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Self Managed Super Fund (SMSF) Article
Some Ideas About Better Super

By Tony Negline.

This article may be out of date.

24th May 2006

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"A fortnight into the consultation process, not a single glitch or logistical flaw had yet been pointed out in the [budget's super] proposal[s]," a spokesman for the Treasurer was quoted as saying in the Weekend Australian of 21-22 May.

Unfortunately the government's latest super proposals contain a large number of glitches and logical flaws.  It is obvious why we need to understand what the problems are as they impact many investors in different ways and everyone needs to understand how they will be personally affected.

1.   Reasonable Benefit Limits – the government has elected to remove these from July 2007 onwards.  The removal of RBLs is a welcome simplification because RBLs were fast becoming a major problem.  It was the removal of RBLs which drove the latest changes announced by the government.  In its annual report for 2004/05 the Australian Taxation Office said that only 2.4% of individuals who have a recorded a benefit against their RBL have an excess benefit and as a result the “investment and the overall effort required to administer reasonable benefit limits appear disproportionate to the number of individuals ultimately affected by the provisions."

If the government had not limited the amount of money going into super at the same time as removing RBLs too many tax concessions would have been provided to super.  Ultimately the system would have become unsustainable from a budget perspective.

One of the key features of the RBL system is the way data is collected when a benefit is paid.  Normally the information is provided by the entity paying the benefit.  Over the years most super funds have made mistakes when reporting benefits for RBL purposes and most funds have spent considerable sums of money trying to accurately satisfy their legal requirements.  This process is often very time consuming and expensive.

Many funds are still fixing their RBL reporting errors.  But what is the point of continuing to fix RBLs if they are to be redundant and, as admitted by the ATO, very few taxpayers will face excess benefit taxes because their total RBL assessable benefits are greater than their RBL?  It makes more sense for the government to remove RBLs now and remove this unnecessary burden on everyone.

Perhaps the government is concerned about the cost of providing this concession twelve months early.  Fair enough.  If that is the case, hopefully they will share with us this cost.

If the government decides to allow RBLs to remain, many taxpayers are left in a jam.  Do they take their super money now and receive less tax concessions or do they try and wait until July 2007 when further tax concessions become available?

2.    The $150,000 limit on undeducted contributions: this restriction is expected to apply from budget night (9 May 2006).  The government has also floated the idea of allowing three years of undeducted contributions (that is, $450,000) in one hit “to allow people to accommodate larger one off payments.”

However no one knows if the $150,000 rule applies for all of 2005/06 or the period between budget night and 30 June.  For example suppose a super fund member made an undeducted contribution of $200,000 before budget night.  Does that mean the member cannot contribute any more after budget night because the $150,000 limit has already been breached.  Or perhaps everyone who is allowed to can contribute $150,000 in undeducted contributions after budget night and before 30 June.

But what is the status of the $450,000 limit?  The government has said that it would “consider” allowing this increased limit but no one knows if this is definite policy and when it would apply.

The danger of contributing to super more than the announced limits is that the contribution will be returned and any earnings will be taxed at the highest marginal rate (46.5% including Medicare levy).  But what happens if the contribution has already been used to purchase an income stream?  Or has been split in a divorce settlement?  No one knows these rules.

Also no one knows if the $150,000 limit will apply to contributions made by a spouse.  And no one knows if people older than 65 will need to work before they are allowed to make personal undeducted contributions.

Some people who were planning to make large undeducted contributions in the not too distant future are also adversely affected because they can no longer implement their plans. 

3.    The need for retirees to access funds: under current law an investor at least 65 but under 75 has to satisfy a work test in order to keep their super monies accumulating away.  Investors who turn 75 after 1 July 2004 must, under current laws, take their super monies out of the accumulation phases.

From 1 July 2007 the government plans to do away with these rules and investors will not be required to take money out of super at any age.  This is a welcome change but it should apply now so that older investors are not unnecessarily inconvenienced.

As can be seen these are some of the major issues requiring urgent clarification.  Hopefully the government will act with some haste and help us all to plan with certainty.

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