In early 2007 our since-retired accountant sat back in his chair and asked the crucial question about starting a self-managed superannuation fund: “Can you tell me why you want to do this?” Then he explained in detail just how onerous it is to run your own super fund. He explained how you need to keep records for 10 years, how big a burden it is in terms of compliance, and, crucially, even when you get an accountant to do the books, the buck stops with you. We decided to go ahead and roll over our superannuation balances from large funds because, if you’ll recall, in 2007 the world markets were imploding and some large listed companies were facing annihilation. We had not been happy with the returns from our managed super funds for some time. She Who Has Not Been An Acronym For A While had slipped her money into cash in 2006 (smart, eh) but the paltry returns (less than 2%) were prompting us to manage our own affairs.
A Big Mistake
I say that from the viewpoint of someone who just wants to lead a quiet life. Our SMSF has brought us a positive return in every year bar one and, despite our expensive travel habits, the balance has not atrophied as much as we had thought. But on a personal front, keeping the books and making sure one does not breach the terms of the all-seeing Trust Deed has been a burden for one of the world’s many anxious people.
I have a theory about anxiety – it troubles conscientious, honest people far more than it bothers the people who hide their money in Luxembourg and pay sanguine lawyers and accountants to keep the Australian Taxation Office (ATO) at bay.
Speaking of the ATO, did you know that among the many functions of our under-resourced tax collection agency is supervising self-managed superannuation funds?
The ATO charged us a supervisory levy of $388 this year. I spend about 11 hours a month updating our internal accounts, filing paperwork and reconciling bank accounts. Any simple errors made along the way can double the amount of time spent. If there was any justice in the world, the ATO should be paying me $388 for supervising my own fund.
Actually, given the ATO’s workload and clearly inadequate staffing levels, it’s a wonder they get around to me. Did you know the ATO has 17.18 million “clients” including 12.3 million individual taxpayers, 2.7 million small businesses, 750,000 trusts and 534,000 SMSFs? All of this work was carried out in 2013-2014 by 23,631 people (before the ATO was required to cut staff numbers by 3,000). They are an efficient lot, though – the ATO’s annual report says the cost of collecting $100 is 69c.
Come back, it’s quite simple really
For those of you who run screaming from the room whenever anyone mentions superannuation, I can understand your anguish. I was a business journalist throughout the era when successive governments pretty much ballsed it up. In 1980-something I set up my first super scheme, before Paul Keating introduced the Superannuation Guarantee Levy (1992), without which many of us would get to 65 with no super whatsoever.
The way super rules were in the early 1980s, I could make after-tax contributions and claim them on my personal tax return. This was before salary sacrifice became a thing. Stay with me here – it’s not that hard to understand.
Historical data from the Commonwealth Treasury tell us that prior to the 1980s, no tax was paid on contributions to superannuation funds. Super fund earnings were tax exempt and tax was only imposed on 5% of lump sum benefits. Pensions or annuities were taxed at the recipient’s marginal rates. Sounds like a fair and simple system.
Tax havens and other sharp practices
Ah, but then the Greed is Good era began and all sorts of chicanery was invented to minimise tax. So in1983, the government moved to thwart the concessional treatment of lump sum superannuation and termination payments.
They introduced a complex system for eligible termination payments (ETPs). The full value of ETPs was included as income, with the post 1983 component taxed at a maximum rate of 30%. For those aged 55 and over, the rate was reduced to 15% up to a threshold.
This system was tweaked in 1988 so the government of the day could bring forward tax revenue. This involved reducing tax on the post 1983 component of ETPs and imposing a 15% tax on super fund contributions and earnings.
Reforms to superannuation in 2007 aimed to make superannuation easier to understand (hah!), and improve incentives to work and save. Superannuation benefits paid from a taxed fund to people aged 60 and over became tax free (hoorah!) The treatment of ETPs was also changed to differentiate between payments received from employers and those received from superannuation funds.
Tax-free Super (Yippee)
These rule changes are said to be behind the exponential growth of DIY Super, which 10 years ago represented less than 10% of all funds.
The ATO reported in June 2014 there were 534,000 SMSFs in Australia with total assets of $557 billion. About 28% of these funds have $1 million or more in assets, but the median fund balance is $518,000.
The ATO is collecting $207 million a year in supervisory levies. It seems iniquitous that they charge $388 whether your account balance is $2.95 million or $295,000. Scope for a sliding scale, perhaps?
I mentioned salary sacrifice before. For a two-income family, this can be a painless way of saving for your old age, which will come along soon enough. In the last eight years of my full-time working life, I was taking home a small wage and shovelling the rest of my pre-tax income into my super fund.
Along the way, there were sterling years when industry-based super funds earned 25%+ and charged very little for managing our money, so as a strategy it paid off. I still have an industry super fund which, now that I am a certain age, is just another bank account from which I can withdraw lump sums whenever needed (as long as it lasts).
Sennheisser headphones maybe?
“Whenever needed” can include expensive, age-related items like hearing aids, crowns, ride-on mowers and mobility scooters (which may or may not be deductible).
Or indulgences like producing an independent songwriter album, augmented by some amazing musicians including Silas Palmer and hopefully ready for sale and download in early 2015.
In coming weeks I will be writing about crowd funding, the creative urges of older Australians, the struggle of independent sound engineers, the death of the CD, the not-quite successful birth of the paid music download, the endemic practice of downloading and copying anything that is not tied down, occasionally mentioning a finely crafted recording of truly excellent songs.
Since you have all been so patient working your way through the perils of superannuation, I’ll leave you with the (free) version of Loudon Wainwright III’s protest song “Something for Nothing.”
Ain’t irony great!