Click here to view the ABC’s 7.30 Report interview of Save Our Super’s Jack Hammond QC and John McMurrick on Kelly O’Dwyer.
Click here for the transcript of the interview.
Save Our Super believes that major changes to the existing rules of the Australian superannuation system should not be made unless, at the same time, appropriate grandfathering provisions are included in the legislation.
“Grandfathering provisions” are qualifying clauses within legislation which exempt those people already involved in the activity with which the legislation deals.
Absent an acute crisis, to get elected with an economic reform programme, it’s probably necessary to guarantee that existing beneficiaries will keep their benefits.
But even with grandfathered changes, a government that accepts we have a spending problem rather than a revenue one can make a big difference over time.
Especially with the 2014 budget, the Abbott government probably exceeded the reform speed limit but there was never any confusion about the direction of travel.
There are many examples of Federal Parliament’s use of grandfathering provisions when major changes were made to the superannuation system. For example:
in a September 1996 Research Paper, the Reserve Bank of Australia said:
“Important changes to the tax rules were made in 1983, 1988, 1992, and 1996, which generally reduced the tax benefits to superannuation, although the treatment remained concessional. … Changes were generally grandfathered at each stage, so that retirees would receive benefits taxed under a variety of rules depending on when contributions were made.” (p 9); and
in a July 2015 study, Superannuation Policy for Post-Retirement, the Productivity Commission said:
“Australia’s superannuation system has been subject to regular policy change since its inception (chapter 1), and those people significantly affected by major rule changes have generally been afforded grandfathering provisions that maintain their previous entitlements.” (p 101).
The historic use of appropriate grandfathering provisions to protect those who were significantly affected by major superannuation rule changes, justifies their use in the Coalition’s Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016) and Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016).
However, none of Save Our Super’s appropriate grandfathering provisions are included in those two Acts.
Jack Hammond, QC, founder of Save Our Super
Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official
Any government must retain the right to change policies as circumstances change over time. Policy change always poses two questions: Is the change an improvement? And is it properly implemented? This article focusses on implementation issues, which are particularly important when changing super laws. (In an article to appear in the June 2017 edition of the SuperGuide newsletter, Jack and Terry will evaluate whether the July 2017 changes constitute an improvement.)
Since the income tax law first specified taxation of superannuation in 1915, it has always legislated taxation treatment over the contribution, accumulation and drawdown phases of this uniquely long-lived financial product. Unless the law included specification of how superannuation will be taxed on withdrawal, no one would accept the restrictions and uncertainties from long-term saving in super, even if contributions and accumulation were favourably treated.
The legally specified tax treatment affects three generations:
Young workers are compelled through the Super Guarantee to contribute to super as soon as they first earn $450 (gross) in a month – a trigger that has never been increased since its introduction in 1992 and is now lower than the dole. Drawdown of funds is prohibited (save in limited circumstances) over a working life which can exceed 40 years, and then superannuation savings have to last a retirement which may be a further 30 years or more.
These extremely long commitments by savers make superannuation policy change particularly sensitive.
‘Grandfathering’ means that transitional provisions continue to apply an old rule to certain existing scenarios, or certain individuals. ‘Grandfathering’ provisions continue to apply an old rule to some existing situations while a new rule will apply to all future cases. Frequently, the grandfathering exemption is limited; it may extend for a set time, or it may be lost under certain circumstances.
A retired Treasury officer, Terrence O’Brien, had written to The Australian newspaper on 11 May 2016 about the 2016 Budget’s superannuation measures. He said:
Past increases in superannuation taxation used to be grandfathered, so as not to disadvantage those who had responded in good faith to previous incentives to save for their retirement income. Grandfathering reflected the commitments that governments encouraged or compelled workers to undertake when locking their savings away for 40 or 50 years. …
Jack contacted Terry to seek elaboration of those claims. The conversations gave rise to an article for the Centre for Independent Studies titled ‘Grandfathering super tax increases’, and a series of submissions by Save Our Super to Treasury on exposure drafts of the legislation, and to Ministers, backbenchers, and the Senate committee that examined the Bills that have now become law.
