On 3 May, Treasurer Scott Morrison delivered his first federal budget, which included massive changes to Australia’s superannuation system, including a lowered $25,000 concessional contribution cap per year, a lifetime $500,000 non-concessional contribution cap and a $1.6 million transfer balance cap upon moving into a pension. Darin Tyson-Chan (DTC) and Krystine Lumanta (KL) hosted the fourth annual selfmanagedsuper SMSF Roundtable discussion to delve deeper into what these changes mean for the SMSF sector and the bigger implications of such measures.
DTC: Welcome to the 2016 SMSF Roundtable. Let’s kick off with the implementation of the proposed superannuation changes. Retrospective or not?
PB: You could argue the law’s not retrospective, but the impact on many will be retrospective. Having to obviously include your contributions from 1 July 2007 will have that impact. If I could start with my take on the budget, it clearly wasn’t a budget designed to repair the budget deficit because if they wanted to do that, they would have gone a lot harder in terms of the tax concessions. There was a $2.9 billion revenue gain, but certainly it was more about improving the integrity and fairness of the system. It’s hard to be critical of the government and I think we all agree with those objectives, but the concerning aspects are the retrospective nature of some of those proposals that were announced. So to answer your question, arguably not retrospective law, but certainly will have a retrospective impact.
GA: It’s blatantly retrospective. If you have a look at the $1.6 million pension limit, that’s going to impact people significantly, so they’re going to have to move from the pension side to the accumulation side of their SMSF, but if people don’t want to go to accumulation, they’re going to have to pull their money out of superannuation, which has quite a dire impact. Many people start with accumulation and they move all the way to pension and they’ve got sizeable balances and, let’s face it, $1.6 million is not a huge amount. So suddenly now they’ve got to go back and start to build two sides, which is an accumulation and a pension side.
Someone like SuperConcepts has to do a lot of work in terms of their administration processes and systems. I don’t think [the government] has really thought about this, but we’ll probably go right back and start using segregated assets, which then obviously has an impact on actuaries because you’re not going to necessarily need the actuarial certificate in order to work out the balance. Two-point-nine billion dollars is a shift, but a lot of that is going to end up in fixing up administration platforms if you think of just the SMSF side, but it’s not just SMSFs.
I don’t think anyone, even all of us in this room here, would know – I have no idea what my non-concessional component is because excess concessional contributions now become non-concessional. So then you’ve got the double whammy because that’s dropped down to $25,000.
TB: It is a backward move for sure. I phoned the ATO myself on behalf of a client last week to talk about their non-concessional contributions and I had some records in front of me. I was 45 minutes on the phone with the ATO and the figures were $125,000 less than what was in my records, so had I just gone, “ATO you’re right”, and said to the client, “sure, put another $125,000 in”, we would have actually exceeded [the cap], according to our records. I asked the ATO to give that to me in writing and they said no. So you can have it verbally, but there’s no written confirmation of what they’re telling us. It’s an administration nightmare and definitely impacts on what the clients have done up until budget night.
I also had an adviser phone me after budget night. He had completed an in-specie transfer of shares and the share registrar recorded the transfer date as 4 May and he’d actually triggered a CGT (capital gains tax) impact as well because he’d sold the shares into the super fund. So we’ve got 4 May, he’s over his $500,000 cap and he’s triggered CGT. So where do we go with that retrospective and reactive advice? What do we do there? There are a lot of impacts.
DTC: Has there been much reaction from advisers about how to go about processing this and adapting to the changes?
LW: Advisers are very, very concerned about the retrospective nature and, similar to what Tracey was saying, it’s going to be a major administrative nightmare to try to work out just exactly how many contributions have gone in. So we’ve been pointing clients to the ATO actually, and the ATO has recently updated their website to say that they’re relying on super funds to make sure that they lodge all their returns on time so that they can then in turn inform taxpayers of how much of the cap they may have potentially used up. I’m just wondering about the quality of the data, especially where people have consolidated and rolled over their super accounts. There’s a lot of concern.
