Category: Features

Why Labor has got its sums wrong on franking credits

The Australian

20 April 2018

Robert Gottleibsen

In the great franking credit debate someone has got their sums horribly wrong. Either Opposition Leader Bill Shorten and his shadow treasurer Chris Bowen are right and enormous sums are going to be raised or, alternatively, the financial planning and accounting industries, which are dealing with the people who must pay these taxes, are right and, apart from a particularly select vulnerable group, there are no vast sums to be raised.

We won’t know who is right until around May or June next year and by that time the election will be rapidly approaching.

I believe that Shorten and Bowen have made a horrendous mistake in their money-raising estimates and this represents the first big mistake that Shorten has made since he became opposition leader.

Worse still, Shorten and Bowen are promising vast expenditure and tax reductions on the basis of these fictitious money raisings. Most accountants, financial planners and myself believe that when Scott Morrison introduced his superannuation pension mode taxes and a $1.6 million pension mode tax-free cap last year he absorbed most of the franking credit bonanza.

If I am right then he is the Liberals’ best chance to achieve an improbable victory in the next election.

But I can’t emphasise too strongly that Chris Bowen honestly believes I am wrong and is adamant that he has taken into account the Turnbull government’s 2016 budget superannuation measures, including the $1.6 million pension mode balance cap.

Bowen says that Labor’s policies have been fully costed by the parliamentary budget office, which is independent and legally obligated to cost out policies, including the $1.6 million superannuation cap.

So for me to be right the budget office must be wrong.

But Treasury is notorious for making such mistakes and in this case there are no past figures available because the superannuation tax did not start until last July and it will not be until this time next year that we start to see the results.

So let’s look at how the investment communities are adjusting their strategies to make sure that there is no revenue bonanza for Bowen and Shorten. The essence of the Bowen proposal is that if an investor/superannuation fund receives franking credits and those franking credits can’t be offset against other taxes payable but rather come to the investor/superannuation fund via direct cash payment, then franking credits will be lost.

In other words as long as an investor/superannuation fund has sufficient other taxable income they can receive franking credits.

Starting with individuals, there is no doubt that a lot of people have big holdings in banks and other investments that carry full franking credits on the dividends.

If they have no other income those investors then will not get their franking credits. But most people with private investment portfolios have properties and other investments that produce non-franked taxable income and many are also working and that also provides taxable income. But there will be a group of people or companies without offsetting income and therefore they going to lose their franking credits under the Bowen plan. .

But Bowen can’t start the new regime until July 1, 2019 so there is the balance of this financial year and all of the next financial year to make sure portfolios are properly balanced for franking credits. Only the mugs will be caught and those that are currently receiving large franking credits into personal accounts are usually not mugs.

And then the next vulnerable group are ordinary non-pension mode superannuation funds whether they be industry, retail or self-managed. These are funds not in pension mode and therefore income is taxed at 15 per cent and again it is possible that some self-managed funds in this situation are stacked to the eyeballs with listed investment franking credit investments, but it is an imprudent investment strategy. Superannuation is about a balanced approach.

But once again those who have adopted this imprudent policy will certainly change it prior to July 2019.

Then we get to the most vulnerable people — those with superannuation funds in pension mode. The only figures we have available to us at this stage are those for the year ended June 30, 2017 and those figures show that there are substantial cash sums being paid in franking credits because the money in the pension mode funds was not taxable and so all the franking credits came as a direct credit.

But on July 1, 2017 a new tax system started and balances over $1.6 million are now taxed at 15 per cent — the same rate as non-pension mode superannuation funds. Accordingly exactly the same situation as non-pension mode applies. Again most superannuation funds will have a mix of assets and the non-franking credit assets and will produce taxable income which can offset the franking credits and enable them to be retained.

Yes, there will be some taxation raised by the Bowen measures but people are going to adjust their portfolios to ensure that the amount paid is small.

If people have pension mode superannuation assets under $1.6 million then they are a prime Bowen target because income from these assets is tax free so all franking credits are a separate payment and will be lost under the Bowen plan.

But the shadow treasurer has exempted those on government pensions.

We don’t know exactly how this will work but it seems those with assets that are low enough to entitle them to a government pension will receive franking credits, so in the roughest of terms it is only those people with assets between $800,000 and $1.6 million that will cop it in the neck.

Those with assets close to the government pension cut off point are planning to reduce those assets to protect the franking credits and obtain a part pension.

But there are still a lot of people in the asset bracket of $800,000 to $1.6 million but there will not be any massive lump payments and people will change their portfolios especially as banks have not been performers. It is this group of savers who saved to avoid being a burden to the public who Shorten and Bowen are attacking.

But even for these targeted people it looks like there could be a let-out. Bill Shorten said that those who have their money in retail and industry funds — the so-called APRA funds — will be protected. Now Chris Bowen is not as clear so this is an area of major doubt and we’ll have to wait closer to the election to have it clarified.

But if industry and retail funds are treated as one organisation rather than a series of individual members then they have substantial tax payments that easily offset franking credits. Those with vulnerable portfolios in self-managed funds will simply hand the management of their equity to industry or retail funds and their franking credits will be protected. If that’s the way it turns out then the real result of the Shorten-Bowen plan is an attack on self-managed funds.

This would be grossly unfair. As I understand it, the industry funds believe Shorten will deliver and are planning a massive campaign to destroy large segments of the self-managed super fund movement.

