Category: Newspaper/Blog Articles/Hansard

Changes to superannuation underline ill-advised policy and waste

The Australian

25 October 2016

Judith Sloan – Contributing Economics Editor – Melbourne.

I received an email from the Treasury the other day. It was dated October 14. I was being invited to make a submission on the third tranche of the superannuation changes being put forward by the government — the proposed new cap on non-concessional ­contributions.

Here’s the kicker: I had to have my submission in by October 21. That’s right — I (and everyone else invited to make a submission) was given one week to prepare and submit a submission. Let’s face it, this is a Clayton’s consultation. It is consultation when you don’t care what anyone says. It’s a joke.

I then looked back on previous emails from the Treasury. For the second tranche of the super package, I was given nine business days to make a submission on 220 pages of exposure drafts and explanatory memos. There are 260 paragraphs explaining the Treasury Laws Amendment (Fair and Sustainable Superannuation) 2016, though I particularly like the ­acknowledgment in the material that there are several areas that are actually not settled. This is sham consultation on steroids.

And don’t even get me started about the faux invitation to hear different views on the legislated definition of the purpose of super. Notwithstanding its glaring faults, the responsible minister, Kelly O’Dwyer, is not for turning, which in this case is a bad thing.

Indeed, given her parliamentary performance, it is a fair question whether she is up to the job. It was one thing to vote in favour of an amendment of the opposition criticising the government, it is ­another thing altogether to fail to explain the purpose of a piece of legislation she is sponsoring. The fact she couldn’t describe the ­impact of the change to the taxation of effective dividends really makes you wonder whether she’s in the right job. It was cringe-­worthy stuff.

For purely political reasons, the government has decided it must get the super changes into law by the end of the year, with the new arrangements in place from July 1, 2017. It won’t matter how many people point out the difficulties and cost of the changes. The decision has been made.

It’s the Gillard government all over again. A policy decision is made for political reasons. No thought is given to the problems of implementation, of unintended consequences, of the disproportionate costs. Think the Gonski package and the underlying legislation. Think the National Disability Insurance Scheme and the underlying legislation. And now think superannuation and the underlying legislation.

Don’t believe the misleading information reaffirmed by the Treasurer that only 4 per cent of superannuation savers and retirees will be affected by the changes. This figure is just wrong; over time the proportion rises dramatically; and the compliance costs will apply to all super members. Every fund will be required to invest heavily to accommodate the changes and all members will bear the costs — not just those directly affected. To be sure, the government doesn’t care but the Treasurer should not be misleading the public on this matter.

There are some very serious technical problems with the draft legislation, including the curious introduction of accounting terms rather than sticking with the convention of using the language of taxation law. There are 23 new ­definitions introduced into just one tranche of the legislation. There are also errors in the draft legislation and the explanatory memos, of which the latter have no legal effect but are required to understand the law.

Some of the complications ­include the fact many superannuation investments are in life companies that are subject to different tax rules; the treatment of death benefits/reversionary pensions and whether they will be ­required to be cashed out; the handling of multiple accounts when one or more is a defined benefit account; and the treatment of deferred superannuation investment streams and their applicability to self-managed funds. There is also the egregious suggestion that ­superannuants face a 30 per cent tax penalty if they violate the transfer balance cap more than once. This is notwithstanding the fact the arrangements are so complex that advisers are very likely to make mistakes and ­unwittingly give their clients the wrong advice — for a high price, of course.

The process is a shambles and there is no way the government’s imposed deadline can be met. Putting the bills to the parliament this year would be highly irresponsible. But my guess is that, at a minimum, the Senate will refer all the bills to be scrutinised by committees. There is no way that the start date of the changes can remain July 1, 2017, which will mean all the make-believe budget savings will have to be recalculated.

Apart from the ill-conceived — nay, harebrained — nature of the government’s proposals, the ­respon­sible staff in the bureau­cracy are far too inexperienced and lacking in knowledge to put the scheme into workable legislative effect. The fact there have been many confidential discussions going on behind closed doors (so much for transparency on the part of this government) underlines the fact the public servants are desperate to pick the brains of people who might actually know about these things — and that doesn’t ­include them.

There is no doubt the government needs to get on with repairing the budget. But attempting to fix the budget by implementing bad policy won’t lead to an ­improvement in the bottom line.

Breaking promises might all be in a day’s work for the Treasurer but he needs to be aware these costly and complex changes will fail to raise the sums of money forecast, particularly because ­undermining the trust in the system will inevitably lead to a higher dependence on the age pension.

The fact the government is happy to hand out more than $1 billion a year to support the parents of migrants, to spend $3bn more on childcare, to write off billions in bad VET FEE-HELP debts, to waste billions on regional boondoggles and to commit tens of billions too much to construct warships and submarines — and the list of wasteful spending goes on and on — explains why many in the community continue to fume about the super changes (and high taxes more generally).

There is really no difference ­between the Gillard and Turnbull governments when it comes to ­implementing hasty and ill-judged policies and wasting money.

Tax Institute’s second tranche submission

taxinstitute_log_tagline

10 October 2016

Ms Jenny Wilkinson
Division Head
Retirement Income Policy Division
The Treasury
Langton Crescent
PARKES ACT 2600

Submitted electronically: https://consult.treasury.gov.au/retirement-income-policydivision/super-reform-package-tranche-2/consultation/intro/view

Dear Ms Wilkinson

Superannuation reform package – tranche 2

The Tax Institute welcomes the opportunity to make a submission to the Treasury in relation to the Superannuation reform package – tranche 2 set of exposure drafts and explanatory memoranda (Tranche 2).

Given the short timeframe provided for submissions on Tranche 2, the submission below does not purport to cover all of the substantive issues arising from this material.