GA: It’s actually good news for the advice industry because it’s going to be so bloody complicated no one will know what’s going on. The last few years have been pretty bland in terms of change and strategies. [Former treasurer Peter] Costello made super way too simple. Now we’re getting to a new age of advice, so it’s probably not a bad situation there.
DTC: The government has said the $1.6 million transfer balance cap will only affect 4 per cent of the population, but is this true?
AY: I don’t know how they [came to that], but it’s going to affect a lot more than 4 per cent of the taxpayers out there. I think they’ve been quite severe in getting that figure. I understand they’re probably trying to mirror what the ALP have in terms of the $75,000 earnings, but I’m not sure that they got full industry and taxpayer consultation on that $1.6 million. I suspect it’s going to be very difficult and then when you apply indexing, it’s a whole new complication. It’s what Grant said – the administration is just going to be so complicated that it will be a boon for advisers. So it’s good for advisers and the software people, but it’s not good for the people themselves.
GA: With the $1.6 million, at some point in time if you go over, you will either have to commute it and take it out, or you’re going to roll it back. Either one of that is dealing with a financial product, so you’re going to have to have a PDS (product disclosure statement) and a statement of advice, and then how does that impact all the accountants because as soon as they say “you need to roll it back or do this”, it’s actually giving a recommendation around financial product.
PB: It suggests that consultation is going to be pretty important here with the industry. A lot of these measures, as we discuss them, are quite complex so there’s going to have to be a consultation phase with the industry. You would think that the government will be looking to get these rules in place before the end of the calendar year, which means they’ll have to target the spring sitting because the industry will certainly want time to make changes to systems.
They’re certainly not going to make changes before it’s law, so if they miss that spring sitting, we’re into March next year, which doesn’t leave a lot of time to bring these things into place before 1 July. So working that back, we’re going to have a pretty targeted phase of consultation, but it’s important we have that because these measures are complex and we don’t want unintended consequences. We don’t want to impose any more additional costs imposed on the industry than we absolutely have to.
LW: It will be good to have a thorough consultative process because some of the questions we’re getting on the front line are things such as what happens if my spouse passes away? How does that work with the $1.6 million cap and then there are implications with divorce, so a lot of people are already thinking about these changes and we don’t have answers for them.
PB: The other one that springs to mind is if you’ve got two pension funds that together add to more than $1.6 million, which fund is going to pay the earnings tax? Now I haven’t even got my head around how that’s going to work. And who’s going to tell the fund? So there are those practical issues that would certainly need to be discussed with the industry.
AY: [Opposition leader] Bill Shorten has mentioned he doesn’t like the backdating of these measures, but he hasn’t actually specified what he would change.
TB: He hasn’t said he’ll rule it out. He just said the backdating.
AY: So everything’s in limbo.
LW: Which brings us back to the original question – would Shorten define the $500,000 as retrospective?
PB: I guess the interesting point about the $500,000 cap is it’s a gain to government revenue of about $500 million, so half a billion dollars.
GA: It’s nothing.
PB: In the scheme of things that’s not a big revenue gain, so presumably if they decide not to make it retrospective back to 1 July, then they won’t pick up that extra half a billion. But as we said, in the scheme of things that doesn’t seem to be insurmountable.
DTC: How optimistic or pessimistic are you that anything the industry says will actually change anything that’s on the table right now?
LW: I understand where you’re coming from and certainly history has shown sometimes it’s not quite consultative. But in relation to the $500,000 limit, we’ve been made aware recently that Treasury has indicated they will actually exclude personal injury payments from that cap and that’s resulted from a particular group lobbying on behalf of those people. So while yes, the consultative process may not be what you hope for it to be, I still think it’s possible to push for some changes.
GA: But why didn’t they consult in the first place?
AY: This budget for super, and I’ll put it out there, is it pro SMSFs or pro non-SMSFs? It seems to be a negative for SMSFs so the retail and industry funds have more of a say in what is coming in these changes, I suspect.
GA: But that’s going the exact opposite of what the coalition is supposed to be. They’re supposed to be pioneering SMSFs.
TB: It’s definitely negative SMSF, absolutely.