The accounting and financial planning people can’t see a major money pot — Morrison took it away last budget. But to be certain, we will have to wait for May-June 2019, as that is when the actual 2017-18 figures from superannuation funds will be available. And if there is no pot of money Shorten will have to recant on promises or borrow the money. Not a good way to start an election campaign.

Meanwhile this is an incredibly wonderful opportunity for the government because it creates uncertainty around pensions and has a hint of chaos.

If I was the government I would freeze all superannuation tax measures for five years and I would also be briefing my marketers to prepare a pension scare campaign that equates to the ALP’s Medicare scare campaign.

Both have no validity but like all good scare campaigns it doesn’t matter.

Labor’s excess dividend imputation credits Media Release – 27 March 2018








Labor’s reforms to excess dividend imputation credits will crack down on an unsustainable tax loophole that gives tax refunds to people who don’t pay income tax, while protecting pensioners and paying for better schools and hospitals.

Today, Labor is introducing a new Pensioner Guarantee – protecting pensioners from changes to excess dividend imputation credits.

The Pensioner Guarantee will protect pensioners who may otherwise be affected by this important reform.

Labor is cracking down on this tax loophole because it will soon cost the budget $8 billion a year.

Much of this goes to high-wealth individuals, with 80 per cent of the benefit accruing to the wealthiest 20 per cent of retirees. The top one per cent of self-managed superannuation funds received an average cash refund of more than $80,000 in 2014-15.

Labor does not think it is fair to spend $8 billion a year on a tax loophole that mainly benefits millionaires who don’t pay income tax – not when school standards are falling and hospital waiting lists are growing longer.

$8 billion a year is more than we spend on public hospitals or child care. It’s three times what we spend on the Australian Federal Police.

Labor will close this tax loophole to help pay for better schools, better hospitals and tax relief for working Australians – but we’ll protect pensioners with our Pensioner Guarantee.

We believe in a fair go for pensioners. We know they are struggling with the cost of living, especially with out of control power prices and Turnbull’s cuts to Medicare.

That’s why Labor is making sure pensioners will still be able to access cash refunds from excess dividend imputation credits.

The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

This means that every pensioner will still be able to benefit from cash refunds.

Labor has always protected pensioners – and we always will.

In contrast, the Liberals have cut the pension, increased the cost of living, and are trying to force Australians to work until they are 70.

Turnbull has:

  • cut the pension for 277,000 retirees;
  • kicked another 92,300 retirees off the pension altogether;
  • cut pension concessions that help pensioners with costs including rates and registration; and
  • is trying to cut the $365-a-year energy supplement for 400,000 pensioners.


Turnbull’s cuts will see more than $7 billion taken out of the pockets of Australia’s pensioners.

Turnbull has been the worst prime minister for Australia’s pensioners in living memory.

Labor’s policy is fair and responsible because it cracks down on an unaffordable tax loophole while protecting pensioners and paying for better schools and hospitals.

Mr Turnbull and his Liberals are protecting tax loopholes for millionaires, giving a $65 billion tax handout to multinationals, increases taxes for seven million working Australians, and cutting funding to local schools and hospitals. They are totally out of touch.

Labor’s policy will improve the budget position by $10.7 billion over the election forward estimates and $55.7 billion over the medium term.  This is a reduction of $700 million over the election forward estimates compared to the original announcement, and $3.3 billion over the medium term.

Part of this saving will be used to fund Labor’s Australian Investment Guarantee – delivering tax relief for businesses investing in Australia and in Australian jobs.

Labor’s policy has been fully costed by the independent Parliamentary Budget Office. The Parliamentary Budget Office’s costings are based on the current budget baseline, which includes the effect of the $1.6 million balance transfer cap.

More information on Labor’s policy can be found here.


Authorised by Noah Carroll ALP Canberra

Labor’s Pensioner Guarantee for dividend imputation credits

27 March 2018

Sourced from:
– (no longer available)

“The Uncertain Path of Superannuation Reform” by Peter Costello

SuperRatings & Lonsec
Day of Confrontation 2017
Grand Hyatt, Melbourne

12 October 2017

Award superannuation approved by the Australian Conciliation and Arbitration Commission is now 30 years old. Superannuation implemented by the Commonwealth under its tax power – the Superannuation Guarantee Charge – is now 25 years old. We have quite a deal of experience to judge how the system is performing. It is no longer in its infancy. It is maturing, if not a fully mature system.

The origin of Award superannuation was the ALP – ACTU Accord Mark II of September 1985. It was agreed there that a 3% wage rise should be paid, not to employees, but into superannuation on their behalf. The then Government also pledged that:
“before the expiration of the current parliament the Government will legislate to: – establish a national safety net superannuation scheme to which employers will be required to contribute where they have failed to provide cover for their employees under an appropriate scheme”

Taken together the proposal was:-
(a) employer/employee schemes would be certified by the Arbitration Commission where there was agreement;
(b) outside that there would be a national safety net superannuation scheme;
(c) a 3% contribution would be a safety net, not to replace the Age Pension but to supplement it.

Neither the contribution into the Fund nor the earnings of the Fund were to be taxable. That was introduced later, in 1988, when the Government needed revenue, so it decided to bring forward taxation receipts otherwise not payable until there were end benefits. With few lonely exceptions, Governments have been hiking superannuation taxes ever since.

