fund of which a person is a member, the balance provided may not accurately represent a reasonable value of their account. It would seem to indicate therefore that consistent valuation methods would be required if the balances of all fund members are to be reported consistently.

There are a number of strategies that could be used to stay under the $500,000 cap if the current rules stay the same.

It could be possible for someone to withdraw amounts from super by 30 June in one financial year if the amounts are unrestricted non-preserved and then early in the next financial year recontribute them if they satisfy the contribution tests.

Also, another strategy could be to delay non-concessional contributions over a number of years to remain under the $500,000 balance cap for as long as possible.

In other cases where pensions are payable an increase in the amount of the pension, particularly where it is tax free, could keep the balance below the $500,000 limit.

One strategy proposed is the use of superannuation contributions splitting to a spouse to remain under the $500,000 cap. While this strategy may work, it would depend on when the split occurs and how the cap is calculated.

The reason is that under the current legislation only concessional contributions can be split, and in most cases after the end of the financial year in which they are made. This would appear to be a longer term solution to remain under the caps.

The announcement in the Budget does not indicate whether the $500,000 is to be indexed. It would seem reasonable to index the $500,000 to take account of income accrued on the account and to retain the real value of the member’s retirement savings as part of the measurement.

Other issues with valuation

Other issues that need to be addressed include whether defined benefit funds will have notional balances to be used in the calculation.

As a general rule defined benefit funds, such as some public sector funds, provide benefits directly from consolidated revenue and do not have an account balance.

Case Study

Let’s have a look at a case study on the benefits of remaining under the $500,000 cap for as long as possible.

Kathy is a self employed florist with no super savings. From 1 July, 2010, she intends to make the maximum concessional contribution to super each year, until she retires at 60. Assuming Kathy’s super returns are around 7 per cent, what increases can be expected?

Figure 1 illustrates Kathy’s projected account balance if she was restricted to a $25,000 cap, her account balance if she was able to access the $50,000 cap and the difference between the two scenarios.

We can see from figure 1 that the benefit of accessing the higher $50,000 cap is an increase of up to $227,679.

What did the Henry Tax Review recommend? To permanently retain the $50,000 concessional contribution cap for those aged 50 and above.

Minimum pension payments for account based pensions

The transitional measures to half minimum pension payments for account based pensions are expected to cease at the end of the financial year. However, if you read the Budget announcements, you won’t find any mention of the measures.

Was it in the Budget? No, the absence of a Budget announcement to continue the transitional measures has been taken as an indication that the measures will cease on 30 June, 2010.

Increase in Superannuation Guarantee

One of the other proposals in the Budget was to increase the Superannuation Guarantee (SG) rate from 9 per cent to 12 per cent by 2020. The proposal is to increase SG from 1 July, 2013, in increments of 0.25 per cent in the first two years and 0.5 per cent thereafter until 2020.

Case Study

As illustrated in the following case study, small increases can make a vast difference.

Neil is an office administrator who commenced working on 1 July, 2010. Assuming he is on a salary of $45,000 which increases by 4 per cent a year, doesn’t make any voluntary contributions to super and his super returns are around 7 per cent, what increase in account balance is expected?

Figure 2 illustrates Neil’s projected account balance while the SG remains at 9 per cent, his account balance operating under the proposed increases to SG, and the difference between the two scenarios.

Figure 2 highlights a potential increase in account balance of up to $723,423 if the Government’s proposed increase in SG is legislated.

What did the Henry Tax Review recommend? The Henry Tax Review recommended retaining the SG rate at the current level of 9 per cent.

Uncertainty on how the $500,000 cap will be calculated will plague the development of strategy until we see the legislation and gain some insight into its operation. On the bright side, the $500,000 cap may lead to advisers having another tool in their strategy kit.

In contrast, the proposed increase in SG contributions is relatively straightforward. We can quantity the benefits of this measure, which should result in a higher super balance.

Both measures present an opportunity for advisers to increase their clients’ retirement savings, which is the key ingredient for a very happy client.

Graeme Colley is national technical manager, advice and distribution at ING Australia.