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More Super Changes
It’s been nearly 30 years since superannuation was available to all - ever since there has been a multitude of changes as successive governments have tried to “refine” the system.
Because superannuation is the best taxation minimisation vehicle around, there have always been attempts to minimise the amount that could be contributed to it, or held within it.
Initially everybody was allowed to retire with seven times their final average salary over three years. However, in 1988 to prevent abuse by high income earners, they introduced Reasonable Benefit Limits (RBLs) which reduced the scale of benefit multiples as salary increased.
In 1994, to make it simpler, the Howard Government introduced standardised RBLs which allowed everybody a maximum of $400,000 if the benefit was taken as a lump sum, and $800,000 if half the benefit was taken as a complying annuity. These numbers were indexed and were close to $650,000 and $1,300,000 by 2006.
The RBLs were a nightmare to keep track of, and were often subject to mistakes by the Tax Office. I remember vividly the irate correspondence that came from clients when they received an incorrect assessment - usually a heavy penalty.
In August 1996 the Howard Government made one of their biggest blunders of all time - they introduced the Superannuation Surcharge which hit all contributors who had an ‘adjusted taxable income’ (ATI) of more than $70,000 in that financial year, with a sliding scale penalty of up to 15% of deductible contributions.
The surcharge was an even bigger nightmare than the RBLs, as ATI’s were extremely difficult to track and calculate. It is estimated that the superannuation industry spent more than $400 million in administration costs just trying to extract the surcharge from their members - almost as much as the surcharge raised.
In 2005, much to the relief of everybody in the industry, the surcharge was abolished.
Superannuation got a boost in the May 2006 Budget when the Howard Government atoned for their previous sins by totally reforming it. The unwieldy RBLs were abolished, as were taxes on the end benefit for the over 60s, and the complex contribution calculations were replaced with standard caps for deductible contributions of $25,000 for the under 50s and $50,000 for the over 50s.
That’s about as perfect as the system could get, but the incoming Labor government decided the caps were too generous, and with effect from June 2012 reduced the $50,000 cap for older people to just $25,000.
It was a bad decision because the period from age 50 to 65 is the time when most Australians are likely to have surplus cash-flow with which to boost their super. After pressure, the government announced in May 2010 that those with a balance of less than $500,000 next June would be able to continue to contribute $50,000 until their balance reached $500,000.
That’s easy in theory, but hell in practice - this is why the government has spent the last fifteen months trying to find a definition of $500,000. If it is to be the fund balance at 30th June, it will be subject to performance of the markets on that day, but in any event it will be necessary to include all previous withdrawals.
Most people 55 and over who are properly advised will be on a transition to retirement pension, which means they are withdrawing money from their super at the same time as they are making contributions. I am told that Treasury expects that all such withdrawals will not be just counted - they will also be required to be indexed!
The super funds don’t have the software to do this, and if the proposal goes ahead, they will be in an even worse position than when the dreaded surcharge was forced upon them. It’s RBL’s by stealth.
The Association of Superannuation Funds of Australia and other providers have come up with a brilliant idea to solve the problem - just have a standard cap of $35,000 applying to anybody over 50.
How could anybody disagree. It would retain the simplicity of the system, eliminate the need for the industry to waste hundreds of millions of dollars on compliance and also give those nearing retirement a chance to boost their superannuation balances.
For all our sakes let’s hope Treasury listens.
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