There had been various proposals throughout the 20th Century to set up a funded retirement scheme in Australia The Chifley Government introduced the National Welfare Fund Act of 1945 to impose an additional tax levy which, along with a payroll tax paid by employers, would pay for such benefits. The money was separately accounted for but nonetheless treated the same as consolidated revenue. It was formally abolished in 1985. No individual benefits were ever paid from it. When I became Treasurer in 1996, people were still writing to me asking about their entitlements in the National Welfare Fund! There was nothing to look for.

In 1973 a National Superannuation Committee of Inquiry was established and in 1976 it reported and recommended a partially contributory, universal pension system with an earnings – related supplement. This was rejected by the then Fraser Government.

The first leg of Award superannuation, Consent Schemes were endorsed by the Arbitration Commission to come into operation where there was Employer – Union agreement from 1 July 1987.

The second part – a national safety net scheme was never followed through.

What the Government, in fact, did was to introduce the Super Guarantee System which provides that unless an employer pays a superannuation contribution into an approved Superannuation scheme it is liable to pay an equivalent or greater charge to the Tax Office. No sane employer would give money to the Tax Office when they could use it to benefit employees. As a result money was forced into the superannuation system under the Commonwealth taxation power.

When I became Treasurer (1996), the SG was 5% for small business and 6% for big business. When I left office (2007) it was 9% for both. In 2014 it went to 9.5% where it is today. It will start to increase again in 2021 as the legislated table shows:

1 Year starting on 1 July 2013 9.25
2 Year starting on 1 July 2014 9.5
3 Year starting on 1 July 2015 9.5
4 Year starting on 1 July 2016 9.5
5 Year starting on 1 July 2017 9.5
6 Year starting on 1 July 2018 9.5
7 Year starting on 1 July 2019 9.5
8 Year starting on 1 July 2020 9.5
9 Year starting on 1 July 2021 10
10 Year starting on 1 July 2022 10.5
11 Year starting on 1 July 2023 11
12 Year starting on 1 July 2024 11.5
13 Year starting on or after 1 July 2025 12

The SG  system was superimposed (no pun) on the existing landscape – Industry Funds that had been agreed on and certified by the Arbitration Commission, and private – sector company or public offer plans.

After the idea of a national safety net scheme was dropped, there was little interest in a financial structure that would maximize benefits for those compulsorily enrolled in the scheme under threat of taxation penalties. Yet since this is such a valuable stream of income, mandated by the State, there has always been a very vigorous argument between potential recipients about who should receive it.

I will come back to that in a moment.

Australia’s retirement system therefore consists of three parts:
1. The Commonwealth Age Pension currently fixed at 27.7% of Male Total Average Weekly Earnings – maximum rate of $23,254 p.a. for an individual and $35,058 p.a. for a couple . This is income tested and asset tested. It is totally unfunded. It is paid out of tax revenues received in the year it is paid or (if the Budget is in deficit) paid out of a combination of tax revenue and Government borrowings for that year.

2. The Superannuation System. This is a defined contribution scheme. It guarantees no defined benefit. It is fully funded, but subject to investment risk.

3. Income – whether by way of defined benefit or from defined contributions – over and above the SG system. Voluntary contributions are usually the subject of a tax incentive. As we know both sides of politics have recently combined to reduce the tax incentives to discourage larger amounts in private savings.

Average Retirement Benefits

According to APRA’s Annual Superannuation Bulletin, the average balance in the Age Bracket 60 to 64 (coming up to retirement) in an APRA regulated entity with more than four members as at 30 June 2016 was:
Male- $148,257
Female- $123,690

These figures would include those who have made voluntary contributions, that is, those under both the second and third stream above.

Those who have only received the SG payments (with no voluntary contributions) would have considerably less.

If you were born in 1956 you could have been in the SG system since age 30 – for 30 years. This is not a system still in infancy. We are now starting to get people who have spent nearly their whole working lives in it. On average (male and female) the balance is $137, 144.

That balance is worth less than the value of 6 years of Age Pension. Yet life expectancy for males at age 60 is 26.4 years and for females 29.1 years.

The SG system will not provide anyone with average life expectancy a retirement income for life, not at a comfortable level and not at all.

What the SG system will do, is supplement a person’s Age Pension. And it is particularly harsh in that respect.

The Age Pension is subject to income and assets test. Roughly, for each $100,000 of assets (after the first), a pensioner will lose $2,000 of pension. They will lose 50 cents in pension for each dollar of income or deemed income over the threshold. It is an extraordinary high effective marginal tax rate.

Superannuation can give a person extra up to the threshold in assets and income, but after that every dollar they get back results in 50 cents being clawed out of their pension.

The Commission of Audit, which reported in February 2014, noted that around 80% of Australians of pension age are reliant on the Age Pension. It then looked at what would happen if contributions were lifted to 12%. It found that with a 12% SG over the next 40 years, the same number – roughly 80% would be still be on the pension. The difference is that the SG would reduce many of those now on full pension to a part pension (about 20%).

The SG system does not take people off the pension. It supplements it.  And as it supplements it, it reduces their pension 50% for each dollar (above the threshold). In February, APRA reported there were total superannuation industry assets of $2.1 trillion as at 30 June 2016. “Small funds which include SMSFs, small APRA funds and single member – approved deposit funds accounted for 29.7 per cent of total assets. Retail funds held 26.0 per cent of total assets, industry funds held 22.2 per cent, public sector funds held 17.0 per cent and corporate funds held 2.6 per cent.”