The Institute, along with its expert members in the area of superannuation, would be pleased to provide additional details on any of the matters set out below or to address the material in more detail in person.

Summary

The Institute submits that further consultation is required to discuss and resolve the technical challenges in administering the current measures in practice. We strongly urge the Government to consider the practical difficulties with some of these measures and be open to consider alternatives that could largely achieve the same objective, but also with the subsidiary objective that the superannuation system be simple, efficient and provide safeguards in mind.

Discussion

General comments

We submit that the consultation period for the superannuation reform package should be extended to allow a more considered redrafting of the exposure drafts. A consultation period of nine business days has been provided for the public to provide comments on Tranche 2, which comprises approximately 220 pages of exposure drafts and explanatory memoranda. This is an insufficient period to provide considered comments on this significant and complex material, which taxpayers and their advisers will be dealing with for decades to come.

Members of the Institute’s Superannuation Committee also consider a start date of 1 July 2017 for many of the measures in the package is not realistic given the uncertainty around the final form of the legislation and the considerable systems and other work that trustees and administrators need to do to implement the measures.

We understand that some consultation on Tranche 2 has taken place on a confidential basis. The current drafting of the material focusses primarily on administration, procedure and systems. Given the volume of technical issues that have become apparent at the draft legislation stage (many of which are set out in this submission), we are concerned that an appropriate cross-section of stakeholders in the superannuation system have not been consulted at an early stage. We have heard from members whose organisations have been consulted on a confidential basis that they have not been able to gather feedback from other relevant stakeholders and experts within their particular fund or organisation to improve the quality of the legislative package.

While the explanatory memoranda for Tranche 2 predicts further consultation on some discrete issues, this form of ad hoc consultation coupled with the release of the superannuation reform package in tranches increases the risk of interaction issues, consequential amendments and any necessary transitional relief not being fully considered or identified. For example, the interaction between the introduction of the transfer balance cap in Tranche 2 with the amendments contemplated in relation to eligibility for making non-concessional contributions, cannot be considered because the non-concessional contribution amendments have not yet been released. Another example identified is how an excess above transfer caps will work where the super fund invests solely in investment policies with life companies which are taxed exclusively under Division 320.

We are concerned that the exposure drafts are inconsistent with the subsidiary objective of superannuation that the superannuation system be simple, efficient and provide safeguards. In particular, the drafting of Tranche 2 is overly complex and cannot be readily understood without reference to explanatory memoranda, which do not have legal force on a standalone basis. For example, the exposure drafts introduce approximately 23 new definitions into the tax law, with requirements to maintain account of multiple new superannuation concepts – including Transfer Balance Accounts, Personal Transfer Balance Caps, Unused Cap Space, Unused Cap Percentage and Highest Transfer Balance.

Further, we consider the use of accounting terms such as debits and credits in the transfer balance cap to be generally inappropriate in their application to the new superannuation concepts, and they may invite a quasi-accounting construction of the provisions – moving away from well-known legal principles and judicial concepts applied in superannuation and tax law. In addition, the draft material does not appear to adopt the strict accounting definitions and therefore could cause confusion for advisers and risk misinterpretation by superannuants. The uncertainty of announced measures and the substance that will ultimately become law means advisers cannot properly inform clients on these measures at this stage. Other than accountants, not many people are aware that a debit is an entry that affects the left side of an accounting ledger, whilst a credit affects the right side. In the absence of specialist assistance, which forces up compliance costs, the use of such concepts will result in mistakes being be made.

The media release issued by the Hon Scott Morrison MP, the Treasurer, on 27 September 2016 in relation to Tranche 2 states that 96 per cent of individuals with superannuation will either be better off or unaffected as a result of these changes.1 The Institute wishes to point out that the likely substantial administrative costs of implementing these measures will not be limited to those individuals directly impacted by the measures in revenue terms.

Significant education, updating documentation, upskilling process and reporting costs will also be incurred by the industry and that will be incurred all members to implement the systems necessary to comply with these measures. For example, some industry funds have more than 5 million members but the key measures may impact very few within these funds but all of the members of the fund will generally be required to pay for the updated systems to cater for the new changes The complexity of the measures is also likely to lead to further costs and inefficiencies in terms of work created by misunderstandings and errors that requires a fair degree of learning and education to be rolled out to members by fund providers, advisers, ATO and Government. The costs of collection of each $1.00 of revenue from each proposal should be tested to ensure the costs are not out of proportion to the revenue gained. The industry-wide costs should be considered and not just a fund-specific cost.

Given the above issues, the Institute considers that the introduction of the measures to Parliament in sufficiently clear and certain form by the end of the calendar year is ambitious. The application of the majority of the amendments in Tranche 2 to commence on 1 July 2017 also provides insufficient lead time to finalise and implement the measures, particularly given that other tax measures such as the Attribution Managed Investment Trust regime and measures to improve compliance through enhanced third party reporting and data matching will also impact on large superannuation funds and also commence on 1 July 2017. Furthermore, Trustees and Registrable Superannuation Entities are already facing a myriad of regulatory reform measures from both APRA and ASIC (ranging from MySuper ADA transfers to enhanced disclosure/reporting with Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements).

Transfer balance cap

Defined benefit funds

The Institute is concerned about the lack of clarity for how credits and debits are to be applied to the transfer balance account for members with multiple income streams across multiple funds where some of those income streams (lifetime pensions) are “non-commutable superannuation income streams” referred to as “capped defined benefit income streams”. Special values are applied to determine the credit to the transfer balance account for members with lifetime pensions or certain other term pensions and then special rules apply to calculating the debit value of the income stream – unlike for other account based income streams where the actual lump sum commutation value is applied as a debit against the transfer balance account (possibly resulting in a negative balance).