KL: Looking at the specific measures, firstly the reduction in concessional contributions to $25,000 starting from 1 July next year. What is the overall effect on the SMSF sector?
AY: It’s going to be much more difficult for people to accumulate and save for retirement if they’re down to $25,000 a year. I mean we’ve come down from over $100,000 from 10 years ago and it bounces down to $50,000 then $35,000 and now to $25,000. So if people haven’t saved for superannuation when they’re at pre-retirement age, they’re just going to have no hope. It’s a major disincentive for superannuation in general with that concession so low.
PB: When the caps come down it’s never a good thing and we certainly don’t like to see that, but given one of the other proposals here is the ability to carry forward your unused concessions, I think that’s going to be very useful because the statistics tell us not many people contribute up to their concessional cap. So I think the impact of reducing the concessional cap is less because we can now carry forward any unused concessions. It means that the shock of any reductions in the concessional caps is not as great.
AY: But that’s adding more complexity to the system. It will mean extra fees for these people that are going to carry forward their concessional contributions because they’re going to have to pay for tracking the cap over five years.
PB: They’re good planning opportunities.
TB: Removing the work test is another good thing because obviously at 65 there are lots of trustees and members that would like to make contributions over that and claim the tax deduction. So that’s going to be positive as well.
KL: What about the controversial $500,000 lifetime non-concessional contributions cap. Can it can be measured and recorded correctly?
TB: Not with the ATO at this point in time, given our feedback from them.
PB: It’s going to be very difficult from an administration perspective as well because we are providing that information to our clients. But of course if they’ve rolled money into their SMSF, they’re administering it and we don’t have a record of the contributions prior to that event. So there are all sorts of disclaimers we’re having to put on our communications. But this could be an opportunity for the ATO and the industry to work together in terms of sharing information. We know the ATO is reinventing itself and they’ve talked about the ability for the industry and perhaps the ATO to share data going forward. I don’t think we’re there yet and we may not be there for a while, but this might fast-track some of those measures. While everyone sees the ATO as the source of truth, I think it’s an opportunity to work with administrators and so forth to share that data.
AY: I suspect the ATO will have that information put into the portal for tax agents and clients. They may set it up on their myGov portal where people can see what super they have at year end. They’ll probably also have a record of the non-concessional contributions as well. That’s how I imagine it will operate.
TB: At what point do we get to that though?
DTC: There’s going to have to be a massive reconciliation. Is it possible to do that before 1 July 2017?
GA: Actually it applies right now. With LRBAs (limited recourse borrowing arrangements) a lot of the refinancing to bring the LVR (loan-to-value ratio) down to satisfy the safe harbour conditions in [Practice Compliance Guideline] PCG 2016/5 requires a deed of forgiveness, and a deed of forgiveness of debt actually is a contribution and should only be a non-concessional contribution. Now a lot of this stuff has to be done within the next six weeks and is actually being impacted by the non-concessional contributions cap because you can’t go and tell a client: “We’ll do a deed of forgiveness, it’s a non-concessional contribution.” What if the commissioner comes and pings you next year and says: “By the way, you have to pay 45 per cent tax on it.” So it has an impact from 3 May 2016 for a lot of people.
TB: I think if you’ve had the client for all of that period of time and you have all of the records for that period of time and you haven’t changed software for all of that period of time, you could do it quite easily. But how many firms are like that? Maybe you’ve had the clients, but we’re all going through a transition of changes with technology and that’s where the difficulty comes in.
PB: And it’s something that advisers are dealing with now because they may have clients that want to make further non-concessional contributions, but they just don’t know where they’re at.
DTC: Adequacy has not seemed to have entered the debate whatsoever. Is that a concern?
GA: Definitely. As chairman of the SMSF Members Association we’ve surveyed our members and a lot of the younger guys have said: “Why bother? I just don’t know how I’m going to get up to that situation.” And with the older guys, the theme is why touch my super now? The overlying theme is that it’s actually put a lack of confidence in super [because we were all originally] going down this track and doing everything right. Then suddenly the government comes and knocks on the door. My mum is 82 and dad’s lost his mental capacity. How am I going to tell her that she has to roll back some of her pension-phase assets? She doesn’t even know what a pension phase is, let alone going back to accumulation. It’s difficult at that age to say hold on, you’ve got to change your ways when you’ve had them going down this way for such a long time. It’s crazy.
