The Worst of All Possible Systems

The Government has announced that for 2012/13 and following financial years, a special concessional contribution cap will apply to super investors then aged 50 or more.  This replaces the current transitional contribution cap which will cease to apply from 1 July 2012.

The proposal is that if a super investor is aged 50 or more during the financial year and has super assets of less than $500,000, then a $50,000 concessional contribution cap will apply instead of $25,000.

The key problem with this proposal is the $500,000 requirement.  The age test is simple to apply and should present no issues.  However, the $500,000 limit will present very significant issues.  Additionally, it is not proposed that the $500,000 limit be indexed.

The Treasury is also thinking about how the $500,000 requirement will be implemented and administered, and is currently seeking the comments and views of interested parties.  

Treasury has proposed three different options.  The key issues for all options are: whether to extend the special contribution cap to super investors who have already accessed or are accessing their super;  when is the $500,000 requirement to be satisfied;  what is to be included in the $500,000 requirement and how to ensure that funds use current market values.

1st Option - Includes super investors who have accessed their super balance 

The quid pro quo for inclusion of super investors who accessed their super balance (eg by making lump sum withdrawals or commencing a pension), will be that the amount of the super benefit accessed will have to be added back to determine the total super balance of the super investor.

The add back of the accessed amounts (both lump sum and pension payments) will be indexed.

A minor issue is whether the add back should be retrospective to include all previous payments, only payments made since 2 May 2010 (the date the policy was announced), only from date of the introduction of the legislation, from 1 July 2011 or from 1 July 2012.

 
2nd Option - No add back of prior drawdowns

This is the same as the first option but without the adding back of the previously drawn down amounts.


3rd Option - Simply exclude from the special caps anyone who has accessed their super

This option simply means that if a super investor has accessed their super (eg by taking a super lump sum or commencing a pension), they will be ineligible to access the special contribution cap.

Under the 1st and 3rd  options, financial hardship and compassionate amounts will not be added back (1st option) or will be disregarded (3rd option)

 
When is the $500,000 balance to be determined?

Given that super balance information is not instantaneously available and generally only determined on particular dates, Treasury suggests that the super balance be as at 30 June either before the relevant year (or 12 months earlier).

For example, to determine whether a super investor in respect of the 2012/13 financial year satisfies the $500,000 requirement, you will look at their balance at 30 June 2012, or alternatively, 30 June 2011.

Given that most self managed super funds will only provide 30 June balances 6 to 8 months after balance date, using the 30 June balance 12 months preceding the relevant year is better.

What is included in the $500,000 balance requirement?

For all super funds, the balance will be determined by including all super interests and also the value of any reserves.  The need to include reserves is obviously to overcome the artificial manipulation of balances.

Additionally, all fund assets will have to be valued at current market values.  Market valuation is required to preclude artificial manipulation of fund balances.


SUPERCentral View

The 2nd and 3rd options are simplest to implement.  The 2nd option will simply encourage super investors to draw down their benefits to satisfy the $500,000 threshold.  The 3rd option materially disadvantages super investors who have commenced a T2R strategy.

The 1st option best achieves the Government’s policy but will be very costly and very difficult to administer.  This option involves tracking accessed benefits and then indexing them for possibly 25 years.  A previous system which required tracking of benefits and indexing them failed.

Relying on a super balance which is 12 months old is better than relying on a balance immediately preceding the current financial year.  If the latter is used, then super investors will have 3 or 4 months in which to make a decision as to whether they satisfy the $500,000 balance and whether they wish to take advantage of the higher concessional contribution cap.

The problem with the $500,000 requirement is that an error of $1 can have a materially adverse impact.  If a super investor considers their balance to be $499,999 and makes a $50,000 concessional contribution, an error of $1 will mean that the $25,000 will now be counted as excess concessional contributions giving rise to a minimum tax liability of $7,895, and possibly more, if the excess concessional contributions are also counted as excess non-concessional contributions.

The sensible policy is simply to permit super investors who have attained age 50 to have a concessional contribution limit of $50,000.