The 2011-12 Federal Budget contained only minor superannuation changes because most of their reform plans are contained in their upcoming StrongerSuper and Future of Financial Advice reform packages, which are already well advanced.
By Alex Dunnin

KEY POINTS
The 2011-12 Federal Budget did not include major superannuation changes but nonetheless contained some fine-tuning adjustments. The major fine-tuning was the relaxation in excess contribution penalties and changes to the account-based pension draw-down amounts. Super fund members looking to see from where the major superannuation changes will come should look at the StrongerSuper and Future of Financial Advice reforms.

It has been many years since superannuation was the centerpiece of the Federal Budget, and the May 2011 budget was no different. Yes there were several adjustments to superannuation laws and tax administration rules but these were about fine-tuning the system, not major changes.

The government nonetheless has a major reform agenda planned for superannuation and financial advice but these have already been announced in previous years via major policy change statements rather than through budget programs.

These include the StrongerSuper reforms that include the SuperStream plan to simplify superannuation administration and the MySuper changes to encourage the development of simpler lower cost super funds. Complementary changes to financial advice through the Future of Financial Advice reforms are also in the pipeline and their progress is well advanced on this front as well.

These reforms come on top of the government’s announcement in 2010 to increase the Superannuation Guarantee charge from 9 to 12 per cent, phasing it in progressively between 2013 and 2019, and increasing from 70 to 75 the age at which employees will be eligible to receive employer paid superannuation contributions.

Increases to the age pension are just as monumental but these initiatives were announced in previous budgets albeit some additional top-ups have since been flagged as part of the carbon tax provisions.

Fine-tuning concessional limits

There are two types of superannuation contribution limits: concessional and non-concessional limits.

Concessional contribution limits are the thresholds below which people can make superannuation contributions from ‘pre-tax’ salary and still receive tax concessions. They are significant because contributions above these thresholds are taxed not at your Marginal Tax Rate but at the penalty rate of 46.5 per cent. The high rate is made up of the normal 15 per cent contribution tax rate plus a penalty charge of 31.5 per cent.

The limits are $25,000 per year for employees under the age of 50 and $50,000 for people aged 50 or more who have less than $500,000 in superannuation. The $25,000 limit is indexed but none of the other amounts or thresholds are indexed.

Problems have been found to arise for people who inadvertently exceeded their limit as the penalty didn’t just apply to the excess amount but the whole contribution. To address this anomaly the government has decided to introduce a provision so that if people breach their limit by less than $10,000 they can make a once-only application to the Australian Taxation Office for that excess to be refunded.

This new arrangement will however only apply to excess contributions that occurred from 2011-12. Excess contributions that occurred in previous financial years will still be subject to the same harsh penalties as before.

Non-concessional limits are thresholds below which people can make contributions from ‘after-tax’ salary. Contributions made this way are not however tax deductible. This limit is still set at $150,000 per annum but making a contribution this high triggers what is known as the ‘bring forward’ rule, which is that you can only make $450,000 in such contributions over three years.

If you trigger this rule you will most likely need advice from your accountant or financial adviser as the details are quite subtle.

Freezing the government co-contribution

In the previous 2010-11 Federal Budget the government announced the freezing of the superannuation co-contribution thresholds until 1 July 2012 at a matching rate of 100 per cent. This meant that for every eligible dollar contributed by a low income person the government will match that amount with another dollar. The maximum co-contribution available per eligible person will stay at $1,000 per year throughout this time.

At the time the government said that from 2012-13 this matching rate would increase to 125 per cent and a maximum $1,250 per eligible taxpayer and increase it again in subsequent years.

However in this 2011-12 Budget the government has changed its mind and decided to extend the co-contribution threshold freeze until 30 June 2013.

Low income earners super contributions rebate

The superannuation contribution rebate for low income earners will stay in place, so from 1 July 2012 people earning less than $37,000 per annum will be eligible for a tax rebate of up to $500 per annum in respect of their concessional personal contributions, ie contributions paid by them rather than their employer under SG arrangements. This threshold will not be indexed and the rebate will be paid directly into the individual’s superannuation account.

 Increased disclosure of contributions tax structure

Reflecting the complexity of superannuation contribution taxation arrangements, the government has also announced that from 1 July 2012 employers will have to disclose to their employees, on their pay slips or as requested, the amount of super contributions they are paying on their behalf, the tax nature they are paid under and when are these monies are actually deposited into their superannuation accounts. For example, are they salary sacrifice, when was the contribution deposited or is it outstanding and yet to be paid?

Reduce minimum account-based pension draw-downs

Fund members who have retired often transfer their superannuation into an account-based pension product. The advantage of these products is they are designed to pay a regular income stream to the retiree each month to supplement their other retirement income, such as an age pension.

Another advantage is retirees can use the money in these accounts as a source of capital and withdraw additional funds for special purposes, such as to pay for a holiday, home repairs, to buy a household appliance. However, because superannuation savings are intended to pay retirement living costs to supplement the age pension, the government has always been concerned that money in such accounts should not go untouched to act, say, as a de facto non-taxed savings vehicle for future generations.