As such, the Institute notes that the new rules will, in effect, require separate sub-accounts of the transfer balance account to be maintained in respect of lifetime pensions – because it would appear that a commutation amount (in respect of a lifetime pension or like income stream) cannot be applied as a debit to the transfer balance account without calculating the special debit value by reference to the special value credited to the account when the lifetime pension or like income stream commenced. Paragraph 1.186 of the Exposure Draft Explanatory Materials appears to confirm this:

1.186 The extent to which an excess is attributable to capped defined benefit income streams is worked out by reference to an individual’s capped defined benefit balance. This balance is a sub-account of the individual’s transfer balance account and includes all debits and credits that relate to capped defined benefit income streams. That is, the capped defined benefit balance reflects the net amount of capital an individual has transferred to the retirement phase in respect of capped defined benefit income streams. [Schedule 1, Part 1, item 3, subsection 294-125(3) of the ITAA 1997]

There would appear to be a high likelihood for misunderstandings, misreporting and mistakes to occur in respect of these kinds of blended transfer balance accounts (operating with a sub-account). As a minimum, the Institute considers that the Commissioner should be given broad discretion to issue relief with respect to such matters.

Calculation of the cap (credits)

Credits to the transfer balance cap measure include death benefit/reversionary pensions. While the legislation makes it clear that any amounts over the transfer balance cap must be commuted it is not clear whether death benefits can be commuted into accumulation phase or whether they must be paid as lump sums pursuant to regulation 6.21 of the Superannuation Industry (Supervision) Regulations (SISR). The examples used in the Explanatory Materials for child pensions would suggest that the measures foresee that a cashing out of the excess as a lump sum will be required.

Spouses and other financial dependants have always been permitted to continue to hold their spouse’s death benefits in their superannuation funds by way of a reversionary pension or death benefit pension. The examples used in the Explanatory Materials for child pensions would suggest that the measures foresee that a cashing out of the excess as a lump sum will be required. If funds are no longer permitted to provide pension benefits to reversionary spouses and children under age 25 and other financial dependants for amounts over the transfer balance cap (or adjusted cap in the case of child pensions) that is a significant change from the current rules. Such a position would also go against the rationale of the current measure (i.e. that the measure is not designed to stop members accumulating benefits but rather caps out the pension phase tax concession).

The Institute notes the likelihood of significant liquidity issues arising for some superannuation funds if substantial portions of current reversionary pensions are required to be cashed by 1 July 2017.

We submit that the legislation should be amended to permit death benefits being paid in the form of a pension under SISR (i.e. spouses, financial dependants and interdependents) to be commuted to accumulation phase and to not be required to be cashed out of the superannuation system. This could be in an accumulation account or a taxable pension account. Alternatively, such “excess death benefit pensions” could be retained as pensions but not qualify as exempt current pension income

As a minimum, this measure should be available to in effect grandfather any death benefit/reversionary income streams that have commenced prior to 1 July 2017.

It is also relevant to note in the context of death benefit income streams/reversionary pensions that many superannuation products may have been issued to members (and paid for) as a reversionary income stream product. A requirement to cause excess transfer cap amounts to be cashed out of the superannuation system significantly alters the structure of the product that members may have selected and paid for and the Institute submits this provides further support for allowing these death benefits to be retained in accumulation phase within the superannuation system
In addition to the comments above, we note the phrase “retirement phase recipient of a superannuation income stream” is used a number of times. It is submitted that the phrase “retirement phase recipient” is sufficient (and less circular).

Excess transfer balance determinations and tax

The Institute would submit that the Commissioner be given a broad discretion to remit excess transfer balance tax or disregard a certain period when determining the notional earnings where the delay in issuing a determination is beyond the control of the member. The Institute is particularly concerned that this may likely occur if insufficient lead time to finalise and implement results in delays with Funds reporting and/or ATO to issue determinations within a reasonable time of receiving all the information.

Miscellaneous

The Institute is also concerned about the penal nature of the imposition of a 30% tax on second and subsequent breaches of the cap due to the complexity of the measures and the length of time over which taxpayers are likely to be in receipt of income streams following retirement. There is a high possibility of one or more errors with respect to an individual’s income streams across multiple providers and over periods in excess of 20 or so years. Further, it is noted that there is no equivalent concept for a further sanction to be applied to the capped defined benefit tax.

Catch up concessional contributions

Schedule 6 of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 Exposure Draft contains amendments to the Income Tax Assessment Act 1997 to give effect to the Government’s 2016/17 Federal Budget measure ‘Superannuation Reform Package – Catch-up Concessional Contributions’.

In our view, broadly the proposed changes are positive changes in terms of allowing individuals to make catch-up contributions where they have not fully utilised their concessional contribution caps in the previous five financial years, noting that the measure requires that they have a total superannuation balance of less than $500,000 on 30 June in year prior to making the catch-up contribution. This measure allows those who may not had the capacity or support in previous years to increase their superannuation account balances to a level commensurate with that which they would have enjoyed if the concessional cap had been fully utilised.

However, we note the following issues:

  • The mechanism for allowing the catch-up is confusing.
  • The basis for determining the total superannuation account balance at a particular time appears to contain an error.

Confusing mechanism for applying the catch-up

The draft legislation introduces two related but separate concepts – “unused concessional contributions cap” and “unapplied unused concessional contribution cap”. For each financial year the “unused concessional contribution cap” is to be determined. It is the amount by which concessional contributions fall short of the concessional contributions cap for a particular year. This amount is not adjusted even where catch-up contributions are made in future years. Instead, a second concept of “unapplied unused concessional contribution cap” is introduced.

