In my last blog post, I set out some of the long term reform challenges for the Council of Superannuation Custodians. It’s likely that the government’s 5 April announced changes will take up the bulk of the budget changes relating to superannuation, but it doesn't prevent some other measures from popping up. Reading through various Treasury pre-budget submissions, two reforms proposed by industry bodies caught my eye as deserving attention.
Tax deductibility of financial advice
Readers of this blog will be well aware of one of the key planks of the FoFA reforms – to improve the quality of financial advice and to strengthen the trust and confidence in the financial planning industry. The FoFA reforms have been a major undertaking for the industry, and as they are rolled out, the role of financial advice in many ordinary Australians’ lives is coming to the forefront.
One thing missing from this increased focus on financial advice is the tax consequences of obtaining such advice. As the legislation currently stands, getting a tax deduction for financial advice is not guaranteed. Deductability depends on precisely what kind of service is obtained (for example, the cost of an upfront plan is generally not deductible; however, recurring expenses to service an investment portfolio may be deductible). Both the Financial Services Council and the Financial Planning Association (FPA) have called for deductibility of financial advice fees for consumers to improve their access to affordable financial advice. Removing complexity and putting financial advice in the same category as tax advice (which is expressly made deductible in the Tax Act) should encourage more Australians to take a greater interest in planning for their future.
Greater flexibility for contributions
The Government’s 5 April announcement contained some welcomed changes to the concessional contribution cap rules, however they arguably don’t go far enough. The FPA is calling for a rolling cumulative contribution cap, which would essentially provide Australians with a lifetime contribution limit. A lifetime limit would avoid some of the problems that the restrictive annual caps have posed – namely, the penalties for excessive contributions, and the fact that an annual limit unfairly disadvantages people who are out of the workforce for periods of time (often women with children) who need to “catch-up” in later years. It would also allow younger people who don’t have the capacity to contribute to super due to other financial commitments to top up their super when they have greater disposable income later in their careers. The government has flagged that it will reduce the harsh penalties for excessive contributions (a move long called for by the industry) but there remains no commitment to addressing the fact that not everyone has a stable amount to contribute to super each year. As ASFA said in their submission “contribution caps should reflect the diversity of life experiences of Australians”, and the FPA’s rolling cumulative contribution cap would go a long way to achieving this goal.
We’d argue that both these measures have another kind of merit to them: they are simply easier to understand.
Simpler policy makes it easier for people to make short term decisions that are in their (and the nation's) long term interest. Individual financial independence equals better quality of life. And increased national retirement savings have many upsides including reduced call on taxpayers.
Both potential changes are also easier to communicate. In our industry complexity and confusion remain barriers to Australians being able to make good choices. In this contest simplicity is an aim in itself.
Budget night is only 12 sleeps away – only Wayne Swan and the boffins in Treasury know whether there are more superannuation “goodies” hidden under the tree. The rest of us must wait and see!
