Michael Houlihan is a Strategic Wealth Services Director and Head of Superannuation. He’s also a Director and the Victorian Community Chair of the Self Managed Super Fund (SMSF) Association.
Given recent changes to the way superannuation is managed in Australia and following the announcement of a Government review of the retirement income system, we thought it an ideal time to ask Michael for his thoughts on some of the issues that are ‘top of mind’ with the SMSF Association.
Q. The Government recently announced a review of Australia’s retirement income system. Is this necessary when our system is often viewed as best practice overseas, and do you think SMSFs should be included in the review?
Australia has one of the best retirement systems in the world but there are gaps. The retirement income system review aims to identify those gaps and secure sustainable outcomes for the retirement system across its three pillars: voluntary contributions, compulsory contributions and the aged pension.
The SMSF Association believes that an objective of superannuation should be legislated before any inquiry progresses. The objective should outline the role of superannuation, what it is supposed to deliver and how all parts of the system fit together.
There should then be a direct link between any new superannuation policy, including policy affecting SMSFs, and the legislated objective and principles. Proposed changes to superannuation policy identified in the retirement income system review should also be benchmarked against the legislated objective.
Building a successful retirement income and superannuation system requires public confidence in the efficiency and fairness of the system. Previous and numerous ad-hoc changes and lack of integration between all parts of the sector have degraded this confidence. Making effective changes to the system only when necessary is essential to restoring stability and public confidence in the system.
Q. The superannuation system is highly complex. What are some of the ways it could be simplified?
Simplifying the superannuation system should be an ongoing focus for Government in order to maximise the efficiency of superannuation so it can continue to deliver the best retirement outcomes for fund members.
The SMSF Association considers there to be three priority areas for focus:
1.An amnesty to allow SMSF trustees to convert their term allocated pension and legacy pensions to account based pensions
With the introduction of the $1.6 million transfer balance cap, an amnesty period is needed to allow SMSF trustees to convert their term allocated pension and legacy pensions to account based pensions. A superannuation ‘clean up’ of these legacy pensions is desirable for the Government, regulators and the superannuation industry for the purposes of simplicity and efficiency.
2. Addressing the current residency rules for Australian superannuation funds unfairly affecting SMSFs
Currently, the definition of ‘Australian Superannuation Fund’ in the Income Tax Assessment Act 1997 prevents Australians who are temporarily resident overseas from making contributions to their SMSF due to the penalties involved and the fund being taxed as a non-complying superannuation fund. The alternative to being able to make contributions to an SMSF is for the individual to make contributions to an APRA-regulated fund and, on return to Australia, transfer those contributions back to their SMSF. This is cumbersome and causes the individual significant additional costs, reducing their superannuation balance.
The SMSF Association considers that a minor amendment to the residency test would ensure that SMSF members who are working overseas could still contribute to their SMSF.
3. Streamlining the total superannuation balance thresholds
Introduced on 1 July 2017, an individual’s total superannuation balance (TSB) has been used to determine their ability to access certain superannuation measures. The SMSF Association has been supportive of this method as an effective way to target support to appropriate cohorts of superannuation members.
However, the introduction of multiple TSB thresholds has added unnecessary complexity to trustees trying to understand the superannuation system and for their advisers and administrators to manage. It also increases the costs for superannuation members as they need specialist advice to understand the multiple different thresholds that may apply and when they apply.
The SMSF Association believes that the TSB amounts should be streamlined and simplified where possible.
Q. There’s a lot of debate about what’s a realistic balance for SMSFs to be cost effective. What is the SMSF Association’s view?
If you’re planning to do absolutely everything yourself (except for accounting and audit services, which can be $3,000) then $250,000 might be realistic. But if you’re going to need assistance with investments, such as using a financial adviser as we would recommend, then your balance needs to be higher. What the SMSF Association is concerned about that is that recent recommendations and proposed policies regarding the minimum balance required have been based on evidence that is not as accurate or timely as desired.
For example, the Productivity Commission recently found that SMSFs with less than $1 million are not cost-effective. However, this was based on inconsistent ATO data, which was also recognised by the Commission. Using alternative data sources, the SMSF Association found $500,000 to be a more realistic figure for anyone starting an SMSF today.
A realistic balance for you will depend on your individual circumstances and objectives.
Q. Are the current contribution caps adequate for Australians approaching retirement age?
The SMSF Association believes that the current concessional contribution cap of $25,000 per year has negatively impacted the ability of individuals to save an adequate amount for superannuation to be self-sufficient in retirement. This is especially the case for people approaching retirement who have not had the benefit of a full career with compulsory superannuation or who have had broken work or contribution patterns.
The absence of a higher cap for older Australians fails to recognise that most people have a greater financial capacity to make voluntary contributions to superannuation later in life. The lead up to retirement, beginning around age 50, is a critical time period for individuals to plan and grow their retirement savings. These are the final years of full-time work and we believe Government policy should incentivise, encourage and provide opportunities for individuals to take ownership of their retirement savings at this time.
The SMSF Association’s view is that the cap for individuals over 50 should be set at $35,000. This would provide an extra $10,000 per year which can result in a significant positive impact on retirement outcomes.
Q. Females on average retire with a lot less super than males. What strategies are there for partners with significantly different account balances?
In most families, women are still the primary carers of children. That generally means more time out of the workforce than men, often returning to work part-time. Along with systemic issues such as the gender pay gap, rise of the gig economy and design of the superannuation system which means it is not as effective for part-time earners, women generally retire with much less than men.
For couples, member balance equalisation strategies are vital to ensure members can make the most of the $1.6 million transfer balance cap, and the total superannuation thresholds.
Current strategies in this regard have been to employ a re-contribution strategy, use spouse contribution tax offsets, or spouse contribution splitting. These strategies are limited in effectiveness due to contribution threshold and cap restrictions, withdrawal restrictions, and the lack of flexibility and incentives with spousal contribution measures.
For couples, retirement is not an individual equation but a function of both individual’s savings. A more equal allocation of retirement savings between a couple can lead to more equitable retirement outcomes for women and simpler administration of the superannuation system. The SMSF Association has therefore proposed that a spousal rollover measure be introduced for superannuation fund members.
In essence, the measure would allow an individual with a higher superannuation balance to rollover a portion of their superannuation balance to their spouse in order to help even out balances. This measure would provide an effective and efficient way to significantly improve the superannuation retirement gap between genders and improve equalisation for couples.
Q. What are some of the ways you can help SMSF trustees manage their obligations?
The 2019 Vanguard/Investment Trends Report identified that SMSF trustees are seeking advice on estate planning, tax and income strategies, post-retirement planning, portfolio strategies and investment selection. Our professional SMSF advisors can assist you in all of these areas to ensure your SMSF’s compliance as well as mitigate risks and maximise returns.
We can also administer your SMSF on behalf, guide you through your compliance obligations, provide professional auditing services, strategically manage your investments, or put together a post-retirement or estate plan. Whatever your advice need, Strategic Wealth Services is here to help. Give us a call on 03 9896 5100.