Rather than reducing the unused concessional contributions cap as it is utilised in making catch-up payments in subsequent years, the legislation requires a separate determination of the unapplied unused concessional contribution cap. As previously unused concessional contributions caps are utilised or applied, the unapplied unused concessional contribution cap reduces, but without reducing the unused concessional contribution cap.
The mechanism is likely to cause confusion given that the unused concessional contribution cap does not reduce as it is applied (or used). It seems a more logical and intuitive approach would be to determine the unused concessional contribution cap initially for a financial year, and then for the legislation to provide for this amount to be reduced as it is applied (or used) so that at any point in time the “unused concessional contribution cap” for a financial year reflected the amount that was otherwise available for the individual to use in making catch up concessional contributions

Total superannuation account balance

In Part 2 of Schedule 6 the draft legislation sets out a mechanism for determining the “total superannuation account balance” at a particular time. This is relevant in determining whether a member has a total superannuation balance less than $500,000 on the last day of the financial year preceding the year in which they wish to make catch-up payments.

The draft legislation breaks down the balance into separate components, and sets out a specific mechanism for determining the retirement phase value of an individual’s total superannuation balance which arises because an individual has a transfer balance account. The explanatory memorandum in paragraph 6.28 described the approach in the following terms: “The retirement phase value of the individual’s total superannuation balance is determined by the balance of their transfer balance account, adjusted to reflect the current value of account based superannuation interests in retirement phase.”

However, the specific mechanism in the proposed legislation appears confusing, unnecessary and potentially incorrect.
Specifically, section 307-230(2)(b) requires one to “increase the amount of (the transfer balance account) balance by the total amount of the superannuation benefits that would become payable if” the individual had a right to cause the superannuation interest to cease and voluntarily caused the interest to so cease. It seems that the word “by” ought to instead be replaced by the word “to” – that is, that the adjustment required is to the amount that the member would have been paid had they voluntarily ceased, rather than increasing it by the total amount they would have received in those circumstances (the latter appears likely to give rise to a double counting and over-inflation of the member’s retirement phase value).
It is also unclear why such a mechanism is to be adopted and whether it achieves the outcome suggested in the explanatory memorandum. As an alternative approach it may be more appropriate that instead of taking the amount of the transfer balance account at the time and then seeking to increase it by an appropriate adjustment, that instead the balance of the account would be taken as the total amount of the superannuation benefit that would become payable if there was a right to cease the interests at the time and the individual voluntarily caused their interest to cease at that time.

Innovative income streams and integrity

New Deferred Superannuation Income Streams (DSIS)

These are income stream products which will enjoy the earnings tax exemption but will not have any immediate pension payment obligations until the end of a deferral period (say when the purchaser attains age 80). The requirements which a financial product has to satisfy in order to qualify as a DSIS are yet to be determined. Presumably there will be additional sub-regulations to 1.05 & 1.06 of the SISR. These products will be either deferred annuities issued by life insurance companies or “grouped self annuities” in which a cohort of pensioners in a large super fund forms a group so that any account balance released by early death of a member will be used to underwrite the payment guarantee. Presumably there will be restrictions on exiting the contract/cohort – as otherwise there will be no profits to transfer from those that die early to those that survive.

These products cannot be issued by SMSFs. Presumably the justification for excluding SMSFs from this type of income stream is that (a) there is no counterparty which will shoulder the longevity risk (in the case of deferred annuities – it is the issuing life insurance/registered organisation) or (b) that an SMSF does not have a sufficient number of members which can be grouped into a cohort where the longevity risk is shared amongst the cohort.

However, excluding SMSFs from DSIS may significantly reduce the attractiveness of SMSFs. A member concerned by longevity risk with $800,000 in super could buy an account-based pension with $400,000 and with $400,000 buy a DSIS where the deferral period ends at age 80. Under the new rules the $400,000 invested in the DSIS will from day 1 enjoy the “earning tax exemption” and only commence payment at when the deferral period ends – say when the investor is aged 80. (Strictly, if the DSIS is purchased before an unrestricted release condition has been satisfied, the earnings tax exemption only applies from the date an unrestricted release conditions occurs and the value of the DSIS will be credited to the transfer balance account when the earnings tax exemption applies to the product.)

The longevity risk of account-based pensions is magnified (if not created) by the minimum drawdown requirements in later years.
If the Government wishes to address the above discrepancy between the treatment of SMSFs and DSISs, the following changes could be made to the rules:

  • reduce the excessive mandatory drawdown rate in later years or
  • allow SMSFs to issue DSIS (albeit there will be no payment guarantee). To maintain integrity, the DSIS in an SMSF could operate by having the income stream commuted on death (if the account has not previously exhausted) and commutation payment made to the estate of the deceased member.

Transition to Retirement Income Streams (TRIS)

TRIS on the hand will not be recognised as a retirement phase income stream going forward and will lose their earnings tax exemption. It should be noted that for efficiency and economies of scale reasons, all assets backing pension liabilities are typically pooled into common investment asset pool(s). Members in large superannuation funds typically own units in these investment asset pools. The value of their account based income stream is determined by the number of units they hold in the particular asset pool x price. Earnings tax if it were to be calculated would be calculated at this investment asset pool level and not by pension type or down to member level.

To administer this measure, Funds would need to be able to attribute and isolate any earnings tax to just members in that asset pool that have a TRIS income stream. This will require asset segregation of the existing asset pool (shared by TRIS and non-TRIS members) with possibly CGT relief required in certain circumstances. Furthermore, the unit price would typically capture realised and unrealised income & gains and the earnings tax payable each year should be limited to just income and realised gains only and not unrealised.