LW: It’s a good point you make there, Grant, about how people feel about superannuation. Some of the comments I’ve received in the past few weeks from clients, especially in their 40s, is they think the $1.6 million is a bit of a farce because if you combine the $500,000 lifetime limit, the $25,000 concessional cap and the changes to transition to retirement, everybody is getting the sense they will never ever get to that $1.6 million cap. Overall there seems to be a growing uncertainty and maybe a feeling the super system is something they have less confidence about.
TB: My 91-year-old grandmother said to me after the budget announcement that anyone should be allowed to do whatever they want to with their own money they’ve paid tax on. She doesn’t have any superannuation, she’s on a pension and she said: “I just don’t understand what Turnbull’s doing about this.”
GA: It doesn’t make sense.
LW: There is a lot of confusion.
DTC: Are these budget changes counterproductive to enshrining the purpose of super in legislation?
PB: I think the message was that [the government is] going to make these changes, but by the way, super has got an objective so from now on there shouldn’t be these type of shocks in terms of legislative change. If we’re going to have an objective, then we also need to enshrine the mechanism to ensure the policymakers are going to refer to that objective, and we haven’t heard a lot about that. We’ve heard a lot about enshrining the objective, but yes, we also need a process to make sure the objective is considered by the policymakers.
I guess the other point is many in the super industry believe the objective suggested is not aspirational enough and it’s essentially placing super as a safety net in some people’s view. So there’s been a lot of debate around the fact that the objective needs to be more aspirational because the wording is important from a funding perspective. The more aspirational it is, the more the government’s got to fund concessions and incentives for superannuation. That’s what the debate’s been about.
DTC: How do people go about their excess contributions, particularly in light of the lifetime cap, and does it mean that there will be the ability to refund it immediately?
GA: I’ve always been of the view that unfortunately with the concessional cap now going down to $25,000, it will not be difficult for people to go into an excess position. Obviously we use a whole multitude of family members, but when we do go over the concessional cap, that’s when we have the non-concessional cap to fall back on. Who’s recording that? That’s obviously going to be important to criteria, but that now does have a sting in its tail, that we are going to have these excess concessional contributions that will be treated as non-concessional.
We’re going to have to record it all the time and, probably just going back to what everyone has said here, it’s just going to end up an administrative nightmare that will ruin the faith in superannuation. You’re going to have your accountant – oh, the first thing is the accountant’s going to say: “Well hold on, I’m going to have to determine your $500,000 lifetime limit. I’m going to have to go back to 2007 and find out what it is.” How is the accountant going to charge for that? The clients are going to say: “Well hold on, I’m not going to pay for that.” People don’t want to pay for compliance. They want to pay for strategies, but there are no strategies in there because it’s a compliance issue.
AY: That’s right. As you said, you’ll have to call the ATO, speak to someone for half an hour and you might still not get the right answer. How are you going to charge for that? Clients won’t put up with that. It will cause friction between you and your clients. How can you explain that to them?
PB: We’re getting lots of those requests now and as I said, we’ve made a commitment to provide that information as best we can to clients and we’re not charging for that. But there are situations where we have to go back through archive boxes because some of the stuff is not in the automated systems. There is a lot of work here and, as Grant’s pointed out, there will be a problem with those that have gone over their concessional cap and the excess portion that counts against their non-concessional cap, that’s sometimes not recorded in systems. So how you reflect that in your figures is going to be very tricky.
KL: On the reduction of the concessional caps, how will that impact on strategies like holding insurance?
GA: Really the theory should be the money you’re contributing to super that goes into insurance premiums shouldn’t be counted in the caps as far as I’m concerned. Because if you’re unable to contribute as much to super, then the argument is well if that’s going to happen, why wouldn’t you then do your insurance outside super? That again is another loss of faith in the whole system.
