Complicating concessional caps

I recently started writing the Institute’s submission to Treasury on the implementation measures to make permanent the higher concessional contributions caps of $50,000 per annum for those over the age of 50. The catch now is that the increase will only be available where the person has a superannuation balance of less than $500,000.

I found, however, that before I could even get into the detail of the submission, the broader issues of the impact of this legislation were becoming more apparent and it worries me.

Firstly, it concerns me that the $500,000 balance limit (which will not be indexed) could send a message to Australians that once you meet this level of superannuation savings, you have enough to live on when you retire. We are an ageing population; individuals will be spending more years in retirement than ever before. It is a dangerous message for Australians to be receiving that this will be enough.

Secondly, including a maximum superannuation balance adds yet another hurdle for people to jump over in saving for retirement. It worries me that the new rules are going to exacerbate an already growing problem of people being subjected to excess contributions tax. The consequences of the concessional contributions caps legislation are already causing major problems for people – adding another factor (the $500,000 balance limit) will cause more people to falter and I believe that many more will be receiving excess contributions tax assessments as a result.

At a time when we have undergone a major review of our superannuation system in order to simplify and restore confidence in it, we should be thinking very carefully before bringing in new rules that will add complexity, cost and confusion and undermine other efforts to restore the confidence of Australians in their super.

Excess Contributions Tax – getting uglier

The latest ATO figures show that more Australians are breaching their concessional super contributions caps than ever before and are being slugged with extreme excess contributions penalties as a result. In fact, 65,733 people breached the cap in 2009-10 - more than twice the number of people who breached the cap in the previous financial year. The situation is getting worse and many of these breaches are unintentional errors by Australians wanting to save for their retirement within the current rules. So why are they being so severely punished?

I wonder why the government is so reluctant to remove this ugly tax, particularly when many alternatives have been suggested to fix the problem of people putting ‘too much’ money into super. The longer the government waits to solve the problem, the more it looks as though the tax is a revenue raiser!

If the government is going to impose limits on the amount people can contribute to their super, then they also need to be realistic about imposing appropriate penalties for making a mistake. In order to prevent too much money going into a concessionally taxed environment, excess contributions should simply be refunded.

This is a flawed tax and is detrimental to the retirement savings of many people who are genuinely trying to do the right thing. It’s time for the government to commit to change.