The Institute is concerned with the cost and effort involved to deal with this particular class of pension and members. We submit that taxing the income stream benefits that these TRIS members received could achieve the same objective and not require any investment restructure and asset segregation. As an alternative, members who were preservation age to age 59 could lose entitlement to the 15% tax offset on their assessable income stream benefit, whereas those aged 60 and over but not retired could be taxed 15% on their income stream benefits.

Administrative issues

Commutation Authority

The Institute is concerned that the current 30 day time limit provided to superannuation income stream provider to comply is not reasonable. Particularly if as outlined in Paragraph 1.131 of the Explanatory Memoranda they are also required to make reasonable efforts to consult with the member first, to seek their wish/preference as to whether to roll the excess back to the accumulation phase or cash it out. We would submit that 90 days would be a more reasonable time frame to allow member and provider to discuss and process the request. Furthermore, there may be instances in which assets supporting the particular income stream may be temporarily illiquid or non-commutable and require more time for an orderly redemption in order to avoid unnecessary penalties and/or break costs.

In the event there is a failure by the superannuation income stream provider to comply, the consequence is that the investment earnings supporting that particular income stream will cease to be exempt from tax and deemed to be effective from the start of the financial year and for the whole income year. It should be noted that this particular calculation is extremely difficult in relation to members in a large superannuation fund whereby their interest in the fund is based on their share in a single investment asset pool (as noted above in relation TRIS). A failure to comply with a commutation authority has the effect of retrospectively deeming certain member(s) as not belonging to this particular tax exempt cohort. Significant build is required by large superannuation funds to overhaul their systems to calculate earnings tax based on the tax attribute of a member (i.e. member level, as opposed to investment asset pool level). At the very least, one would need to track what income and realised gains were attributed to each member in the investment asset pool, when currently there is no income distribution made to these members.

* * * *

If you would like to discuss any of the above, please contact either me or Tax Counsel, Thilini Wickramasuriya, on 02 8223 0044.

Yours sincerely

Arthur Athanasiou
President

1 http://sjm.ministers.treasury.gov.au/media-release/105-2016/

Transfer of super death benefits becomes increasingly complex

Australian Financial Review

5 October 2016

John Wasiliev

It’s another change to superannuation rules arising from the government’s 2017 super reforms that is almost certain to be unpopular with savers.

Where smart investors with SMSFs have organised either a reversionary pension or established a death benefit nomination to ensure their super pension is transferred smoothly to a partner, it will be infinitely more complicated from July next year if the transfer of the benefit pushes the beneficiary’s pension account above the proposed $1.6 million tax-free limit.

A reversionary pension is an income stream that automatically reverts to a spouse on the death of a member.

The current super rules are sympathetic when it comes to pensions being passed to a beneficiary, such as a spouse.

Under the current rules, the tax-free investment earnings on any pension benefits inherited from a deceased partner are maintained in exactly the same way, regardless of the size of the pension that is being transferred.

But from July 1 next year, if the value of the pension results in the size of the combined pension exceeding the government’s $1.6 million tax-free pension limit, it will be a different ball game.

There will be a requirement for any amount greater than $1.6 million to be transferred to an accumulation account. Where this does not happen the government will impose penalties that are reminiscent of the punishments levied not so long ago when members exceeded the after-tax super contribution limits.

It is a change that is likely to be challenging for SMSF members with existing pensions and who have based their retirement and estate planning arrangements on the current rules.

Daniel Butler of DBA Lawyers notes that the proposed change will reduce the tax effectiveness of super pensions and have a major impact on succession planning strategies.

In particular, many couples will not like the fact that their deceased spouse’s reversionary pension gets “retested” to a surviving spouse where the surviving spouse is subject to only their own $1.6 million personal balance cap.

Butler predicts this will be a major issue that is likely to arise in submissions.

Six-month grace period insufficient

Although the legislation allows a period of six months to make a decision on how to handle a reversionary pension if it pushes the beneficiary’s pension account above $1.6 million, typically a surviving spouse suffers years of grieving following the loss of a loved one.

The new rules mean that couples will need to revisit this aspect of their retirement planning, familiarise themselves with the changes and then consider how they will deal with them.

Those already in retirement who have their private pensions and death benefit arrangements in order will arguably be hardest hit because of the lack of grandfathering.

No grandfathering means existing super arrangements won’t be granted any concessions from July 1.

To ensure a beneficiary is automatically entitled to the pension on the member’s death, the nomination of the reversionary beneficiary generally needs to be in place at the commencement of the original pension.

While that’s fine under the current rules, this will need to be reconsidered after July 2017 if the transferred pension is likely to take a beneficiary’s total pension above the $1.6 million limit.

Different strokes

An interesting aspect of the draft legislation is that the six-month adjustment period is available only where the transferred amount is a reversionary pension.

There is no mention in the legislation, says Dixon Advisory’s Nerida Cole, of the amount of time available where the excess in the pension account is caused by a death benefit income stream.

A death benefit income stream is an income stream commenced for an eligible dependant, such as a spouse, as a result of a valid binding death nomination by a deceased member that specifies that a death benefit is paid as a pension to the beneficiary.

There is no reason for the difference, Cole argues.

Both recipients of reversionary pensions and death benefit income streams will need time to adjust to their new circumstances.

At present most people in an SMSF regard their fund as a joint pool. From July 1 individual accounts in an SMSF might need to be considered separately if there is any prospect of a member exceeding the $1.6 million private pension limit.

Risk of penalties

If the death benefit income stream is not given the same six-month window of adjustment, people will risk being penalised from the day that money is received in the surviving spouse’s name if they don’t act immediately, says Cole.

Having to make adjustments to get back under the $1.6 million limit is likely to be stressful for people in this situation.

The penalty regime for anyone who finds themselves exceeding the $1.6 million limit is a 15 per cent individual tax penalty on the notional earnings of any excessive amount that remains within the pension phase.

