Is simpler super here to stay?

It is hard to think of any Government policy that has been changed so much so often as superannuation. Well, perhaps industrial relations.

Successive governments have changed the rules so often that there is no doubt our current superannuation system is complicated — so complicated it has probably scared many people away. It may explain why there is $8 billion plus of unclaimed super lying around.

Calculating ETPs, tax regimes and other super requirements has created a complex industry so, in many respects, it was pleasing that the Government committed to ‘simple super’ in the May budget.

This is good news for everyone. My view is that people, previously scared away from seeking financial advice by the complex nature of super, may be more inclined to use it when they hear of the benefits.

In addition, many advisers who have kept away from super in the past to avoid compliance risks due to complexity, may be encouraged to pick it up again.

However, the concern is that the Government can change the super rules again so what is proposed today, may change by the time an individual is ready to retire. After all, it has been a financial and political football in the past.

Therefore, we can only hope that future super changes will be fine-tuning of a simpler system, not wholesale rewrites adding back in complexity.

Speaking of fine-tuning, the Treasurer recently announced some to his ‘simple super’ statement on Budget night. Again, there is good and bad news.

The good news. There was no change to some proposals such as:

~ abolishing RBLs;

~ abolishing compulsory cashing;

~ lump sum withdrawals and pension payments from a taxed source being tax free for members aged 60 and over;

~ lump sum death benefits being tax free for dependants (the definition of dependant has now been confirmed as meeting the taxation definition); and

~ TPD payments being tax free for members 60 and over.

These measures are all positive for clients and advisers and they start to make super very attractive again as an investment vehicle.

What did change most recently was the undeducted contribution cap that was previously proposed.

Again, a welcome change. From May 10, 2006, until June 30, 2007, clients will be able to contribute up to $1 million to super. This has been introduced as during the consultation period people requested transitional arrangements.

After this period (that is, July 1, 2007) the $150,000 annual limit on undeducted contributions cuts in. The Government paper also further clarified what counts towards the cap — spouse contributions count and government co-contributions are excluded.

In addition, they went back on the initial averaging provisions to an extent as they have extended this measure only to people under 65. (Before there was no distinction based on age.) The work test also has been considered when averaging as many people in the industry clearly had doubts about how this would work and its overall practicality.

The new view taken in the recent Budget paper is that the work test will only apply when the person makes the contribution — which they would satisfy as they would be under 65.

People aged 65 will not be able to use averaging which is not good news — especially as some people may still be working and may wish to realise assets upon retirement. This doesn’t really help in terms of an ageing population.

One other chestnut is the implementation (which has been described as another surcharge) of the undeducted contribution cap. The Government has waived the refunding of contributions and although it has said that the tax liability imposed for beaching the cap will be the individual’s, it has allowed the individual to ask the fund to pay the liability — many people may adopt this approach which means the fund is stuck with another administrative function.

One of the big wins was that self-employed people will have the same general rules as employees for invalidity payments from a super fund from July 1, 2007.

Another area that was further clarified was the calculation of the pre-July 1983 component. In the previous Budget paper there was no information about timing. This component will need to be calculated as at June 30, 2007, although super funds will have an extension of time to calculate until June 30, 2008. This may be a good prompt for advisers to consolidate super accounts with a pre component.

Employer ETPs will not be caught up in the same rules and will have no crystallisation of the pre component.

A couple of other additions to the mix were that the benefits drawn from pensions or lump sums that include the new exempt and taxable components will need to have them withdrawn in proportion from July 1, 2007 (like what currently exists for pre and post). In addition death benefits paid to children as a pension will need to be paid out as a lump sum when the child reaches 25 (although it will be tax free).

It still all sounds pretty complicated but for those who have worked in the current environment, it is a welcome change. Clearly, there are parts the industry is not happy with and some complexity still exists.

However, if super is overall simpler, then it is good for everyone — provided future Governments don’t change the rules too much in the future.

Unfortunately, history often shows that regulation or simplification is followed by regulation or complexity in a new form. We can hope history is wrong.

Carly O’Keefe is a superannuation marketing specialist at Tower Investment Australia.