The Federal Government has released a discussion paper that explores the possibility of raising super contribution caps for people aged over 50, in yet another sign the Government may be backing down on the issue of excess super contributions and taxation.
The announcement comes just days after tax commissioner Michael D’Ascenzo said that some of the current laws restricting self-managed super funds were “draconian”.
But super experts say Shorten’s latest proposals will result in unnecessary red tape, and have called for the Government to reduce the harsh penalties for excess super caps that even the Australian Tax Office says are too “draconian”.
The discussion paper suggests that people aged 50 and over with a retirement savings balance of less than $500,000 should be permitted to make up to $50,000 in contributions.
Currently, the concessional contributions cap is $25,000. For those aged over 50, the current cap is $50,000, but this will expire at the end of the 2011-12 financial year. This discussion paper proposes that cap be extended beyond 2012.
But Dan Butler from DBA Lawyers says the proposed cap program will result in higher costs for both fund managers and the Government.
Butler argues there are a number of different ways to actually assess whether you have $500,000 or not, which creates confusion – you maybe under one method, and you may not under another. Having the Government keep track of all this will result in higher costs, he argues.
“You are only entitled to use the new caps if you have under $500,000 in your account. There are a whole range of ways to actually assess that, and there are various rules and compliance costs there.”
“There are a number of rules about this new procedure, particularly if that super has been split, whether you’ve transferred money outside the determination date, and so on.”
Experts point to a number of proposals in the paper that would restrict the possibility of being included in the program. One proposal is for a person’s balance to be assessed on June 30 the year before the contributions are made, while the second would have the fund measured two years before the end of the financial year in which the contributions would be made.
The paper also suggests a number of ways for officials to measure how much a person has in their account. For self-managed super fund members, the paper says all super elements including fund reserves should be included.
“These changes will provide flexibility for those nearing retirement to make additional ‘catch-up’ contributions at the stage in their lives when they are most able to do so,” Shorten said.
Overall, the proposals are said to help 275,000 people and will take effect from July 2012. But Butler says the Government’s scheme is too restrictive and will cost too much to run.
“This will give rise to a hell of a lot of unnecessary costs. The Government should just realise that people, particularly women, have broken work patterns and don’t have much super at all. They should be given the opportunity to put more money into super.”
“If we go back just a few years, the caps were so much higher it wasn’t funny. We have this harsh penalty tax, but they’re just trying to milk the system for all it’s worth.”
Partners Superannuation Services director Martin Murden says the Government needs to recognise that the limited number of people who can benefit from the scheme means the benefit will be minimal.
“People under 50 are still restricted to the $25,000 limit. If you’re over 50, and have over $500,000 in your super, then this change doesn’t do anything for you. And most people don’t even get anywhere near $25,000 in contributions.”
Murden also points out that transitional pension payments will also be taken into account to determine whether you’re eligible for the scheme. He says the Government is beginning to recognise they shouldn’t have halved the contribution caps in the first place.
“The Government is now beginning to say that ‘what we did was not correct’. And they’re starting to unwind what they did,” he said, adding the Government needs to look at the entire system and fix some of the more restrictive penalties.
“We need to recognise that we shouldn’t have halved the contributions cap. A preferable solution is to have one cap for everybody. I have no problem with the contributions tax, but we need to be thinking long-term about allowing people to fund themselves into retirement.”
Liz Westover, superannuation spokesperson for the Institute of Chartered Accountants, also says the Government needs to rethink some aspects of the super system.
“The cap should not be subject to all of this extra criteria. We should go back to the original caps, and we need to be very careful that the legislation around this doesn’t become so complex that people will start making errors again.”
The issue of superannuation has become a hot topic once again, with tax commissioner Michael D’Ascenzo weighing into the debate last week. He commented that some of the penalties on self-managed super accounts were “draconian”.
“There should be a review of the penalty structure for SMSFs,” he told the Australian Financial Review.
Self-Managed Super Fund Professionals’ Association chief Andrea Slattery welcomed the commissioner’s comments, saying it wants the Government to look at minimising the impact of inadvertent breaches leading to excessive penalty taxes.
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