2018/19 Pre-Budget submission: Superannuation & SMSFs

This 2018/19 pre-Budget submission makes several superannuation-related recommendations, including prioritising the legislative objective of superannuation, repealing the ‘work test’ and indexing the LISTO to Super Guarantee rate.

Prioritise legislative objective of superannuation

Before further changes to superannuation are made priority should be given to enacting the objective of superannuation.

The Superannuation (Objective) Bill 2016 has not been debated in the Parliament in over a year. In the most recent sitting of Parliament every Government superannuation Bill, except the Objective Bill, was scheduled for debate. It is incongruous with having an objective of superannuation, one to which statements of compatibility are to be published, to pass all other super legislation before enacting the objective.

I note that in recommending setting objectives for superannuation in legislation the Financial System Inquiry said that “broad political agreement” for the objectives should be sought.

Repeal ‘work test’ for superannuation contributions

I urge the Government to proceed with a repeal of the ‘work test’, which restricts the ability of people aged 65-74 to contribute to superannuation.

Repealing the so-called work test was proposed in the 2016/17 Budget, but dropped as part of the changes to the non-concessional contributions cap.

When it was announced that the work test repeal would not proceed a joint Ministerial statement said: “…the Government remains supportive of the increased flexibility delivered by this measure…”

The 2016/17 Budget papers say repealing the work test would: “…simplify the superannuation system for older Australians and allow them to increase their retirement savings…”

This reasoning for the repeal of the work test stands and I encourage the Government to include it in the 2018/19 Budget.

Index Low Income Superannuation Tax Offset (LISTO) to increases in Super Guarantee rate

The Low Income Superannuation Tax Offset (LISTO) should be increased and indexed so that it keeps pace with increases to the Superannuation Guarantee rate.

The Explanatory Materials to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, which introduced the LISTO, says:

“The low income superannuation tax offset seeks to effectively return the tax paid on concessional contributions by an individual’s superannuation fund…”

However this is not fully achieved under the LISTO as it is structured. The LISTO is very similar to the Low Income Superannuation Contribution (LISC). When the LISC was introduced it offset the full amount of contributions tax – $500 – a low income earner would pay on their compulsory Superannuation Guarantee contributions (9% of $37,000 equals $3,330, $3,330 at 15% equals $499.50). However provision was not made to increase the LISC when the Superannuation Guarantee (SG) rate increased.

As such, as the SG rate increases, the LISTO fails to offset the full amount of contributions tax, meaning some low income earners will pay more tax on some of their superannuation contributions than they would on their salary and wages.

The LISTO should be indexed to increases in the SG rate, so that it fully offsets the contributions tax on the compulsory employer superannuation contributions for low income earners.

Encourage the use of corporate trustees for SMSFs

The vast majority of SMSFs are set up with individual trustees rather than corporate trustees. The latest available ATO SMSF statistics show that only 7.24% of SMSFs registered in 2015/16 had a corporate trustee.

This preference against corporate trustees for SMSFs was remarked on by the Super System Review, also known as the Cooper Review. The final report of the Review said:

The Panel and various stakeholders have expressed their surprise at this trend in various consultations and submissions. It is widely accepted by professionals and the ATO that a corporate trustee is superior.

Information on why SMSFs are increasingly being set up with individual trustees is limited. The Cooper Review suggested lack of education and the higher cost of the structures could be factors.

Corporate trustees for SMSFs do involve higher setup costs than individual trustees, however they also offer limited liability and require fewer changes upon the death of a member, easier removal and addition of members and clearer ownership of assets.

I recommend the 2018/19 Federal Budget include two measures to encourage the use of corporate trustees for SMSFs. Firstly, though ASIC offers a lower annual fee for special purpose companies, the setup fee remains. This ASIC fee can represent over 90% of the cost of a company, from some providers. Provision should be made in the budget for ASIC to reduce this fee for SMSF trustee special purpose companies.

Secondly, provision should be made for research into why individual trustees are increasingly being chosen for SMSFs. Based on this research an education campaign could be conducted by the ATO.

Reconsider time-frame for reaching a 12% Super Guarantee rate

I urge the Government to reconsider the decision to delay increases to the Superannuation Guarantee (SG) rate.

Delays to increases to the Superannuation Guarantee (SG) rate, MRRT

The SG rate was set to reach 12% on 1 July 2019, however it is now not scheduled to reach this level until 1 July 2025.

I urge the Government to reconsider this delay in reaching a 12% SG rate.

This is a 2018/19 pre-Budget submission by SolePurposeTest writer Luke Smith, it has been published here with permission, he retains all copyright.

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