Retirement planning policy watch

It’s important to be cognisant that any one of the following proposed changes may happen in the near future. Being aware of these issues, as well as the long-term objective of the Government’s policy, can ensure that when a financial plan is implemented now it is resilient in times of political and legislative change.

Social security

The Government has consistently recognised that social security remains the ‘bread and butter’ of Australian retirement policy.

History has shown shifts in the application of means testing for social security purposes. Recently, the asset taper rates were changed to allow, in theory, more people to access the age pension.

The income test remained unchanged until this Budget. In this year’s Budget, it was announced that salary sacrifice contributions would be included in the expanded definition of income.

This will affect income support payments for people below age pension age, family assistance, child support, Government superannuation co-contributions and financial and retirement savings assistance delivered through the tax system. This may have the effect of decreasing the social security net.

While one can’t predict with exactness what lies ahead, given that social security is an expense on the Budget balance sheet, we could expect to see a few changes to means testing, but with the long-term view of only targeting those near the poverty line.

Superannuation guarantee

On the superannuation guarantee (SG), Nick Sherry, the Federal Minister for Superannuation and Corporation Law, has stated the Government has not supported raising the SG amount from 9 per cent to 15 per cent because it will cost $6 billion.

Nevertheless, the Government has not given up on ensuring super contributions amounts rise beyond 9 per cent. According to Sherry, there is a range of solutions and models that are presented to the Government “every day of the week”.

One method presented by a number of groups that could possibly be introduced in the future is the soft compulsion option.

Soft compulsion is a method to increase retirement savings by automatically increasing the individual employee’s superannuation contributions and reducing the their wages accordingly.

The soft part of these arrangements is that employees can opt out of these additional contributions. A number of countries (the United States, New Zealand and the United Kingdom) and some Australian employers are already implementing this type of arrangement.

A number of other technical changes to the SG could be made to ensure contributions are paid on pre-salary sacrifice income as well as ensuring SG and salary sacrifice payments are paid by a common deadline.

Furthermore, the Government could legislate to require that all employers provide salary sacrifice arrangements when and if requested by an employee.

The effectiveness of SG policy is based upon the assumption that a person is employed earning a decent income over a long period of time. If there is no sustained employment, or even a break in employment, accumulated SG could be insufficient.

There are a number of groups in society who have interrupted working careers, a high concentration of casual work or are low paid. SG policy arguably does little to help in those situations.

In order to ensure the non-SG receiving groups of the community have enough retirement funding through super, other non-work based changes may need to be implemented.

For example, the Government could consider increasing accessibility to the Government co-contribution by increasing the income threshold as well as extending it to those beyond the workforce. It could also consider abolishing the work test for super contributions beyond age 65.

Self-funded retirement

The Government has provided a number of significant incentives to fund retirement through superannuation.

The pinnacle of the ability to choose and control your own retirement destiny is through a self-managed super fund (SMSF). But as most know, doing it yourself doesn’t necessarily equate to doing it properly.

There is a real concern over the lack of trustee knowledge and understanding and appropriateness of investment strategies. Most would agree that a trustee declaration stating they have a detailed understanding of the Superannuation Industry Supervision Act (SIS) works only in form, not in substance. Most would also agree that in reality, a SMSF trustee relies on professional advice.

In this respect, what we could and should expect to see is further clarification on investment restriction issues and Australian Taxation Office (ATO) publications that reach beyond the issues summarised in the published ATO rulings.

For those who practise in this space, the real difficulty with SMSF investment rules is the interaction of the provisions with each other. Applying the rules to each case requires a complete application of all the rules, this is a difficult task.

International competitiveness

One of the challenges Australia faces is the attraction and retention of foreign funds invested in Australia.

In regards to transferring foreign super funds into Australia, the Senate Standing Committee on Economics in its inquiry into simplified superannuation legislation stated that it is preferable to encourage these individuals to transfer their super benefits to Australia rather than keep them overseas. It further recommended that the Government consult with the industry to develop anti-avoidance measures to allow bona fide overseas transfers in excess of the non-concessional caps.

In its pre-Budget submission, CPA Australia argued that the risk of this was low, due to the difficulties involved with residency, termination of employment, taxation and payment rules, compared to the importance of allowing, and encouraging, expatriates to consolidate their retirement savings in Australia.

If measures were put in place to allow foreign super transfers above the caps (without any tax penalty), this would be a welcome change, as it may attract significant amounts of self-funded retirement money.

Virakone Sengchanh is a technical research analyst with Centric Wealth.