These notional earnings are calculated at a much high rate than a fund’s expected investment return. The notional earnings are considered to be 7 percentage points above the 90-day bank bill rate – the Reserve Bank’s benchmark indicator for short-term interest rates.

During the 2015-16 financial year this interest charge averaged 9.2 per cent per annum.

Where a member happens to exceed the limit on more than one occasion, they could end up paying 30 per cent tax on the notional earnings.

Saving or slaving: find the sweet spot for super

The Australian

4 October 2016

Tony Negline Wealth Columnist

The new super laws — coupled with the age pension tests — discourage saving, especially for those earning average weekly wages. Here I will show why, using some examples.

We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income — that is, you are happy to live off an average 5 per cent return on your total savings. Let’s also assume that all income is paid to you tax-free.

For the sake of simplicity we will assume that this super pension started after December 2014, which means the account balance is ‘‘deemed’’ under Centrelink’s income test.

Apart from your home and your super, you own $50,000 worth of personal-use assets, including your car. You have no other assets. All of our examples will consider the assets test thresholds that will apply from 1 January 2017.

Case study 1
You have $1.6 million in super assets. In this particular case you will receive no age pension and therefore your income is $80,000 per annum.

Case study 2
Let’s say you have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382, including the pension and energy supplements. Total income is therefore $44,382.

Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.

Case study 4
What about $700,000 of super assets? They will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.

Case study 5
How about $1 million in super assets? They receive no age pension and need to live off all their super pension of $40,000.

What does all this mean? At it’s very worst it means you can have less assets but more income each year!

The perfect formula

What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.

Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75 per cent more income.

The government says it is changing the super system to make it fairer and more equitable. These are the reasons for the $1.6m pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above, do these arguments really hold?

For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.

After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?

Anyone earning $50,000 each year, which increases at 2 per cent each year, and their super grows by 5 per cent after all taxes, fees and charges and receives compulsory super, will have $400,000 in super assets after 31 years of work. At that point if they were to retire they would receive 100 per cent of their pre-retirement income. Clearly there is a distinct disincentive for people in this situation to work for longer or to try to earn a higher salary.

The government wouldn’t be keen but maybe we need to go back to the drawing board. New Zealand has a universal age pension — called NZ Super — set at about 65 per cent of average wages and is subject to income tax. It is paid from age 65 regardless of your income.

$66 billion blowout in the cost of public service super scheme

The Australian

1 October 2016

David Uren Economics Editor Canberra

Falling world interest rates have pushed up the cost of servicing the lucrative public service ­defined-benefit superannuation pensions by $66 billion over the past year.

The final budget outcome for 2015-16 shows a sum of $314bn would be required to cover public sector superannuation liabilities at the government bond rate of 2.7 per cent, up from $248bn a year ago.

The government’s deteriorat­ing financial position is also shown by the rise in net debt, up by 18.5 per cent to $296bn over the past year.

The final budget outcome shows the overall deficit for 2015-16 was $39.6bn, worse than the $35.1bn predicted when it was announced by Joe Hockey in May last year but $300m better than the most recent Treasury update in this year’s budget ­papers.

Both spending and revenue dipped in the final six weeks of the financial year; however, the gains on the spending side of the budget were largely one-offs, such as Victoria’s failure to get its application for funds from the asset recycling fund in on time, whereas weakness in revenue will carry into this year’s budget.

Deloitte Access Economics partner Chris Richardson said the budget outcome contained worrying trends as the government started work compiling its mid-year budget statement sched­uled for December.

“Yet again, we’re seeing signs that income weakness is eating not just into the most high-profile bit of the budget — the company tax take — but also the personal income tax take as well,” he said. “A hit to wages is continuing to weigh on the budget.”

The government closed the major defined-benefit pension scheme to new entrants in 2005 and set up the Future Fund to help cover outstanding liabilities. However, falling global interest rates are pushing up the amount the government is required to set aside in its financial accounts and making it harder for the Future Fund to meet its growth targets.

The Future Fund holds $122bn and is unlikely to get any further government contributions until the budget returns to surplus.

The final budget outcome’s measure of the public service superannuation liability is 50 per cent bigger than the estimate contained in the budget, which was based on an actuarial calculation that assumes inflation returns to 2.5 per cent and an average 6 per cent return is achieved.

This is similar to the Future Fund’s mandate, which requires it to earn 4.5-5.5 per cent more than the inflation rate, a target fund chairman Peter Costello said could only hope to be achieved by taking excessive risks.

The final budget outcome, similar to a company’s annual ­report, has to ­follow accounting standards which say the cost of meeting the generous fixed public sector superannuation pension payments needs to be based on the cost for the government to ­borrow the funds required.

Mr Richardson said that while interest rates were falling it made investment returns look good because share and bond prices were pushed higher. But ultimately, the low returns made it harder to meet fixed commitments, a problem shared by insurance companies, aged-care homes and retirees.

“We have made promises that are now more expensive to fulfil because the future returns are horrendous,” he said.

The final budget outcome shows it will be difficult for the government to meet its revenue forecasts.

Company tax raised only $62.9bn, $1.8bn less than predicted and the lowest since 2009-10. BHP Billiton and Rio Tinto, two of the largest taxpayers, have ­reported a halving in profits since the end of the financial year, so company tax will struggle to achieve the 9.7 per cent growth required to hit the $69bn revenue predicted in the budget.

Personal income taxes were $1.3bn lower than Treasury predicted in the budget, mainly ­because of lower pay-as-you-go tax deductions in large companies. Refunds were also higher than Treasury expected, which Mr Richardson said could reflect cash-strapped employees pushing harder with their tax claims.

Super reforms have unintended consequences

The Australian

27 September 2016

Tony Negline Wealth Columnist

Despite some very good work the government’s recent changes to super look like they will bring a string of unintended consequences.

