The 2009 Australian Federal Budget - Time for a Re-Think!

The future of Self Managed Super Funds:

We can all be forgiven for letting the essence of recent changes in the Superannuation regime announced in this year’s Australian Federal Budget pass us by without further analysis. But…

To recap: The concessional contribution cap was reduced from AUD50K  to AUD25K effective from the 1st of July 2009  and the transitional cap for those persons over 50 years for the transitional period 2008—2012 reduced from AUD100K to AUD 50K (non-indexed). The obvious thought is to maximize your superannuation contributions before the 30th of June 2009. The non-concessional cap of AUD450K for a given three year period remains in place. The 50% reduced minimum annual amounts for retirement payments made during the 2009 financial year have been extended to the 2010 financial year.

Although seemingly unrelated, the retirement age in Australia has been increased from 65 years to 67 years and will not commence until July 2017 when the qualifying age will increase by 6 months every 2 years. This will begin to effect people born after July 1952 and have full effect on those persons born after January 1957.

So you may ask; ‘what is the mischief in these changes’--- apart from a reduced ability to salary sacrifice your super depending on your age. The other question to ask is; is this merely a revenue raising measure in a budget with a deficit of $57b or is this, the first tranche in a long term structural change of retirement policy thinking in Australia.  In my opinion it is time to read the ‘tea leaves’.

Consider the following facts:

Self Managed superannuation funds are used as a tax effective retirement vehicle that gives fund members flexibility in setting aside maximum amounts for retirement purposes knowing they have flexibility in how their funds are invested and involvement in the investment decisions. The use of installment warrants to leverage superannuation fund investments is but one example of what I mean.

However the cost of setting up and maintaining a self managed superannuation fund means that you should have at least AUD500K invested or have the means to contribute that amount either  on a concessional or non-concessional basis.

The reduced cap will mean that it becomes less cost effective to establish a self managed fund, which in time will mean more money will be directed to industry and large public funds. There are sections of the superannuation industry in Australia that have always disliked self managed super and these changes ‘scratch an itch’ that has been around for a long time.

 The Australian government, championed by Senator Sherry’s office and the Australian Treasury under Ken Henry, are undertaking a taxation review including a review of taxation as it relates to Australian superannuation funds.

You can back it in that the tax free regime for 60 year olds and over will be subject to substantial change—but what might those changes be- or mean to us baby boomers who have worked so hard for what we have?

I have no particular insight other than being involved in this industry for over 30 years, but here are some possibilities:

1.       As previously stated the retirement age has been increased to 67 years; Why? Unless of course, the Government’s social engineering philosophy  will require all retirees to wait until 67 years instead of 60 years to access their superannuation entitlements.

2.       The tax free status of retirement incomes for 60 year olds and over may not survive this ‘review’ because if the change as muted above takes place then there will be a tax penalty placed on early retirement payments, unless they are made under the hardship provisions of the Act. It is likely that the Government will explain this by reference to the effect of the baby-boomers on Government pension obligations and some reference to those that can retire earlier not being allowed to ‘double-dip’

3.       The final insult to those of us who have funded our own retirement might be to place a cap on how much you can take out of your self managed fund after age 67 before the government decide to tax it.

I have a strong concern that the Government of the day is trying to herd all retirees regardless of their circumstance in one philosophical direction rather than allowing choice in the management of one’s own retirement strategies.

If this be the result, then the power of the big unions/ industry funds together with the large public funds have seen off over time one of their most effective independent competitors -the self managed fund.

 If you accept some, or all of the above thesis, then it is time to rethink your retirement strategies and structures. There are still substantial opportunities available for those that don’t believe in fairly tales.

Kelvin Boyd

Director