The million dollar question

He is in his mid-60s. She is in her late 50s. They own a home on Sydney’s lower north shore that affords them uninterrupted views of the Harbour Bridge. They drive matching late model Mercedes cars. What they want to know is what they should do about the ‘$1 million superannuation’.

Simpler super is emerging as a testimony to the power of the media.

The Government has not even launched an advertising campaign around the new arrangements, yet consumers have been galvanised by the phrases ‘$1 million’ and ‘tax free’.

Financial planners, accountants and superannuation fund executives may persistently refer to the Howard Government’s 2006 Budget changes to superannuation as the “simpler super” initiatives, but well-heeled baby boomers have got their eye on the prize — the opportunity to contribute a tax-advantaged $1 million to superannuation by June 30, this year.

Put simply, the 2006 Budget has made superannuation an extremely attractive investment vehicle — something that may explain the numerous reports of people selling investment properties so that they can reinvest the proceeds in tax-advantaged superannuation.

However, the day-to-day reality for financial planners is that the simpler super arrangements have really only acted as a trigger — generating higher levels of interest.

Many planners see it as ironic that their clients might have activated similar strategies before the 2006 Budget, if only they had asked for the relevant advice. It took the publicity surrounding the 2006 Budget and the mere mention of $1 million to provide the necessary motivation.

As one senior planner put it: “The irony of simpler super is that while it has made our jobs simpler, that doesn’t mean clients will find superannuation any easier to understand.”

It is a measure of the impact of the 2006 Budget changes that bureaucrats within the major superannuation regulators — the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) have noted the change in behaviour.

At a recent Sydney seminar, APRA’s general manager, specialised institutions division, S.G.Venkatramani pointed to the manner in which ‘simpler super’ was “expected to motivate individuals to move more of their wealth into the superannuation system, especially as they get closer to retirement”.

“The current tax incentives that exist for superannuation, as well as the removal of tax on exit being introduced as part of the simpler super changes, are likely to lead members to take advantage of the small window to contribute up to $1 million by June 30, 2007,” he said.

Venkatramani said people were also likely to continue contributing at higher levels beyond the June 30 cut-off because of the member-based (rather than employer-based) contribution limits that would apply from 2007.

“Once the merits of drawing benefits from a taxed super fund that will not even feature in your tax calculations are fully appreciated, the advantage of maximising the super nest egg ahead of other forms of discretionary savings, especially close to retirement, will drive the surge in contribution,” he said.

Venkatramani then looked at the bigger picture and said that it was very likely that the simpler super changes would accelerate the growth in superannuation assets.

“Currently, Australian superannuation assets are about 100 per cent of the national GDP,” he said.

“The simpler super plan should mean that the current projections of superannuation assets as a percentage of GDP will be revised materially upwards.”

Venkatramani made the important point that it was not only the Budget changes that had made superannuation attractive, with other measures also attracting peoples’ attention such as transition to retirement (where those aged 55 or more could take a non commutable pension with a tax rebate, and simultaneously salary sacrifice into super), co-contribution (whereby those under low to middle incomes could access tax-funded benefits through voluntary contributions), spouse contribution (whereby contributions could be made in respect of low income spouses, with tax benefit) and contribution-splitting (contributions made could be split with a non-retired spouse to benefit from the non-retired spouse’s tax-free threshold and address excess RBL issues; post-July 2007 the same device could be used by splitting with the older spouse to accelerate access to tax-free super).

Of all the Government departments and agencies involved in superannuation, the ATO has probably been most acutely aware of the change in consumer sentiment that has been driven by the Government’s simpler super proposals.

The ATO’s deputy commission of taxation, Raelene Vivian, revealed there had been a spike in the number of self-managed superannuation funds registered since the Government brought down its 2006 Budget.

“The actual increase in registration numbers since the Budget announcement has been around 20 per cent, higher than the average registrations over the last few years,” she said.

What neither bureaucrat could or would have said is that while the ‘simpler super’ regime has created some great one-off opportunities for well-heeled baby-boomers, the so-called $1 million window of opportunity is not one they should utilise unless they are fully informed.

This was certainly something made clear when Mercer Wealth Solutions earlier this year urged people to ensure they were fully informed.

“Australians are beginning to realise something about the super proposals announced in the May 2006 Budget,” Mercer said.

“It’s a dawning appreciation that while the ‘simplified’ and ‘streamlined’ super system may make the rules easier, the task of making effective super decision for retirement remains inexorably difficult.