Over the last 10 years the fastest growing sector of the superannuation Industry was the SMSF sector. While total superannuation industry assets increased 132% SMSF assets increased 206%. This is the truly voluntary sector of superannuation. These are the people aiming to, and the people likely to, fund a retirement that will take themselves off the Age Pension entirely and for life.

This works out to be a great saving to the taxpayer.

Of course, this is the sector the Government has targeted with new tax increases, particularly through caps on contributions.

What could be done?

Let us think of how this system of fully funded pension supplement could have been differently structured.

Canada is a country that shares many similarities with us – population 36 million with a similar level of per capita income. Like us it has a three tier retirement income system consisting of :

(a) Old Age Security Pension (lower than ours)income tested and unfunded;

(b) The Canadian Pension Plan (CPP), a defined benefit Plan with compulsory contributions, that is partially funded;

(c) Private savings.

The contributions into CPP are currently 9.9% The employer and the employee pay half (4.95%) each. It is planned to go to 11.9% soon. The CPP makes pension payments to contributors when they reach 65 equal to 25% of the earnings on which contributions were made over 40 years. At present the average is around C$7,839 and the maximum is C$13,370.

Like our SG scheme it is an occupational scheme. Unlike ours (because it is DB) it is not fully funded. In another respect the CPP is very different. It is managed and invested by a Government body, the Canadian Pension Plan Investment Board (CPPIB). CPPIB currently has C$300B in investments. It has economies of scale. It is extremely active in Australia. It would be one of the most respected investors in the world.

Let me say that I believe that, subject to safeguards, people should be able to choose who should manage their superannuation. But the reality in Australia is there is a very large cohort of people that don’t.

Their money goes into so-called “default funds” that get allocated to an Industry Fund under an Industrial Award or union agreement, or to a private sector plan by an Employer.

With default funds we are dealing with the money of people who make no active choice about where they want the their money to go or how it should be invested.

Instead of the Government arbitrating between Industry Funds and private funds, there is a fair argument that this compulsory payment should be allocated to a national safety net administrator – let us call it the Super Guarantee Agency – a not for profit agency, which could then either set up its own CPPIB – like Investment Board – the SGIA – or contract it out – the Future Fund Management Agency could do it. There would be huge economies of scale. It would end the fight between the Industry and the profit sector over who gets the benefit of the default funds. Neither sector has been able to attract the money voluntarily. It exists by reason of Government fiat. The Government has decided it should go into the Super system. It could show some interest in managing it in a cost – efficient way.

Default contributions are now spread between many Funds. They allocate them to equity products, fixed income products etc. Sometimes the different superannuation funds use the same managers each paying the fee to do so. Those fees would be reduced if the money were pooled together, if there were one default fund making larger allocations, if market power were used to reduce costs.

It is the other side of the investment equation that particularly interests me. One side is how it comes in, the other side is how it is invested out. You all know that the biggest variable in the benefit that a retiree will receive from Super is the investment return. A bigger pool with economies of scale and access to the best Managers would likely drive down costs and drive up returns. It would be in the interest of all, except of course the mangers, and those interested in using administration fees for other purposes.

CPPIB is an example of how a long term Sovereign Fund investing defined contributions can get global reach, and valuable diversification in asset class and geography.

It also adds to the National skill base that Canada has: – a Sovereign Institution of sophisticated investors operating in global markets. The feedback and expertise developed is very valuable to national decision-makers.

The Concentration in Australian Equity Markets

Now I know that Super Ratings is releasing or has just released its ratings on performance of various funds.

The year ended 30 June 2017 was a good year for superannuation returns. I congratulate those of you who have done well.

For Balanced Funds (growth assets ratio between 60% and 76%), the top quartile return was 11.15% and the bottom quartile was 8.28%. It would be wrong to conclude this means there is a 3% return for skill. Inside this category – Balanced Funds – there is a large variation for growth assets – 15%. We would expect allocation further up the risk curve to do better – and in fact that was the case.

What made returns good this last year was the bounce on global equity markets. You know and I know that the most important factor in return is the overall market movement – Beta.

And what worries me is that the Australian Market is overwhelmingly influenced by Bank Stocks. Bank Stocks make up 25% of the ASX 200. They are either the four largest companies on the Australian Stock Exchange or 4 out of the top 5 – depending on the price of BHP.

There would not be another Western Country where the Stock Exchange is so dominated by financials and in particular by the main banks – the quadropoly as I have previously described them.

We therefore have a situation where superannuation returns are unduly influenced by the returns of the big four Australian Banks. I do not think it is healthy to have retirement incomes so significantly concentrated in this way.

I have no doubt it is an enormous advantage for the Banks. It means that every Australian in a super scheme that holds growth assets (and every working Australian is in a super scheme by virtue of Government legislation, and every person short of nearing retirement will be in growth assets), is invested in Banks.

Banks never have to fear a flight of Australian investors.

By reason of their size and by reason of compulsory pool of savings, Australian superannuation funds with their compulsory rivers of gold have to hold them.

The four big banks are privileged. They are immune from takeover. They cannot merge. They have an ever ready supply of superannuation money flowing in to their stocks. You can see why an air of impregnability and complacency has seeped into the management in Australian banks. Market discipline is negligible. And the returns on equity are hardly matched anywhere else in the world.