In fact I believe they contain significant landmines that will be expensive for super funds and investors to deal with.

If they proceed as announced they will lead to a string of court cases, because people will have made innocent mistakes and no doubt they will seek redress, as they will almost certainly find themselves facing penalty charges.

The $500,000 lifetime cap is gone and the annual cap and its three-year-in-advance rule have been returned, but with lower limits. The new annual lifetime cap from July next year will be $100,000 and the three-year bring-forward will be $300,000. (Yes, the government has given ground and should be congratulated for doing this).

The old annual cap of $180,000 will now apply until June 30, and if eligible, you can contribute $540,000 before that date.

A range of three-year bring-forward transitional rules will apply in other situations. If a three-year period commenced in 2015-16 then $460,000 can be contributed in 2016, 2017 and 2018 financial years before tax penalties will apply. If the three-year period commences in the 2017 financial year then $380,000 can be contributed in the 2017, 2018 and 2019 financial years.These new rules are really complex, so getting some advice might be essential

l. But anyone who has the financial resources available now and is allowed by the super rules should seriously consider taking advantage of the $180,000 annual cap or its equivalent transitional three-year amount before these opportunities are gone.

Pity the people in the following category — they were aged under 65 but had contributed more than $500,000 in non-concessional contributions between July 2007 and the May budget; they held off making any additional contributions because of the government’s original policy even though they would have liked to put more after-tax money into super. Now they’re aged over 65 — or soon will be — and can make more super contributions under the government’s revised rules, but must also now satisfy a work test that will now remain in place.

How do they solve this problem if they can’t satisfy this work test?

The number of people impacted here will be small, but does that mean they don’t deserve some fairness? The government has adopted an extreme utilitarian approach. That is, let’s whack a few people so the majority can benefit.

This latest compromise by the Turnbull government contains a new element: you will be allowed to make non-concessional contributions if your total super balances are less than $1.6 million. When your balance is close to $1.6m then you can only contribute money so that you don’t exceed this new cap. The $1.6m amount will be indexed by consumer price inflation.

This step sounds simple and just seems to be an extension of the maximum amount you can initially put into a super pension. I can assure you that in practice this is something very different and will be very complex.

The super balance will be determined on June 30 each year for the next financial year. But many super investors do not know their super balance for many months after the end of the financial year, which means they will have to wait some time before being eligible to contribute. In 2011 the Gillard government tried to put in place a similar system but gave up after it became too difficult to implement.

Overall, I see these new contribution rules as very complex. The annual contribution cap system is very unwieldy and should be replaced with a lifetime cap system that is an appropriate amount and has appropriate transitional arrangements.

Bleak View – Bill Leak Cartoon

cartoonbillleakflightsuperjumbo

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.

At last, common sense on superannuation policy

The Australian

16 September 2016

Editorial

Common sense has prevailed; the retrospective superannuation cap is gone. Yesterday, the government said it would substitute a prospective annual cap of $100,000 on after-tax contributions for its unacceptable $500,000 lifetime cap with the clock wound back to 2007. Malcolm Turnbull has achieved a principled compromise on an issue that stoked anger within the Coalition and its base. It was a week of compromise, in fact, as government and opposition found enough common ground to pass $6.3 billion worth of savings measures. We need more of this. Through a lower house with a majority of one and an upper house with a sizeable crossbench, the Prime Minister must articulate a compelling economic narrative and negotiate his way towards the national interest.

In April last year, former treasurer Peter Costello warned of unintended consequences facing policymakers. “Increasing superannuation tax will make negative gearing more attractive again,” he wrote in The Daily Telegraph. Abolition of the $500,000 lifetime cap means we are less likely to see a shift of funds away from superannuation into other more bankable investments. The government went wrong in its budget in May when it approached the rules on superannuation not as retirement income policy but as an ill-considered revenue grab. As such, it was difficult to defend and became one of the reasons for the Coalition’s lacklustre campaign leading up to the July 2 election.

The effect of the superannuation changes would have been to blunt the incentives for self-funding retirees, a class needed to take the pressure off the (already unsustainable) Age Pension. The changes also sent a destabilising message: that governments could change the rules of the long-term investment game that superannuation represents. It was not just the $500,000 lifetime cap that rankled but its retrospectivity. Soon after the budget, a former senior public servant, Terence O’Brien, crystallised the problem in a letter to this newspaper: “A 60-year-old can today expect to live past 90, so superannuation needs to finance a further 30 years of sustained retirement living standards, ideally in a predictable taxation environment. There might be 20 to 25 governments over that 70 years of a typical worker’s saving and retirement, so it is important that there be some sense of fundamental ‘rules of the game’ governing superannuation rule-making and taxation — a ‘superannuation charter’, if you will.”

Paul Keating’s superannuation changes of the 1980s were grandfathered so as not to disadvantage people who had relied on the old rules when making investment decisions. So, too, were John Howard’s 2004 changes affecting the superannuation of MPs. Scott Morrison and Kelly O’Dwyer, then assistant treasurer, failed to convince when they insisted that the $500,000 lifetime cap was not in truth retrospective. Now, at least, there is the basis for restoring trust in the integrity of the system. And, in a political sense, there is the basis within the Coalition for renewed confidence in Mr Turnbull now that the superannuation policy has been shifted from the spurious “fairness” of the centre-left closer to a commonsense position on the centre-right. It was Mr Costello, again, who had put his finger on the problem. “The Coalition is flirting with higher tax on superannuation,” he wrote last December. “The longer it does so, the more it will give ground to Labor on the issue.” Even so, political posturing aside, there should be enough overlap in substance by now for Mr Turnbull to broker an agreement on superannuation with Bill Shorten. Opposition Treasury spokesman Chris Bowen had focused his criticism on the retrospectivity of Coalition policy, a policy to which Labor gave tacit approval by building its savings into its own costings for the election campaign.

