Superannuation - which cap fits best

The Government has proposed retaining higher concessional contributions caps for those aged 50 or over, however Craig Day argues imposing eligibility criteria needs further consideration.

In February this year the Government released a consultation paper in relation to the proposal to retain the $50,000 concessional contributions cap for people aged 50 or over with super balances under $500,000.

While the decision to retain the higher cap to allow people to make catch-up contributions closer to retirement should be supported, the idea of imposing eligibility criteria to determine who will qualify for the higher cap needs further consideration as it will increase super fund costs and increase the complexity of the super system for members.

Outline of the proposals

The consultation paper outlines the key elements of the proposal, which are summarised as follows:

• From 1 July 2012 a higher cap of $25,000 over and above the current concessional cap of $25,000 will apply for people over the age of 50 with a total super balance of under $500,000.
• The $500,000 threshold will not be indexed.
• All of a member’s superannuation entitlements (which will presumably include pension interests) will count towards the $500,000 threshold, including superannuation interests held in accumulation funds, defined benefit funds and untaxed and constitutionally protected funds and schemes.
• The calculation of a member’s account balance will be based on their withdrawal benefit or on the method used to determine the value of their super interests under the family law regulations.
• The value of a member’s superannuation interest will be measured at one of the following dates:
  • 30 June in the financial year preceding the year in which contributions are to be made, or
  • 30 June two years prior to the end of the financial year in which the contributions are to be made.
• The process for assessing eligibility will be based on either a self-assessment model or the Australian Taxation Office (ATO) will be required to provide a super account balance reporting facility which members could rely on to determine their eligibility to the higher cap.

One of the major concerns around these proposals is that by introducing a $500,000 threshold, the proposal will result in increased complexity and cost for super funds due to the increased reporting requirements involved.

It is incongruous for this proposal to be announced so soon after the release of the final report of the Cooper Review, which sought to reduce the complexity and cost of the superannuation system. 

The proposal not to index the $500,000 threshold will also make the higher cap harder to qualify for over time in real terms.

As a result, this could lead to an increase in the number of people exceeding their concessional cap and having to pay excess contributions tax in the future.

The proposal to assess the member’s entire superannuation entitlements, including amounts derived from non-concessional contributions, also discriminates against those members who have made personal contributions from after tax dollars.

The introduction of a $500,000 threshold may also lead people to assume that $500,000 is an adequate retirement balance for their individual situation.

It could also lead to people not making additional non-concessional contributions in the lead up to retirement due to fears they may impact their ability to access the higher concessional cap.

Eligibility criteria for people who have already started drawing down

The consultation paper outlines three different options for how the rules would potentially apply where a person has already commenced drawing down their super. These options are summarised as follows:

Option one

This option involves adding the indexed value of any benefits previously withdrawn from a fund (excluding rollovers and amounts withdrawn on hardship grounds) back in to the member’s account balance when assessing their balance against the $500,000 threshold.

While the intent of this measure is to ensure the $500,000 is not circumvented by people withdrawing benefits where possible, it involves the re-introduction of a quasi-reasonable benefit limit system as it would require funds to report all withdrawals, including pension payments, and for the ATO to maintain records for each member for life.

This option would impose additional costs on funds and would increase the cost of financial advice as advisers would potentially need to do additional work to identify and verify all withdrawals and to calculate the member’s notional account balance to determine their eligibility to the higher cap.

In addition, it could also undermine legitimate strategies, such as a re-contribution strategy to maximise a client’s tax-free component for estate planning purposes, as it would result in the double counting of amounts withdrawn and then re-contributed back into the fund.

For example, if a 60-year-old member with $350,000 in super withdrew the whole amount and re-contributed it as a non-concessional contribution, their account balance for the purposes of assessing eligibility to the higher cap would be calculated as $700,000 – being their actual account balance of $350,000 plus their withdrawal of $350,000.

Option two

This option involves ignoring any previous withdrawals when calculating the member’s account balance to determine their eligibility to the higher cap.

While this option lacks the cost and complexity of option one, it would allow people who had unrestricted non-preserved benefits to withdraw those amounts in order to qualify for the higher cap each year. This would obviously undermine the integrity of the higher cap as well as the super system in general.

Option three

This option simply involves excluding those people who have already started drawing down their super from being eligible to the higher cap. For example, someone who had commenced drawing a transition to retirement pension at age 55 would be ineligible to qualify for the higher cap, regardless of the fact that their super account balance did not exceed $500,000.

This option could significantly disadvantage those members who had previously withdrawn any benefits from super and impact their ability to fund an adequate retirement.

Potential alternatives

In June the Financial Services Council, the Self Managed Superannuation Fund Professionals Association and the Association of Superannuation Funds of Australia called for the higher concessional contributions cap to be set at $35,000 instead of $50,000, but to remove the $500,000 threshold and make it a universal cap for everyone over age 50.

While this measure would reduce the amount of concessional contributions a member could make after age 50, it would avoid all of the additional cost and complexities associated with the $500,000 threshold, and would remove an additional layer of uncertainty for members who are just seeking to save enough for their retirement.

Alternatively, if the $500,000 threshold must remain it should be indexed and non-concessional contributions should be excluded from the calculation.

Craig Day is the senior manager technical services at Colonial First State.