In the May federal budget, the government proposed new superannuation rules that will allow individuals to refund any excess non-concessional contributions that may have been made to their retirement savings.
While the final details as to how the process will operate are still to come, in particular the manner in which the income associated with the additional contributions will be treated, the principle behind the move remains sound.
For starters it means the treatment for all excess contributions, be they concessional or non-concessional, will be consistent from here on in.
But although it is a very positive development, continual assessment of the contributions caps, namely the amount of the caps themselves and how well they work, is still needed.
The new refunding rules have effectively eliminated the unfair nature of the previous excess contributions tax arrangements and, according to some commentators, have allowed a tax deferral opportunity, which taxpayers can take advantage of to get more money into their superannuation funds.
Effectively, the proposed strategy has some appeal if SMSF members, or any other superannuants for that matter, can generate returns from the excess higher than their marginal tax liability plus interest charged before it has to be paid back.
But there is one inherent flaw that highlights the system still has a long way to go and that is fund members have to break the rules in order to gain an advantage.
Is this not a strong enough indication to the legislators and regulators that the cap limits themselves are still too low?
If this isn’t enough evidence to support the argument, then perhaps the concern about limited recourse borrowing arrangements (LRBA) will help.
While LRBAs are not what you could consider prevalent among SMSFs, concern around their effect still remains as well as an anticipated increase in their take-up.
And of course one of the more compelling arguments to employ an LRBA in an SMSF is that funding of the assets purchased under these arrangements is not included as part of the contribution limits.
If SMSF governance associated with LRBAs is a worry, especially in the context of related-party zero interest loans, then surely making them less attractive by raising the contributions caps would be of benefit.
But even if you choose to ignore these arguments, industry research into the adequacy of the nation’s retirement savings continues to point out the need to allow an increased level of superannuation contributions if we are to self-fund our retirements.
In fact, the latest report compiled by Deloitte Actuaries and Consultants, “Adequacy and the Australian Superannuation System – A Point of View”, has suggested we will all have to contribute anywhere between 5.5 per cent and 7.5 per cent to our superannuation savings in excess of the 12 per cent superannuation guarantee in order to fund a comfortable lifestyle in retirement.
Obviously this cannot be achieved without changes to the current cap levels.
As the old saying goes, Rome wasn’t built in a day and it would be completely unreasonable to think contribution levels could be changed so significantly with just one stroke of the brush.
But perhaps the legislators can begin by having a look at measures such as allowing catch-up payments for those approaching retirement or excluding superannuation guarantee payments in cap assessments.
These may only be small steps, but a series of them can help bring together a more sensible all-round approach to finding a better solution regarding super contributions and in turn the ultimate goal of self-funded retirement.