In question time yesterday, struggling to be heard above the hyperpartisan ruckus, Mr Turnbull gave the opposition credit for its compromise on Tuesday’s omnibus savings bill. The Prime Minister said he wanted Australians to know that “with a little less grandstanding, a little less name-calling, a little more constructive negotiation, we (in parliament) can achieve great things for Australia”. As usual, the tone of question time suggested anything but consensus. Even so, the Prime Minister has little option other than the path of negotiation and compromise. Politics is the art of the possible and what is possible for Mr Turnbull is heavily constrained by the parliament elected on July 2.

As the Prime Minister put it in a Fairfax Media report yesterday: “The Australian people have elected the parliament that we’ve got and we are determined to work with it.” He suggested that negotiation could allow the passage of the double-dissolution trigger bills — for the Australian Building and Construction Commission and the Registered Organisations Commission — without the need to call a joint sitting of parliament. And the same spirit of compromise may see the government split its $48.7bn company tax package to pass on savings straight away to small business.

Super changes will punish those who save relative to pensioners

The Australian

12 September 2016

Henry Ergas

There is a fundamental defect in the government’s superannuation proposals that has been entirely overlooked. Instead of growing in line with average earnings, the $1.6 million “transfer balance” cap, which limits the amount that can be held in the withdrawal phase, is only indexed to consumer prices.

As real wages rise over time, the cap will therefore fall relative to earnings, reducing the system’s allowed replacement rate (that is, the ratio of pre-retirement to post-retirement income) and steadily increasing the effective tax rate on privately funded retirement incomes.

To make matters worse, the age pension is, and will no doubt remain, indexed much more generously, rising in line with the higher of consumer prices or nominal wages. As a result, the government’s proposals ensure that the capped replacement rate under superannuation will fall not only in absolute terms, but also compared to the age pension.

The proposal would, in other words, punish increasingly severely those people who save for themselves relative to those whose retirement is paid for by taxpayers. And the effect is far from trivial, since compounding means even small differences in growth rates soon translate into large differences in outcomes.

Assume, for example, that initially, the $1.6m is sufficient to buy an annuity one and a half times greater than the pension, and that real wages and consumer prices each increase by 2 per cent a year. Within 10 years, the maximum annuity that can be purchased will have fallen to just a quarter more than the age pension, while in 20 years, it will barely equal the pension.

At that point, anyone relying on the withdrawal account will, despite saving for decades, be no better off than a person who did not save at all.

And adding insult to injury, it is of course those self-funded retirees who, during their working life, will have paid the taxes that finance the age pension others are enjoying.

Instead of frankly acknowledging those effects, the government’s claim is that the initial $1.6m is generous, implying that its progressive erosion as a share of typical middle income earnings is of no consequence. To make that claim, its unpublished briefing to backbenchers assumes a return on investment in retirement of 5.5 per cent and compares the resulting income stream to the age pension.

That comparison is nonsensical. The age pension is effectively an annuity that rises in value as the economy expands and incomes grow. While there is some political risk associated with that annuity, experience suggests it is slight, making it close to a sure thing, both in absolute and compared to the uncertainties that plague the superannuation regime.

As a result, the proper comparison is between the value of the age pension and the income stream a superannuant would secure investing the $1.6m in assets whose yield is also a sure thing, i.e. government bonds, net of the fees incurred in purchasing and periodically renewing that portfolio. With the commonwealth bond rate reaching a record low of 1.82 per cent in August, the resulting relativity would look far less favourable to self-funded retirees than the government claims. And of course, as the difference in indexation arrangements played itself out, the relativity would deteriorate further.

In short, it may be that the greatest effects of the proposed changes would initially be on a small number of wealthy retirees, as the government argues.

What is certain, however, is that the indexation arrangements will soon spread the damage to an ever greater swath of middle Australia, in the process redistributing income from those who save to those who don’t.

Unfortunately, the redistribution does not end there. As part of its package, the government intends to recycle a large share of the revenue it collects into subsidising the superannuation accounts of people on low incomes.

However, using the superannuation system, with its high transactions costs, to boost low incomes makes no sense: a carefully targeted increase in the pension some years down the road (when the accounts that would have received the subsidies would have matured) can achieve the same outcome at far lower expense to taxpayers.

But one person’s excess costs are always another person’s windfall income: with that other person being, in this case, the industry super funds, who will largely garner the fees taxpayers subsidise.

Moreover, the recipients of the transfers will also be grateful, although they are likely to thank Labor, which initially put the payments in place, rather than the Coalition, for the largesse. Little wonder then that the government’s proposals are endorsed in whole or in part by its bitterest opponents.

The pity is that instead of using what little political capital it has to address our superannuation system’s myriad weaknesses, the government is squandering it on changes that undermine the system’s ability to serve what ought to be its purpose — facilitating the transfer of income from working life to retirement.

Bringing that missed opportunity into sharp perspective is the great merit of Rebecca Weisser’s paper on superannuation reform released today by the Institute of Public Affairs. As the paper emphasises, these are not solely economic issues: they go to whether we want a society that rewards self-reliance or that punishes it.

So far, for all its statements about the taxed and the taxed not, the government shows no sign of understanding what is at stake.

“Stuff your pension!”, Phillip Larkin famously wanted to shout in his poem Toad.

But despite belittling the aspirations for financial security in old age that he saw as profoundly middle class, even Larkin recognised “that’s the stuff dreams are made on”.

As those dreams take another battering, an efficient and equitable retirement income system seems more distant than ever.

Load more