Grandfathering has been used frequently, often for the purely pragmatic reason of gaining democratic support for a change that might otherwise be defeated.
In applications such as superannuation law, grandfathering gains an important moral dimension, and a further practical dimension. Morally, it honours legal commitments governments have made to citizens and on which citizens have lawfully based their affairs, while applying the new rules prospectively to citizens who have the flexibility to adapt to them. Practically, it is ideal for addressing fiscal or demographic challenges that are developing slowly. It can permit early action to prevent a problem worsening, without reducing the living standards of current retirees.
Save Our Super submissions noted that people had lawfully saved, planned and retired on the basis of legislated super rules introduced only a decade earlier, in the Costello Simplified Superannuation System reforms of 2007. They had been encouraged into depositing funds into super under the legislation of one set of rules, only to have those rules changed to their disadvantage after placing their funds irrevocably into the super system, and indeed after retirement in many cases.
Although contemporary politicians seem to have forgotten, grandfathering significantly adverse changes in superannuation law has a valuable 40-year history in Australia. Prime Minister Whitlam commissioned Justice Kenneth Asprey to propose tax reform through a Taxation Review Committee that reported in 1975. One important focus of Justice Asprey was exploring how to make superannuation serve retirement income objectives more effectively, with minimum disruption to life savings plans. He offered five timeless insights in Chapter 21 of the Asprey Report, officially titled the Taxation Review Committee Full Report (released on 31 January 1975):
Source: The Taxation Review Committee Full Report (31 January 1975), Chapter 21: Income Taxation in Relation to Superannuation and Life Insurance.
While there was little immediate application of the recommendations from the Asprey Report, it subsequently steered Australian tax reform for some 30 years in several key areas. When Treasurer Keating radically increased the tax on superannuation lump sum payments in 1983, he succeeded by applying the Asprey principles exactly: he ensured the ten-fold increase in tax on a lump sum benefit applied only to those dollars of the lump sum saved after the change; any savings pre-dating the change and the earnings on them continued to be taxed under the more concessional rules applying when they were saved. There have since been many other examples of the use of the Asprey grandfathering principles to adverse changes in both superannuation and the Age Pension (for details of these examples, see Terry O’Brien’s article, Grandfathering super tax increases https://www.cis.org.au/app/uploads/2016/08/32-3-obrien-terrence.pdf .
The frequent recourse to grandfathering significantly adverse policy changes, over more than 40 years, has set the reasonable expectations of citizens for how any necessary changes should be made. It is the violation of those expectations that helps explain the vociferous opposition many super savers have expressed to the Coalition Government, and to Save Our Super.
As recently as February 2016, Treasurer Morrison seemed to understand the importance of grandfathering and the detrimental effect of retrospective changes. In his speech to the SMSF Association 2016 National Conference in February 2016, he said:
One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.
Source: Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016 (emphasis added).
In Save Our Super’s view, the five Asprey principles remain the best practical guide to how to introduce any necessary adverse changes in superannuation law while avoiding ‘effective retrospectivity’. They should have been used for the adverse measures in the 2016 Budget (with those changes taking effect from 1 July 2017), as Save Our Super submitted at the time. Even now, they should be applied to mitigate the destruction of trust and confidence in superannuation arising from those measures.
Jack Hammond, QC, founder of Save Our Super
Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official
About the authors:
Jack Hammond: Save Our Super’s founder is Jack Hammond QC, a Victorian barrister for more than three decades. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne. During his time at the Victorian Bar, Jack became the inaugural President of the Melbourne community town planning group Save Our Suburbs.
Terrence O’Brien: Terrence O’Brien is a retired senior Commonwealth public servant. He is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His most senior positions have also included several years in the Office of National Assessments, as senior resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and at the Productivity Commission.”