TB: Except that if you have it outside and then you have a payout of insurance, then you can’t get it into super. So you have to keep it in there so that the insurance proceeds come back into the superannuation account. If these $500,000 lifetime caps are remaining, then we won’t actually be able to get it in there, except maybe for personal injury, but that’s different again. The problem is we don’t really know exactly what’s going to count towards the $500,000 lifetime cap here so it makes it really difficult to advise clients from a strategy point of view.
PB: It’s not just insurance. I see it also in the LRBAs. If we’ve now got caps on the amount of non-concessional contributions you can put in as well as a lower concessional cap, I would suggest that some lenders are going to get a bit nervous about the ability of funds to be able to meet their loan repayments, given there’s limited opportunities perhaps to put money in, so that’s another flow-on effect as well.
DTC: If you’ve got less money that’s allowed to go into the fund to actually service the debt, what’s the impact on gearing strategies?
TB: LRBAs are still going to be a strategy that’s considered each and every time because we’re limited in how many contributions we can put in, so it is a valid strategy. I was talking to someone the other week around the impact of this on their serviceability and the liquidity requirements of these loans, because they’ve always said it’s rent plus the contributions, and so that’s how they’ve serviced it. But now if we’ve got a reduction in contributions, and I’ve been saying similar things to advisers as well, we really need to think about how many members we have in these funds.
If we’ve only got mum and dad right now, we need to start thinking about bringing kids into the funds and bring them in sooner than perhaps we would have done from a strategic point of view, simply for all of these considerations – for the gearing considerations, for the debt forgiveness consideration if we’ve got a related-party, non-bank LRBA. So we need to think bigger picture strategies, not just mum and dad strategies.
DTC: Is there are danger banks and lending institutions would lose enough confidence or faith to stop providing the facility altogether?
AY: They’re getting stricter already.
GA: I think it’s pretty safe. I haven’t seen anyone default on an SMSF loan to date. I think there’s a good opportunity with, for example, LendEx who is going in and doing peer-to-peer lending. That will create a nice little niche there for SMSFs.
TB: I don’t think we’ll see it completely fold from a bank perspective. There’s still a lot of strength in that. I just think that they have to come to better grips with what the changes are. They’ve never, from my experience from a serviceability point of view, looked at non-concessional contributions anyway so they’ve never factored that in. It’s always been the investment income in the SMSF plus contributions, so really we’re only talking about the difference between the concessional contributions that we have now versus what we’ll have post-1 July 2017. So I don’t think it’s going to have a massive, dramatic impact, but from a liquidity point of view, as advisers, we’re going to have to think about that a little more.
AY: You won’t be able to hold a bulky property in SMSFs anymore because what if you have renovations? That takes a lot of capital so how are you going to get that money into super then because you’re at your cap at the moment.
LW: Not to mention the estate planning issues with bringing the children in.
PB: If you’ve got a related-party loan, this budget announcement couldn’t come at a worse time because we’ve got the safe harbour parameters and, as Grant pointed out earlier on, some people have to make a payment to get that LVR down.
Although I’m a bit more optimistic. Maybe I’m just geared this way, but I’m not sure it’s going to have such a big impact on the SMSF sector. I think the getting rid of the anti-detriment provision is actually a positive for the sector. We know that’s discriminated against SMSFs for many years and I’ve spoken to members over that time that decided not to set up an SMSF because they didn’t want to lose that anti-detriment benefit. If that’s been a reason in the past as to why people haven’t moved into an SMSF, well that’s going to go.
The other point that I’d make is around the $1.6 million. I think it would be tempting for them to have an unsegregated approach as well, but the budget papers don’t say that. What I’m getting at is for an SMSF, you may not have to do anything if you’re above your $1.6 million. It just means that portion above the $1.6 million is in the accumulation phase essentially and you’ve got an unsegregated fund. The budget papers seem to suggest that you’re going to have to set up an accumulation account, but we don’t know what the means.