To ensure the money in these accounts is actually used for its intended purpose, the government imposes what are known as minimum draw-down limits. For example, a new 65 year old retiree in 2007 used to have to withdraw at least 4 per cent of their account each year. This percentage minimum increased progressively until it reached 14 per cent per year for retirees aged 95 or more.

During the global financial crisis and the fall in account balances due to negative investment returns, retirees were concerned these minimum draw-down limits would result in their account balances running down too quickly. Responding to this situation, the government agreed to reduce these limits by half so that retirees would be allowed to withdraw lower proportions of their account-based pension funds and so preserve their capital while temporarily increasing their reliance on the government age pension.

Investment returns normalising in the years following the GFC meant the government could gradually increase these draw-down limits to their pre-GFC levels. The government has decided that by 2012-13 these limits should return to their standard levels.

Limiting the trading stocking exception  

The major principle governing tax deductions is that if an expenses is incurred in order to help you earn an income then that expense might be deductible against your gross income. While in most cases the principle is straightforward, for investment businesses it can lead to anomalous results if, for example, a super fund believes they are operating an investment business akin to being a ‘day trader’ and so if they experience negative investment returns they might attempt to claim such losses as tax deductions against their income.

The government has moved to close this loop hole and from 10th May 2011 super funds will no longer be able to attempt to claim such deductions as such losses will always be held on their capital account, meaning funds will be potentially liable to pay capital gains taxes.

Tax concessions for bank account savings

The favorable tax concession treatment for superannuation has often prompted questions whether other forms of savings are discouraged, particularly savings vehicles that are better suited to low income earners such as high interest online transaction accounts, debentures, bonds and annuity products.

Responding to this, in the 2010-11 Federal Budget the government announced that from 1 July 2011 low income earners will be eligible for a 50 per cent tax discount on their savings interest in these products where the interest is up to $1,000. This provision remains in place.

Senior Australian tax offset

A retiree older that 65 can earn up to $30,685 per year before they will be taxed. For couples the threshold will be $26,680 per year for each person making up the couple.

This income is in addition to any super benefits from taxed sources, meaning that for retirees the amount of tax-free income they can receive is continuing to increase.

Collectibles held by self-managed super funds

Self-managed super funds will be allowed to continue to invest in collectibles and personal use assets like artwork and stamps provided they are not used for the pleasure or personal benefit by the fund trustees. Collectibles currently held by an SMSF that cannot meet these new requirements must be sold within five years, ie by 2016.

The investment in the collectible must be independently valued and appropriately authenticated. It must also be insured in the name of the SMSF and be stored according to the conditions of the insurer. Trustees must also be able to reasonably demonstrate the commercial value of any lease or exhibition terms and conditions. Any existing lease arrangements with related parties must be terminated within five years.

Stronger Super

In 2010 the government announced a series of superannuation reforms under the umbrella of its StongerSuper program that they intend will promote greater efficiencies in how superannuation funds are administered and that they wanted superannuation providers to create simpler, lower cost funds that would be easier for fund members to understand.

The administration efficiency initiative is referred to as SuperStream and it refers to the promotion of more use of EFT transactions and electronic processing, simpler identify checking procedures and greater use of data protocols to enables super funds to resolve issues between themselves rather than requiring fund members to continually lodge more forms.

This initiative is on top of the already introduced superannuation clearing house for small businesses which has been introduced by the government in conjunction with Medicare.

MySuper refers to the plan to enable superannuation fund providers to launch funds that will only need to contain one investment choice and one insurance choice, enabling them to operate at very low fees – expected to be less than 1 per cent per year. To support this initiative the government has already brought it rules that allow funds to use what are known as ‘short form’ product disclosure statements.

Financial advice reforms

The FOFA reforms include a prospective ban on conflicted remuneration structures including commissions and volume based adviser rebate payments in relation to the sale and advice of retail investment products, including managed investments, superannuation and margin loans. The government is however yet to finalise whether these restrictions on commissions will apply to insurance commissions, especially group insurance commissions paid through super funds.

These conflicts of interest reforms flow from the government’s proposal to introduce a statutory fiduciary duty on financial advisers and so ensure they always act in the best interests of their clients.

The most controversial aspect in the FOFA reforms is the “opt-in” requirement that advisers should not continue to receive in perpetuity trail commissions from products and policies they have sold to clients with whom they no longer have an ongoing relationship. The expectation is that if these automatic commission amounts go down then it should result in lower fees, especially for members in retail super funds.

To make this happen, financial advisers will be entitled to receive trail commissions or asset-based fees for two years after which they must contact clients who will have to agree that such payments should continue. This provision will however only apply to new business and will not be retrospective.

Don’t overreact, get good advice

Like the case with all superannuation rule changes, employers and their employees should not overreact to them. If you think they impact you and you are unsure about them, talk to your super fund or see a financial adviser.

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