Why the Government’s plan to increase the super contribution cap for balances less than $500,000 won’t work.

Assistant Treasurer Bill Shorten stated “This measure is one of a number of reforms, including increasing the superannuation guarantee rate to 12 per cent and a new government contribution for low-income earners, which will deliver substantial improvements in retirement savings and a fairer distribution of superannuation taxation concessions”.

The new government has obviously discarded the ‘Simpler Super’ motto as this proposed reform has the potential to once again over-complicate the superannuation system.

Whilst, in theory, the government’s proposal is an effective way for individuals with smaller superannuation balances to accumulate additional superannuation benefits, in practice there are a lot of issues that need to be clarified, including:

(1)    Whether previous withdrawals from superannuation will be included in the $500,000 threshold and if so will these withdrawals be indexed. If this is the case the reporting and administrative measures required would be reminiscent of the Reasonable Benefit Limit regime which we were all glad to see the back of;

(2)    How will individuals be expected to monitor their ‘assessed’ superannuation balance to ensure they have less than $500,000 in superannuation? Getting this wrong could be disastrous for many individuals as excessive contributions would be taxed at 46.5%;

(3)     At what date is an individual deemed to have a balance of less than $500,000. The 30th of June  presents a number of issues as many members of Self Managed Superannuation Funds are unaware of their balance until at least 6 months after the end of the financial year;

Given fiscal restraint, it is quite obvious the government cannot afford to allow everyone over 50 to contribute $50,000 to superannuation. However I would strongly encourage the government to consider the implications of introducing such a policy. Surely there is a middle ground i.e. concessional contribution cap of $35,000 per annum for all individuals over 50 – that would  make life much easier for all individuals while keeping our retirement savings system simple..