Again judging from the experience of CPPIB, the ability to accumulate and diversify with economies of scale might be good for superannuation members and it might also be good for the banking system – not so much in price – but in introducing a little more competition and market discipline.

The big mistake in developing our pension supplement (the occupational contributory superannuation system), is that all the focus was on getting money into it, with not enough thought about the optimal way of managing it. I do not say it has caused it, but it has contributed to concentration of financials in the Australian Stock Market.

The interaction of the tax and welfare system (particularly very high withdrawal rates) means compared to reliance on the Age Pension alone, the system does not bring anything like the benefits touted. To really calculate the benefit of SG, you need to deduct foregone age pension it will trigger.

The system has created an industry. It has certainly delivered benefits for those working in it. But it does not exist for them. It exists for those who are forfeiting wages month in month out in the expectation that in 10, 20, 30 or 40 years they will get to enjoy the fruits of their labour.

Peter Costello

Former Treasurer of Australia – (1996 – 2007)

In superannuation reform, O’Dwyer must heed Costello

The Australian

17 October 2017

Judith Sloan – Contributing Economics Editor


You’ll have heard that our system of compulsory superannuation is the envy of the world. But dig a little deeper and you’ll discover that the people making this claim are the beneficiaries of the system, rather than the superannuants.

The superannuation funds, the trustees, the fund managers and the workers more generally who are employed in the industry think compulsory superannuation is the bee’s knees. But the reality is that superannuation is a dud product for pretty much every present and past superannuation member and, deep down, the government knows this.

In effect, compulsory superannuation is a tax-gathering mechanism that knocks off many people’s entitlement to the Age Pension, full or part, while forcing them to forgo valuable current consumption — think buying a house, paying school fees, taking a holiday.

It is a form of compulsory saving that is taxed on the way in, taxed while it is earning, and taxed, implicitly or explicitly, on the way out.

We should be clear on one thing: governments should use compulsion as sparingly as possible. Think compulsory vaccination, compulsory schooling, compulsory military service, compulsory helmet-wearing for cyclists. Sometimes these interventions are debatable, and rightly so.

The arguments that were used to justify the introduction of compulsory superannuation were twofold: Australia needed to raise its rate of savings, as well as overcome people’s short-sightedness in order to provide for a comfortable, dignified retirement. The alternative was to compel people to save to achieve this outcome.

The first rationale was quickly discredited and is no longer used as an economic argument. The second line of reasoning has a series of weaknesses, most of which were discussed last week by former treasurer Peter Costello.

Costello, now the chairman of the Future Fund, made the point that the system of compulsory superannuation is reaching maturity but is failing to meet its intended objectives. The present final balances of superannuants are relatively meagre, on average $148,000 for men aged 60 to 64 and $124,000 for women.

He notes that the average balance for men and women is worth “less than the value of six years of the Age Pension”. Nice, but no cigar.

Moreover, 80 per cent of those 65 or older rely on the pension, in full or in part.

And even in the context of a lift in the rate of the superannuation guarantee charge — from the existing 9.5 per cent to 12 per cent, heaven forbid — the rate of reliance on the pension doesn’t change overall, although more retirees will be on part pensions.

But here’s the real kicker. Because of the way the income and earnings tests for the pension work, there is an effective 50 per cent tax rate on higher superannuation balances after a certain point. In other words, for every extra dollar you have in your superannuation account, you lose 50c of income from the pension. This is a shocking deal.

What super amounts to is a compulsion on citizens to knock off their entitlement to the pension while having their contributions and fund earnings taxed in the meantime.

It really is highway robbery — and I haven’t even mentioned the excessive fees and charges by the funds that are part and parcel of the way the system operates.

It gets worse. For citizens whose incomes are high enough potentially for them to become self-funded retirees, this government has decided to increase their tax burden and limit concessional contributions to the point that many will simply give up the quest and shoot for the pension, at least in part. This is seriously dumb.

The package of superannuation taxation measures implemented by Revenue and Financial Services Minister Kelly O’Dwyer is so complex and counter-productive that the likely medium-term outcome is less net revenue (and I’m not even talking here about doing your political base in the eye — which is, of course, seriously stupid).

And don’t you just love this: one law insists that employers must pay 9.5 per cent of a worker’s pay into superannuation and another law insists that the worker must remove any amount above $25,000 a year if the worker’s superannuation balance is high enough.

But the government seems incapable of doing anything about this inconsistency.

Indeed, apart from raising taxes and vastly increasing the regulatory burden on superan­nuation, particularly self-managed superannuation schemes, O’Dwyer has been incapable of effecting any real reform of a system replete with perverse features.

For instance, her effort to achieve a better balance of trustees of superannuation funds, with one-third of directors (including the chair) being independent, has come to nothing. She has been faffing about in relation to what should happen to the default arrangements — these give an egregious leg-up to the union industry super funds. There is a long list of other required changes, including enforcement of the sole purpose test for super funds, but it remains just that — a list.

This is where the importance of Costello’s speech comes in. He is proposing that the Future Fund, or a body similar to it, be used as the destination for default funds, which are the superannuation contributions made on behalf of workers who don’t make an explicit choice.

It is estimated that upwards of 75 per cent of workers who could make a choice don’t. Note, however, that in most enterprise agreements (which cover close to 40 per cent of workers), a single superannuation scheme is generally nominated and it is the one associated with the trade union linked to the workplace. (Kelly, you must outlaw this — put it at the top of your list.)