You would think they will allow people to have an unsegregated fund because some of these people, some of these funds have got properties and so forth which can’t be segregated. So you’d think if that’s the case, then if you’re in a self-managed super fund above $1.6 million, you don’t essentially have to do anything other than get an actuary at the end of the year and you become an unsegregated fund. That may not be the case in other types of superannuation funds where you physically will have to transfer that portion above $1.6 million into an accumulation account. We’ll have to wait for the details.
GA: That’s the worst of all worlds because if you don’t segregate down the track, you may well end up paying taxes for accumulation, but then you’d have to start drawing down a pension. At the end of the day, if you went back to the Henry report and just said okay, 7.5 per cent flat rate tax across the fund, why would anyone have a pension anyway? That would be the simplest. Why would you have a pension because you’d just draw the money out whenever you want. That would have been the simplest way of doing it, but that’s never seen the light of day.
TB: So much simpler, absolutely.
AY: The $1.6 million cap might even cause people to set up more funds. They might say that’s my pension fund, let’s move the excess to another SMSF and keep it simple from that respect, otherwise they’ll need an actuary, or we’ll need to track this $1.6 million, whether it was a pension or segregated or unsegregated asset. It might just be easier to have another fund to keep it administratively simpler.
GA: I know one guy’s got six pensions. One’s tax-free and the others are taxable. Which one is he going to pull out? Obviously you’d put the greatest taxable one back to accumulation. It’s going to make a huge difference. On the asset side, going back to what you’re talking about, what’s the purpose of super? It used to be retirement incomes. By this very nature it’s saying well hold on, if you’ve got more than $1.6 million in retirement income, you’re not allowed to take it as a pension anymore. You actually have to put it back to accumulation, which now means it’s not retirement incomes anymore. It’s also estate planning, which while they were supposed to get around and not have estate planning, now they’re actually saying hold on, you’ve got to have an estate planning tool. What you’re saying is something that the whole impact is taking money from a pension which has proportions, now flipping that back to accumulation where you lose that – your tax-free is locked in. That has quite a significant impact from an estate planning perspective.
KL: What about the administrative implications of that? Are we going to have to start reporting on pensions?
PB: You would assume they’re going to have to keep records of pension balances, which they don’t do at the moment, so there will be some reporting changes there.
AY: So reasonable benefit limit reporting.
PB: The other thing about the $1.6 million cap is segregation is not common in the SMSF sector. And because of that, software packages and the administration processes are not geared towards segregation. That’s going to be a challenge for the sector, especially for the software providers, because I think there will be a focus on segregating.
AY: It’s another boon for advisers to determine what assets go to the pension fund and what assets go to the accumulation fund. It’s too complicated.
DTC: What do we think about how the $1.6 million figure was arrived at?
GA: Well everyone said it was fudged because wasn’t it designed to give you $80,000 indexed, but Costello came out, and you’d think he’d have a good idea, and said that the inbuilt analytics was based on a 5.5 per cent return inside the fund. He said you just can’t get that at the moment.
DTC: We’re already currently in a low-return environment, so is an assumption of a yearly 5.5 per cent return as the basis for the determination of the cap completely flawed?
GA: I was being a bit cynical before, but the guys who have more than $1.6 million in their SMSF, they’ve done very well. They’ve dumped as much as they can into super and they’ve had a really good run on the stock market. Those in commercial property, have got 10 per cent returns coming in tax-free funds. They’ve done amazingly well. The next generation that’s coming through may struggle with globalisation having an impact on coal, iron ore and on the dairy industry. Employment may also be an issue as ANZ just got rid of a couple of hundred jobs, because now when you put a cheque into the bank it gets scanned in so they don’t need people anymore. So with the $1.6 million, I think if most people could get there by the time they’re 65, they’d be really happy and one of the ways to do it is through returns. Returns are a given I think inside SMSFs. Another thing that will impact is the cost of investing and for me to see industry and some retail funds charge 1.2, the underlying management expense ratios, that’s outrageous. As administration fees in the SMSFs come down, it can have quite a significant impact over time in terms of what your underlying balances are. I think the next area we need to draw attention to is SMSFs, particularly if you’ve got $1 million or plus, are extremely economical. I believe SMSFs will be here for a long time.