“The anxiety might just increase over the next four months too. Why? Well, many eligible members are currently grappling with the idea of making an undeducted contribution (that is, post-tax) of up to $1 million to their super fund. These undeducted contributions can then be accessed tax-free as a lump sum or pension at age 60,” it said.

Mercer then added the clincher: “The catch is the offer is a ‘one off’ and ends on 30 June, 2007.

It said despite the radical makeover of superannuation, navigating the rules remained difficult, and for those wanting to make up to $1 million in undeducted contributions by June 30, there were many associated issues for think about, such as:

~ whether they have any debts that should take priority over an undeducted contribution;

~ whether preservation of the funds until age 60 is an issue;

~ how much they want to live on in retirement and how much they should contribute now;

~ When they want to retire and their current age;

~ whether they meet an applicable work test for making an undeducted contribution; and

~ their current income, non-personal investments and personal tax situation.

Mercer said in many respects, the opportunity was likely to entice pre-retirees with wealth outside the super system who were at the top end of the tax scale.

“The key consideration for these members will be how to sell bricks and mortar by the deadline, and the tax issues of disposing shares and managed funds and transferring them to super.”

Port Macquarie-based financial planner Julie Berry is one of those who believe that the publicity surrounding the simpler super proposals, and particularly the $1 million figure, have been responsible for arousing new levels of interest in superannuation.

However, as Berry makes clear, many clients initially misunderstand that key elements of the simpler super regime were already available to them under the pre-existing arrangements.

“The queries that we are getting is that they think that suddenly a window has opened up where they can put money into superannuation and not pay the 15 per cent contributions tax, whereas you have actually been able to make undeducted contributions for a long time,” she said.

“They think that the tax-free part of it is something new but, in reality, that may have already been the case for the average client.”

“Those are the two main things we are getting queries about,” Berry said.

“Interestingly, when I first heard about it, I thought you’d get a lot of people saying, ‘You beauty, I’ll take all my money out and run away and do something different’, but more people are looking to put money in than pull money out in my experience,” she said.

However, Berry and other financial planners confirm that the simpler super initiatives have had the effect of wooing some clients away from property investment.

“We are getting clients coming in who are saying, ‘I’ve decided to sell my investment unit into superannuation to take advantage of the million dollar window’, and it’s a case of talking to them and deciding whether that is the right thing to do,” Berry said.

The other reality to flow from the changes is that while the $1 million figure may be the initial attraction, few clients actually have the capability of reaching this figure.

“I have looked at a couple of high-net-worth people lately, and we are seeing more money triggered by this,” she said.

“I have had a couple of clients with the maximum, but most of them are under that.

“A lot of high-net-worths are considering borrowing, but people need to remember that they can still put in after June 30, it’s just that they can’t put in quite as much — it becomes more a planning issue,” she said.

Berry does not see self-managed superannuation funds as the answer for everyone looking to take advantage of the window of opportunity, but believes that those with, say, a commercial property, might find establishment of a SMSF a useful device for ensuring that the value went into super.

Interestingly enough, Berry said it had been older people — “people who did not realise they could do stuff like this” — who had demonstrated most interest in the new regime.

Monitor Money adviser Chris Murray confirmed that while a number of clients had rushed to make enquiries about the simpler super arrangements, those enquiries had sometimes been based on misconceptions.

He said it was in those circumstances that planners had to explain the basics and go back to first principles.

“In general terms, I’m not seeing anyone going out on a really big limb, because once you run the numbers per case you tend to throw reality at them,” he said.

“You have to throw reality at them, look at the capping restrictions and take that element of panic out of the equation which tends to be associated with the $1 million,” Murray said.

“The point is they could have put that money in any time before the last Budget, and it did not seem to be an issue then,” he said.

“Where these panics have begun you try and hose it down a bit and get back to the basics.

Murray confirms that some clients have looked to convert from property into superannuation, but makes the point that many of them were looking to make such a move in any case.

“I’ve had a client sell down a house in Sydney worth around $3.5 million. He had been looking to downsize for some time, and he had blown his super in the past, and he put $2 million into super and down-sized to a $1.5 million unit, and now he’ll benefit from tax-free super,” he said.

“It’s a bit more of a wake-up call around super, and while it’s being billed as simplified, it isn’t necessarily so, but it does actually reveal an end game for when you reach 60,” Murray said.

“There is an awareness of this, but I have not seen drastic things going on.”