Let’s be clear, Costello is not proposing the nationalisation of superannuation. Rather, he is saying it would make sense for the default funds to flow to a national investment body — think Canada, Singapore — where the economies of scale and scope can ensure lower fees and charges as well as a global reach of investment. One of the biggest flaws of the investment side of our system is the overweight position of local equities, particularly the big banks.

Sadly, it seems unlikely that our system of compulsory superannuation will be dismantled anytime soon, even though it cheats so many people. In all likelihood it has induced higher levels of household debt as people anticipate being able to use their final superannuation balances to pay down outstanding debts, including mortgages.

The key now is to ensure that the super charge remains where it is (at 9.5 per cent); that we have a better way of directing default funds; and that the raft of other reform measures is acted on — sooner rather than later.

No more super tax changes, Libs vow

The Australian

26 August 2017

Glenda Korporaal

The federal government would not be making any more changes to the tax treatment of superannuation, the federal Minister for Financial Services, Kelly O’Dwyer, said yesterday.

“The Coalition has done the job that we needed to do on the taxation of superannuation,” she said at a speech to the Tax Institute in Sydney. “The job has been finished and legislated.

“We have no further plans.”

The undertaking paves the way for super to become an issue in the next federal election, with O’Dwyer arguing that the government’s opponents will be the ones promising higher taxes on super.

But there is also expected to be some scepticism about the longevity of the promise, given that former Prime Minister Tony Abbott won the 2013 election with a promise of no unexpected negative changes to super — a promise broken by the Turnbull government in the budget of May 2016.

Changes that came into effect this July have cut the annual contributions that can go into super on a concessional basis from $35,000 to $25,000 a year. The amount that can be put into super on a post- tax basis has been cut from $180,000 to $100,000 a year.

The changes also set a cap of $1.6 million on the amount of money that can go into a super account that is tax-free in retirement mode. The changes have also reduced the attraction of transition-to- retirement plans.

While the tougher measures are estimated to raise some $6 billion a year, the package also included a range of concessions worth some $3bn, including making it easier for people with low super balances to add several years’ worth of “catch up” contributions from next year.

The government also removed the “10 per cent rule”, making it easier for people who work part-time or in small businesses to get a tax deduction for their super contributions.

Ms O’Dwyer’s promises of no further tax changes will be welcome by the industry, which has been complaining that constant tinkering has undermined confidence in the system.

She said the federal government “legislated a comprehensive package of structural reforms to the tax treatment of super to improve the sustainability, flexibility and integrity of the system.

“The measures ensure that superannuation tax concessions are well-targeted and balance the need to encourage people to save to become self-reliant with the need to ensure long-term sustainability.”

She said there would be no more changes to taxation of super but other changes to improve governance were planned.

While the government has claimed the super changes only had a negative effect on a small percentage of people, the extent of the changes provoked strong criticism from some people with larger super balances who had been actively putting substantial sums of money into super ahead of their retirement.

Ms O’Dwyer told The Weekend Australian that future governments might look at the five-year intergenerational reports as a platform to examine the sustainability of the super system.

Ms O’Dwyer said the tax undertaking would “give Australians certainty and the industry stability about the Coalition’s superannuation tax policy”. “It stands in stark contrast to the Labor Party and the Greens, who will slug superannuants significantly more in tax as they prepare for their retirement,” she said.

She said the Greens’ “so-called ‘progressive super’ tax plan” would “seek to extract up to $11bn in extra taxes over four years”.

“Labor have admitted that their superannuation policy will cost superannuants an additional $1.4bn,” she said.

Emphasis added by Save Our Super

[Superannuation] money matters top of mind as Peter Costello contemplates 60

The Age Businessday

27 July 2017

CBD – Colin Kruger

He may be just weeks away from his 60th birthday, but our former treasurer and Nine Entertainment chairman, Peter Costello, showed he still knows how to play an audience at the Financial Services Council Leaders Summit in Sydney.

Actor Rob Carlton joked in his introduction for Costello that our former treasurer is not an Australian citizen. Costello replied that he had always thought he was an Australian citizen, but he looked into it this morning and discovered he was in fact the son of Bill Gates, and he was going to send him a bill.

Gates turns 62 in October and may be better with his arithmetic than the Future Fund chairman. And if he isn’t, well, he better beware given Costello managed to blow our once-in-a-lifetime mining boom with very little to show for it.

Digging into his trove of political anecdotes, Costello mentioned that the bureaucrats originally proposed to call our bank regulator, APRA, the Australian Prudential Regulation Insurance Commission or APRIC.

He asked them how you’d pronounce it, and they said “a prick”. Costello said he didn’t think that was a good idea.

“I don’t miss politics,” Costello said. “The bad thing about politics is you have to spend a lot of time in Canberra and I don’t miss Canberra. Since I’ve left politics, I think I’ve been back to Canberra three times.”

That may explain why the television networks are having so much trouble getting rid of the licence fees. Honestly, what is Nine paying him $425,000 a year for?

And Costello could not resist a swipe at Malcolm Turnbull’s government and its miserly attitude to superannuation reforms, which kicked in from July 1 this year.

“I don’t see what’s wrong with giving people a tax break to put money into super,” he said. “The government gets it back eventually when you take them off the pension, but that theory seems to have fallen out of favour.”