TB: What we’re going to see obviously is the pension balance coming down because it’s not going to be topped up by investment earnings and so what happens then? Do we then top it back up from accumulation? We don’t have the detail around how that’s going to work yet, so do we just keep topping back up to the $1.6 million, but then if we’ve got unrealised gains in there, that’s not going to help us. If we’ve got property sitting in our pension account and that property has quite a large unrealised gain, then we’ll be at our cap of $1.6 million, but maybe we won’t have the income coming through, so where do we go? We have some interesting times ahead.
PB: I think certainly some of the seminars that we’ve been running with trustees over the last few weeks, there has been a lot of concern about this perceived $80,000 based on 5 per cent. They don’t believe they can generate 5 per cent so they are concerned that their income is going to drop. I guess some of the trustees that we’ve spoken to haven’t realised that they don’t, they think they don’t, have access to their accumulation money anymore so this portion that’s above $1.6 million, they think they don’t have access to that, but of course they do because in most cases it will be unrestricted and unpreserved. So when you explain that to them it’s not so bad, but certainly they are concerned about the perceived $80,000 because when you factor in healthcare costs and that, some would suggest that $80,000 is not enough.
GA: I just put my dad into aged care and that’s in Adelaide and you need $550,000 just as a refundable accommodation deposit. If you’ve got a mum and dad in there, there goes $1.1 million and then there’s not much left in your pension account balance. And what happens if you’re only getting 2 per cent you need to draw down 5 per cent or 6 per cent or 10 per cent? I can see it’s starting to eat into a lot of their capital, which means then at some point in time you’ve got to sell the home. Aged care to me is like the time bomb out of the whole place.
AY: I think the government’s come up with the policy saying everyone can have say $1.6 million or $2 million of super that’s tax-free and that’s it. That’s all we’ll give them for their lifetime and we’ll work from that basis without thinking through if everyone can get to $1.6 million in this environment. I don’t think they’ve thought that one through. They’ve drawn a line in the sand. That’s it, $1.6 million, that’s all you’re getting tax-free. Everything else has to be taxable and come back into protecting the revenue.
PB: It’s consistent with their objective too. If you look at the objective they’re going to enshrine, it talks about substituting or supplementing the old age pension so at $1.6 million if you are using a 5 per cent return generating $80,000 that would mean you’re not on the old age pension. There’s consistency in that story if you believe the 5 per cent.
DTC: What about the starting point and how no one can seem to agree what the existing tax concessions are actually costing the community? Does this not raise doubt over the methodology behind calculating the $1.6 million limit?
PB: It’s a good point you raise. We need to get to a stage where we’ve got a more accurate calculation of what the cost of these concessions is. You’re right, there are various models used and the variation is significant. It would be a good starting point you’d think to actually calculate what exactly is the cost of these concessions that is a fair measure because the measures that are used, as we know, exaggerate to some extent the true cost because they don’t factor in everything. I tend to agree with you that it would be a good position to get to where we’ve got an accurate calculation of these concessions. It’s still going to be a lot of money, whichever way you measure it, so there’s always going to be some public debate around what these policy settings should be. That’s going to continue, but I tend to agree. We need to get to that point.
GA: I think again you just don’t know, no one really knows. One side will say it’s this, another side will say it’s so much. It’s costing $35 billion. Then there are other people who will say imputation credits, they’re a rort in the system because people are getting all these refunds and all that sort of stuff. There are always vested interests who will be bagging one side or the other, but at the end of the day the Australian superannuation system, which really gives coverage to so many people, has been a lifesaver for us.
If you compare our situation against New Zealand, who have only just recently introduced superannuation, go over and have a chat with 55 or 60-year-old retirees. They’ve got nothing. It is social security and that’s a tough one because the next generation are always going to have to pay off the older people and the older people are living a lot longer. Aged care, they don’t like that, so superannuation is what (former prime minister Paul) Keating did and what Costello built on has been quite amazing and it’s just a shame they’re starting to pull it down around the edges.
