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Self Managed Super Fund (SMSF) Article
Moveable beast has bewildered investors running scared

By Tony Negline.

This article may be out of date.

18th August 2010

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Anyone with a passing interest in superannuation will know that the rules are never static.  What follows is a potted summary of the big changes over the last twenty five years.  I conclude by looking at how this constant fiddling affects investor confidence.

The rot started with the Hawke Government's first budget in 1983 when it imposed higher taxes on lump sum withdrawals out of super funds.

The next major change came in 1988 when super funds were taxed on their non-pension paying assets.  Back then the government was desperate for revenue and decided it couldn't increase personal or business income taxes.  According to ATO stats this tax collected about $10.5 billion in 2006/07 on $141.5 billion of income.

At this time the Government formalised and expanded the reach of a mechanism which restricted total benefits available from super.  In 1988 we were told that this revised system, called Reasonable Benefit Limits (RBL), was designed to "improve and extend the regulatory framework for superannuation to ensure that the distribution of concession is more equitable".

Over the next 15 years the bureaucracy and industry spent many hours trying to develop a system that would enable this RBL policy to work efficiently.  It was left to the Tax Office in its 2004/05 Annual Report to tell the Government, "the overall effort required to administer reasonable benefit limits appear disproportionate to the number of individuals ultimately affected by the provisions."

In 1992, compulsory employer super contributions were legislated via the Super Guarantee.  In the same year the policy which introduced the current regulatory structure for super was announced.

The Howard Government's first foray into super policy was the super surcharge which imposed additional upfront taxes based on your personal income and the amount you contributed to super.

This dog's breakfast of a policy was enacted under the Constitution's taxation policy but for political reasons wasn't actually called a tax.  Once again the government needed a revenue source but couldn't increase individual or business taxes.

In 1999 the Howard Government created the Self Managed Super Fund designation and made the ATO their regulatory supervisor.

The next big policy change occurred when the Coalition decided to introduce Transition to Retirement pensions in 2004 for older workers who wanted to reduce their working hours but not fully retire.  Also in '04 it introduced the Government co-contribution scheme.

In 2006 Peter Costello announced significant changes to the super system.  Firstly he sought to limit the amount of money contributed into super.  This enabled him to get rid of Reasonable Benefit Limits.  It also enabled him to remove many of the withdrawal taxes first introduced in 1983.

Naturally moving from one super system to another required some transitional measures.  One policy allowed investors to personally contribute up to $1 million between May 2006 and June 2007.

This new system, initially called Simpler Super but later named Better Super because it became obvious the system still wasn't straightforward, imposed very high taxes on those who contributed above various thresholds.

In 2007 the Howard Government legislated rules which allowed super funds to borrow money using a special structure.

Over the last three years the most significant change by the ALP in the super arena has been to reduce the amount of money which can be put into super before penalty taxes can be applied.

Arguably the most significant work by the ALP has been in two reviews it commissioned.

One of the reviews, chaired by Ken Henry, has recommended significant changes to the tax applying to super.  In response to this tax review the Government proposed policy changes not recommended by the review.

One of these Government changes recommended increasing compulsory employer super contributions.

The other review, chaired by Jeremy Cooper, looked at the structure of the super system.  It found major efficiencies were essential and possible.

The Government has estimated that some of Cooper's proposals might deliver an additional $40,000 in retirement savings.

I will leave it to others to decide what it says about those who run the super industry, and investor's overall engagement with the super system, that efficiencies and associated cost savings have had to come from a Government committee.

Also what might be said about an industry which was unable to find its own efficiencies but could instantly support increasing compulsory employer contributions to super?

What does it say about an industry that almost universally represents many administration and investment fees in percentage terms and a charging structure of such complexity that a mobile phone carrier might blush?

In one way it's harsh to blame the super industry.  My summary hasn't mentioned thousands of other changes which have had to be studied, reviewed and implemented across all areas of a super business.  Often these changes have to be put in place in impossibly short time-frames and are never cheap to implement.

And one cannot certainly blame investors.  It is amazing that investors are still keen on super after all the changes that have been made.  One of my friends said that he had heard about the Howard Government's super gearing policy.  He had decided to let the idea pass.  He couldn't be bothered finding out all about it only to have changed.  He simply lacks enough confidence in the system to invest.

Does anyone believe we will not see the same rate of change in the future?  How can anyone plan ahead with so much uncertainty and regulatory risk?  I think this a sad but accurate indictment on twenty five years of constant "reform".

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