For more information…
For more information about the July 2017 super changes, see the following SuperGuide articles:
This article was first published on 23 May 2017 on the superguide.com.au website. Click here to see the article.
“Trust” and “Certainty” are Save Our Super’s “Pillars of Principle”. They are fundamental. Only with those two pillars of principle in place can a fair and sustainable Australian superannuation system survive and flourish.
First, a government should not undermine people’s trust in the superannuation system.
Trust is shattered when, for example, a Minister like Treasurer Morrison makes, and then shamelessly breaks, his promises regarding the government’s future tax treatment of superannuation.
Secondly, a government should not undermine certainty in the superannuation system.
Certainty is lost when, for example, government changes long-standing superannuation rules and policies without notice nor consultation and without the use of appropriate grandfathering provisions.
For example, for over 100 years, since at least 1915, the pension account of superannuation fund earnings has been exempt from taxation. There are sound policy reasons for not taxing people in their pension phase. They are at their most financially vulnerable time, with none, or limited opportunity to increase lost capital or increase their paid worktime. Yet, as a matter of principle, both the Coalition and Labor will tax peoples’ pension phase account earnings.
Moreover, even where people have relied upon existing rules and policies, and those people will be significantly affected by proposed changes, neither the Coalition nor Labor will protect their superannuation savings by the use of appropriate grandfathering provisions.
Only after government has considered and applied those two pillars of principle, should government turn to see which, if any, changes should be made to the superannuation system, and then calculate their taxation effect.
Government should not start with the amount of tax they want to raise or save from superannuants, and then formulate their superannuation policies.
Save Our Super will vigorously advocate that the L/NP Coalition, Labor and other parliamentarians adopt those two pillars of principle in the application of their superannuation policies and legislation.
Save Our Super will not negotiate, horse-trade or bargain away the two fundamental pillars of principle, namely, “Trust” and “Certainty”. Their application is essential for good public policy and precedent.
Save Our Super calls for all Federal parliamentarians to promote and support superannuation policies and legislation which contain grandfathering provisions that maintain the previous entitlements of those Australians who will be significantly affected by major rule changes to the then existing superannuation provisions.
Save Our Super is an apolitical community-based group which makes the public aware of the implications of the Coalition’s superannuation legislation and Labor’s superannuation policies.
Some of our supporters vote Liberal/National; some vote Labor; others vote for other parties or independents. But we are united in Our Call For Action by the Federal Parliament.
It is manifestly unfair and unreasonable to individuals who now, or will, rely on their superannuation savings for a retirement income under the then existing rules to make new rules which significantly affects them.
Therefore, appropriate grandfathering provisions need to be put in place to protect all significantly affected Australians.
A Government’s right to govern is based upon the bond of trust between the people and their Government. Trust is the currency of Government. When, by a breach of trust, a Government debases that currency, the people lose confidence in their Government.
And so it is when Governments make major rule changes to an existing superannuation system. If they do not provide appropriate grandfathering provisions, Australians will lose faith in the superannuation system.
Those who will lose faith include the millions of Australians who are effectively compelled by the Australian Compulsory Superannuation Scheme to place their trust in the Government.
Furthermore, those who are yet to enter the superannuation system need to be assured, before they commit their savings to the superannuation system, that they can trust Governments to always treat them fairly and reasonably.
Australians’ investment in superannuation is an almost life-long savings plan. It starts from the first superannuation contribution and lasts until the final pension payment.
In 1991, the Superannuation Guarantee levy was imposed. Australian’s participation in superannuation has accelerated from about 30% of employed persons to over 90% today.
Since the 1980s, Australia’s accumulated superannuation savings have risen from an amount equivalent to about 30% of GDP to about 120% of GDP today.
Over time, if more Australians contribute more super funds for longer proportions of their working lives at higher rates, average superannuation balances at retirement should continue to rise.
However, that growth is threatened by the Coalition’s superannuation legislation and because appropriate grandfathering provisions are not included in that legislation.