Is the thought of retirement a little closer to home now that someone is about to turn 60?

(Emphasis added by Save Our Super)

Budget 2017: Coalition is ‘wrecking’ public trust in super system

The Australian

11 May 2017

Pia Ackerman

The Turnbull government has “wrecked” Australians’ trust in superannuation, with changes announced in the budget failing to restore faith in it or in the responsible minister Kelly O’Dwyer, according to a group targeting the Victorian frontbencher.

Melbourne QC Jack Hammond, who founded the Save Our Super group in response to super changes last year, said the new tax on the major banks’ profits would flow to customers who also faced uncertainty over super conditions.

“Banks will pass back to whoever they can,” he said. “Any cost to any business always runs the risk of going back to the customers. Eventually it will be felt by the community at large.”

A proposal to allow $300,000 from the sale of a family home to be shifted tax-free into superannuation, ostensibly lifting the super balance cap from $1.6 million to

$1.9m, needed further clarity.

“The trust and certainty that was present in superannuation has been wrecked by this government,” Mr Hammond said. “This just further complicates it.’’

Save Our Super has attracted mostly Liberal voters outraged by the super changes, with many living in Ms O’Dwyer’s seat of Higgins in Melbourne’s inner south- eastern suburbs. Ms O’Dwyer, the Revenue and Financial Services Minister, is on maternity leave.

Mr Hammond said the budget had not addressed the group’s concerns about superannuation.

“There is no evidence that Kelly has sought or succeeded in making any changes which many of her constituents would like to see,” he said. “Who would now put any money into superannuation with any sense of security that the rules when you’re putting it in now will be the same in 10, 20, 30, 40 years when you’re pulling it out?”

Super reform: Kelly O’Dwyer should hang her head in shame

The Australian

9 November 2016

Judith Sloan | Contributing Economics Editor | Melbourne

The government knows its superannuation legislation is deeply flawed. Its efforts to contain the consultation process — allowing a week for parties to comment on hundreds of pages of new law — haven’t prevented those who actually understand these things to declare much of it is unworkable.

Where tax legislation language is appropriate, the new laws use inappropriate accounting concepts. The rules contain unrealistic start points and maximise the compliance costs associated with the transfer balance cap of $1.6 million.

For those with several superannuation accounts, including one providing a defined-benefit income stream, expect to be unfairly treated. By using the one multiplicand (16) of annual pension income irrespective of age to calculate the implied transfer balance amount, anyone over the age of 70 is essentially done in the eye.

But it is good for the public servants who have given the government such dodgy advice, who will retire on unimaginably generous money courtesy of a recent salary increase and the benefit from the new rule.

But here’s the thing: the government doesn’t care. In particular, the responsible minister, Kelly O’Dwyer, doesn’t care. All she wants is the legislation to be rammed through parliament and she will do almost anything to achieve this dubious objective. The fact that, in due course, there will be many more older people on the Age Pension doesn’t worry her. She will be gone by then.

The fact there will be even higher taxes imposed on superannuation in due course because the Liberals were more than happy to impose additional taxation on current and retired superannuants to the tune of $6 billion over three years won’t bother her either.

She doesn’t care about the extraordinarily high compliance costs or the fact the changes benefit the industry (read union) super funds at the expense of self-managed superannuation funds. She’s from the Graham Richardson school of politics — whatever it takes.

And then we have the Labor Party wheeling and dealing, even though the super policy it took to the election was a Harry met Sally policy: we’ll have what they are having and book the same savings.

Now it turns out that this was actually a bit of a porkie and Labor wants to impose some further changes that will raise an extra $1.4bn over the forward estimates.

Labor Treasury spokesman Chris Bowen wants the annual non-concessional contributions cap to be $75,000 rather than $100,000 and the 30 per cent contributions cap to kick in at an adjusted salary of $200,000 a year rather than $250,000.

And Kelly can say good night to her carry-forward arrangements in relation to unused concessional contributions as well as eliminating the work test for older people. These were really the only sweeteners in the Liberals’ super package announced at budget time, apart from the pointless low-income superannuation tax offset.

All the time, Liberal backbenchers stay mum, in part because most wouldn’t have a clue and in part because those who should object are more worried about their career prospects than prosecuting the case for lower taxes and small government.

The only ray of hope is that Malcolm Turnbull regards the changes demanded by Labor as a bridge too far (and Labor won’t budge) and that enough crossbenchers won’t co-operate.

Going back to the policy drawing board would be the best outcome at this stage.

Morrison, O’Dwyer will keep messing with superannuation policy

The Australian

17 September 2016

Judith Sloan – Contributing Economics Editor, Melbourne


The biggest take-home message from this week’s superannuation changes by the government is that the Coalition can never be trusted on superannuation.cartoonbillleakflightsuperjumbo

Its leaders say one thing and do another, trying to out-Labor the ALP when it comes to imposing higher taxes on savers who are seeking to provide for their retirement.

And how should we interpret the government’s backflip on the crazy backdated lifetime post-tax super cap? During the election campaign, Malcolm Turnbull was adamant: “I’ve made it clear there will no changes to the (superannuation) policy. It’s set out in the budget and that is the government’s policy.” I guess that was then. What a complete fiasco the superannuation saga has been. Mind you, Scott Morrison and Revenue and Financial Services Minister Kelly O’Dwyer have only themselves to blame. They were hoodwinked by extraordinarily complex and misleading advice given by deeply conflicted bureaucrats. The only conclusion is that they are just not that smart.