The $1.6 million and the $500,000 is not a huge deal, but again it means people are starting to lose faith in that system. They fret because they’re only getting 2 per cent return, but then on the pension they have to pull out 4 per cent or if they’re 80 they have to pull out 7 per cent or 8 per cent, but I’m only getting 2 per cent return, so their capital is not being preserved and they worry about when it’s going to run out. Then they think they’ll have to go on the pension, which means they can’t get their hip replaced and all that sort of stuff. In regard to cost, how much is social welfare costing the community, and how much is social security costing as a percentage of GDP (gross domestic product)? Where do you draw the line on that one?
KL: We all agree that a positive outcome of the changes is that people will seek financial advice because they are so complicated. However, where we are currently at with no legislation and an election coming up, are advisers finding it difficult to tell their clients what to do right now?
LW: In terms of the measures, it’s not really meant to be effective until 1 July 2017, so that does give us reasonable breathing space. The biggest concern is the lifetime non-concessional contributions cap because that’s the one that applies from budget night. At this stage it’s very much a wait-and-see.
AY: Some clients are asking us: ‘Can I put in $180,000 now and hope that Labor gets in? Will Labor let me keep the $180,000?”
GA: Or can they use the three-year bring-forward rule?
AY: But what can you say? You really can’t tell them to do that. It’s really up in the air. We’re in limbo at the moment until 2 July.
LW: The way we’ve been dealing with the more urgent cases is we’ve been telling the clients to make sure that they do speak with their adviser if they are in that position to put some money in. You have to look at it on a case-by-case basis and this is where you also need to look at the history or what you know about the client. There is a bit of a risk there because you might not have all the information, but for some advisers who have had a long relationship with their clients, it would be pretty obvious they have not fully utilised the cap, so you could still go ahead. It really depends on the amount. What I’ve noticed though is that suddenly, in the last few weeks, the number of small business queries has doubled around small business CGT concessions and using that to get more money in.
DTC: In summary, are there any groups in particular who you think will be worse off as a result of these super changes?
AY: It’s the middle Australians. The wealth builders are trying to build up their super now and they’re going to find it very difficult with all these caps and so forth. I think they’re going to be disadvantaged, but they’re not the 4 per cent that the government is trying to attack. Those people that haven’t accumulated much in super at whatever age or stage of life they’re at, they are going to find it quite hard.
TB: I think that those small businesses who haven’t had the cash flow necessarily to put money into super and who are expecting on the sale of their business they’ll be able to dump it into super and have this tax-free retirement income will be badly affected. So small business owners are probably going to be the biggest losers from the superannuation measures.
PB: From some of the seminars that we’ve run, a lot of the feedback we’re getting is that these changes do discriminate against those that haven’t had an opportunity to save for retirement, those with broken working patterns, which is quite ironic because one of the changes in the budget was to allow people with broken working patterns to make catch-up contributions. Women in particular have been saying to us that this is discriminatory in that they haven’t had an opportunity due to time off work and so forth to make those non-concessional contributions previously and they may not have it in the future. I think they’re going to be most affected.
LW: I agree because one of the things I’ve been passionate about is women and superannuation. There’s been a lot of talk in the media about what the government can do to encourage women to actually have more retirement savings. It’s ironic because with some of the changes, it’s obvious the government is saying they’re actually trying to help women, help people who haven’t had that pattern, but when you think about it, with the $500,000 lifetime limit, it won’t happen. There are going to be women who took a long break from the workforce, are coming back to the workforce, but not going to be commanding the same levels of salary they had previously. So their ability to use the catch-up contributions might be quite limited, but they may actually receive an inheritance or people are looking to downsize their home and put it into super. I think there’s going to be certain women of a particular age that’s actually going to be potentially disadvantaged.
GA: The winners are going to be the really smart advisers who are really strategic because over the last few years it’s been too easy for everyone to go in and give advice around this area. There will be a whole lot of really great strategies coming out that’s not for the mainstream adviser. It’s actually going to be for the higher level adviser, so I think they’re going to be the big winners. In terms of the losers, we’ll find out when the election comes around.