Insights

From the Editor

From the editor: Unintended consequences of concern

A further month has passed since the federal government announced the scrapping of its proposed $500,000 lifetime non-concessional contributions caps, allowing more time to analyse the situation the sector will face beyond 1 July next year.

As I wrote last month, the proposed yearly non-concessional contributions cap of $100,000 still came with limitations as its use is only available to individuals with a superannuation asset balance of less than $1.6 million.

And while I said the balance limit imposed allows Treasurer Scott Morrison to ensure SMSFs are not used to transfer large amounts of wealth to the next generation, what other message does this $1.6 million threshold send?

Either deliberately or not, a message about adequacy is also inherent in the asset limit that could well be inappropriate and may contribute additional administrative complication to SMSFs.

By setting the $1.6 million limit, there can be a perception this is the magical figure we all need to reach that will allow us to have a comfortable self-funded lifestyle in retirement.

Your guess is as good as mine as to how accurate this watermark may prove to be. However, as I have made the point before, by the time we realise this is not an adequate level of savings to self-fund one’s retirement, it will be too late and future generations will be left to fund the masses of people left to rely on the age pension for an income stream as they ride off into the sunset.

One budget item that hasn’t been changed is the proposed reduction in the concessional contributions cap of $25,000 a year.

In regard to the adequacy debate, to a man anyone involved in the superannuation industry, apart from perhaps the brains trust at the Grattan Institute, has argued for higher contributions limits rather than lower ones.

This thought process applies whether or not we’re talking about concessional contributions or non-concessional contributions or the superannuation guarantee levy.

So it goes without saying the new $25,000 cap flies in the face of conventional wisdom.

But again there might be an unintended consequence with this move as well that involves increasing the risk involved with SMSF portfolios – a scenario I’m sure the government would not like to actively encourage.

The use of limited recourse borrowing arrangements (LRBA) remains one way of circumventing the contributions cap limits as the acquisition of assets via this method is not included as part of the cap.

And already some industry sources are saying the popularity of LRBAs may see a pick up for this very reason.

If so, the government might be inadvertently pushing SMSF members to walk a precarious tightrope of increasing the level of risk the fund incorporates without going too far and have everything turn pear shaped.

What’s more, the use of LRBAs is the one thing that may encourage property spruikers to find a louder voice, something regulators have been so vigilant to stamp out.

These scenarios and attitudes may well not play out, but if they do, the elected officials in Canberra will only have themselves to blame for once again showing an incredible lack of foresight.

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