How do I know this? Because Treasury has been trying to convince treasurers for years that these sorts of changes must be made to the tax concessions that apply to superannuation. Mind you, these concessions apply because superannuation is a long-term arrangement in which assets are locked away until preservation age is reached.

It was only when the Treasurer and O’Dwyer took on their exalted positions that Treasury was able to execute its sting. Other treasurers (even Wayne Swan) had the wit to reject Treasury’s shonky advice.

But here’s the bit of the story I particularly like: when it came to the proposal that those pampered pooches (the advising bureaucrats) should pay a small amount of extra tax on their extraordinarily generous and guaranteed defined benefit pensions (the 10 percentage point tax rebate will cut out at retirement incomes above $100,000 a year), they baulked at the idea. This is notwithstanding the fact they have been members of funds that have paid no taxes during their careers and they will have also built up substantial accumulation balances on extremely concessional terms. Clearly, no one in Treasury has heard of the rule that what’s good for the goose is good for the gander.

Let us not forget that the superannuation changes announced in the budget represent a colossal broken promise by the Coalition government not to change the taxation of superannuation, a promise reiterated on many occasions by Morrison when he became Treasurer.

While trenchantly criticising Labor’s policy to impose a 15 per cent tax on superannuation retirement earnings of more than $75,000 a year, he made this pledge: “The government has made it crystal clear that we have no interest in increasing taxes on superannuation either now or in the future. Unlike Labor, we are not coming after people’s superannuation.”

When you think of all the criticism Tony Abbott faced, including from the media, about his broken promises on (supposed) cuts to health, education and the ABC — actually the growth of spending in these areas was merely trimmed — it is extraordinary that there has not been the same focus on this unequivocally broken promise of the Turnbull government.

To be frank, I am not getting too excited about the government’s decision to scrap the loony idea of having a backdated post-tax lifetime contribution cap. It was never going to fly.

The fact David Whiteley, representing the union industry super funds, is endorsing the tweaked super package is surely bad news for the government. He has declared “this measure, combined with the rest of the proposed super reforms, will help rebalance unsustainable tax breaks and redirect greater support to lower-paid workers who need the most help to save for retirement”.

Actually, the government does the saving for these workers by guaranteeing them a lifetime indexed age pension. It is the middle (and above) paid workers who need the most help to save for retirement.

It will also be interesting to see Whiteley’s stance when O’Dwyer seeks to push through changes to the governance of industry super funds and default funds. Here’s a tip, Kelly: he won’t be your friend then. My bet is that O’Dwyer will lose again on this front.

In terms of the replacement of the lifetime non-concessional cap, the government’s alternative is extremely complex and potentially as restrictive. Post-tax contributions will be limited to $100,000 a year (they can be averaged across three years), but only for those with superannuation balances under $1.6 million.

The fact the market value of these balances fluctuates on a daily basis makes this policy difficult to enforce. Is the relevant valuation when the contribution is made or at the end of the financial year?

And what about the person who is nearly 65 and is barred from making any further contribution, but the market drops significantly after their birthday? O’Dwyer’s response no doubt would be: stiff cheddar, egged on by her protected mates in Treasury who bear no market risk at all when they retire.

What the government is clearly hoping to achieve is that, in the future, no one will be able to accumulate more than $1.6m as a final superannuation balance. At the going rate of return that retired members can earn on their bal­ances without taking on excess risk, the certain outcome is that there will be more people dependent on the Age Pension in the future. But Morrison and O’Dwyer will be long gone by then.

There is also a deep paternalism underpinning this policy. An income slightly north of the Age Pension is sufficient for old people, according to Morrison and O’Dwyer. After all, Morrison had no trouble describing people with large superannuation balances as “high income tax minimisers”.

We obviously should have been more alert to the possibility of the Turnbull government breaking its solemn promise not to change the taxation of superannuation.

Last year, O’Dwyer described superannuation tax concessions as a “gift” given by the government. I thought at first she must have been joking. But, sadly, her view of the world is that everything belongs to the government and anything that individuals are allowed to keep should be regarded as a gift — the standard Treasury line these days.

The final outcome will be a policy dog’s breakfast that carries extremely high transaction costs and delivers little additional revenue for the government. Superannuation tax revenue has disappointed on the downside for years and there is no reason to expect this to change.

But by dropping just one ill-judged part of the policy, the government thinks it can get away with pushing through the rest of it. The dopey backbenchers clearly have been duped into accepting it, even those new members who maintained a commitment to lower taxation and small government before they were elected.

It’s a bit like a real estate agent who shows you four atrocious houses. The fifth house is slightly better and you take it. The reality is that the fifth house is also dreadful but you have been tricked into accepting it on the basis of the contrived comparison.

There are still major flaws in the government’s policy. If there is an overall tax-free super cap, why have any limits on post-tax contributions at all? The figure of $1.6m is too low. And the indexation of this cap should be based on wages, not the consumer price index. The changes to transition-to-retirement should be dropped and the concessional contributions cap raised to $30,000 a year, at least, for those aged 50 and older.

But I’m not holding my breath. When Morrison said the government had “no interest in increasing taxes on superannuation either now or in the future”, he told an untruth. Just watch out for more revenue grabs in the future.

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