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Counter intuitive Super Guarantee changes

by Meg Heffron

The Government has long said it will increase compulsory super via raising the Superannuation Guarantee rate from 9% to 12% over time and it introduced the relevant legislation to the House of Representatives last Wednesday (2 November 2011).  The first increase (from 9% to 9.25%) will happen in 2013/14.

The same legislation will extend the age at which Superannuation Guarantee cuts out from 70 to 75.  In fact, in a press release issued on the same day, the Minister announced that the Government would actually even scrap this upper age limit from 1 July 2013.  (Does this sound like Ground Hog Day?  If so, that might be because you recall a Private Member’s Bill put forward by Bronwyn Bishop earlier this year which proposed exactly the same change.)

Assuming the legislation is passed unaltered (not guaranteed since it is contingent on the mining tax bills being passed) this means that after 1 July 2013, anyone who is working enough to get Superannuation Guarantee (more than $450 per month) will be entitled to compulsory superannuation contributions regardless of their age.  (The usual requirement for anyone over 65 to do 40 hours of paid work over a 30 day period doesn’t apply to compulsory contributions so even quite modest amounts of work will trigger Superannuation Guarantee contributions.)

Unfortunately there is no proposal to amend a key flaw of the Super Guarantee rules at the same time – the lack of an “opt out” mechanism for those who will exceed their contribution caps.  There is a small but growing group of people – particularly those with more than one high paying job – for whom compulsory super alone causes them to exceed the $25,000 limit on employer contributions.  When the previous system of limiting superannuation concessions (“Reasonable Benefit Limits” back before 2007) was in place, those who had already hit the upper limit could arrange for their compulsory super contributions to cease.  No equivalent provision exists now.

It’s also interesting that yet again we have policy that assumes whether or not someone is working is a good indication of whether or not they should be cut out of further superannuation tax concessions.  An 80 year old with $20m in super, holding two board positions each paying $100,000 pa will be able to continue having $24,000 (12% x $100k x 2) contributed to super under this measure.  On the other hand, someone who has recently turned 65 and retired with $300,000 in super but wishes to transfer existing assets into their fund will not be able to do so. 

Isn’t there something wrong with that picture?

Personally I am convinced that our experiment with limiting superannuation tax concessions by focussing on how much can be put in within a particular 12 month (or 3 year) period has failed.  It’s not as complicated as the pre-2007 system but it’s still way too complicated to be called “Simpler Super”.  More importantly, it can’t accommodate the fluctuating earnings patterns (and therefore fluctuating ability to contribute) of people in the real world.  Perhaps it was designed for the public servants who write our legislation? The Government’s proposal to allow anyone over 50 with less than $500,000 in super a higher ($50,000) contribution limit recognises this but it is one small change that will affect a particular group of people who happen to have their high earning period at the right time – after 50.

Curiously, I believe it is small business owners who have the best deal of all taxpayers at the moment.  In recognition of the fact that they often miss out on making super contributions in the start up phase, small business owners (via special capital gains tax concessions and associated extra non-concessional contribution limits) are able to add large amounts to their super at or near retirement.  Effectively, they have a crude proxy for a lifetime contribution limit. 

Isn’t this the fairest system of all?  If we can manage it for small business owners, why can’t we manage it for all taxpayers?

Unfortunately even a great many who might consider themselves small business owners miss out:

  • those who don’t own quite enough of the business but are nonetheless significant contributors to its success and who may have made sacrifices in the start up phase which compromised their super contributions; or
  • those who are successful enough to see their small enterprise turn into something that makes them no longer “small”.  (While this may mean they are able to make large super contributions once this level of success has been achieved, it doesn’t give them back the years they lost in the beginning).

We’ve tried limiting benefits (too complicated) and we’ve tried limiting annual contributions (poorly targeted).  Perhaps we should have another go and look at limiting contributions over a taxpayer’s lifetime.  Now THAT would be long term policy.  Don’t bother watching this space.

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