Category: Newspaper/Blog Articles/Hansard

The paper, produced by Melbourne QC Jack Hammond, founder of lobby group Save Our Super, and former Treasury official Terrence O’Brien, argues that the combination of the changes to super and age pension eligibility, which come into effect this year produces a “retirement and ­income savings trap”.

The combined impact of the changes has been described as “Retirementgate” by SuperGuide superannuation commentator Trish Power.

The Hammond-O’Brien paper shows that a home-owning couple with $400,000 in super, when combined with the aged pension, can earn more than a couple with $800,000 to $1 million in super whose assets mean they don’t qualify for the pension.

The paper, produced for SuperGuide, argues that the retirement savings “sweet spot” is now $400,000 for a home-owning couple. With $400,000 in super, the couple would be eligible to ­receive 94 per cent of the aged pension, delivering them a total income of $52,395 a year.

But as the couple’s assets rise, the pension tapers off and then cuts out altogether under lower rates that took effect from this January.

“Under the new rules, regardless of whether you saved $600,000 or $800,000 or even $1m, you cannot secure more (in income) than what you secure with $400,000, until you have at less $1,050,000 in super,” Ms Power says in an analysis of the paper this week.

At this level, the homeowning couple would be relying solely on their savings from super with no eligibility for the aged pension.

“Financially, it is better to have $400,000 in super than $600,000, or even $1m in super, due to the harsh effect of the aged pension assets test,” Power says.

“Doubling the effect of the age pension taper rate from January 1 this year means Australian couples are effectively taxed 150 per cent for lifetime super savings between $400,000 and $800,000.”

The paper by Hammond and O’Brien, which is now on the Save Our Super website, is titled: “A ­retirement income and savings trap caused by the Coalition’s 2017 superannuation and aged pension changes.”

It argues that, as a result of the lower superannuation contribution caps that come into effect from July 1 on Saturday, from a maximum of $35,000 to $25,000 a year, it would take 26 years for a person to overcome the “savings trap” to take their superannuation savings up from $400,000 to more than $1,050,000.

Ms Power calls the impact of the combined changes “Retirementgate” and predicts it will lead to a “stampede” by retirees to spend their savings on cruises and other holidays and in renovating their home to reduce their savings to make sure they qualify for the pension.

“Australia’s retirees have been conned and are now being ­punished for saving for their ­retirement,” she says.

The stricter pension asset test rules were announced by the ­Coalition government in the 2015 budget and came into effect in January this year.

This was followed by changes to superannuation policy announced in the May 2016 budget, which come into effect from this weekend.

I emphasise that the incentives are not big enough to cause an enormous rush of people aged between 60 and 65 to leave the workforce and rejoin when they reach 65. But I know of a number of people with large superannuation balances aged in their 60s who are now planning to do just that — leave the workforce and return once they reach 65.

When governments play around with pensions and superannuation it can have unintended and potentially damaging consequences for the society.

The latest superannuation changes will come into effect on July 1 so they concentrate everyone’s mind. The superannuation changes have been extensive and, perhaps understandably, the Australian tax office communications with accounting firms has often been complex.

Many accountants have spent hours trying to work out what it all means to their clients’ individual situations.

A number are now telling their clients that the rules whereby a person has a current entitlement to go into ‘transition to retirement’ pension mode have been changed more extensively than first thought (these transition to pension mode age qualifications depend on birth dates and can apply to people in their late 50s but certainly apply when a person reaches 60).

Currently a person can ask their super fund to put their entitlement into transition to retirement pension mode and therefore they must pay a minimum tax-free pension. But there is no tax to the superannuation income. They can continue to work so their personal income comprises superannuation pension and work income. Under the new rules if you are aged, say 61, you can still go into transition to retirement pension mode and draw that pension from tax-free superannuation income. There is a $1.6 million limit to the assets that can be used as applies to all superannuation. BUT in most circumstances it is very dangerous to be employed and gain work income because then your superannuation income is taxed at 15 per cent. This represents a clear incentive not to work in the years leading up to aged 65.

Once you reach 65 you are able to allocate up to $1.6 million into a tax-free superannuation pension account and you are also able to work at the same time. The tax-free status of your $1.6 million is not affected by the fact that you are working. So over 65 there is a clear incentive to work.

For a lot of people who are aged between 60 and 65 (and often the late 50s) and who want to stop working, the fact that they can gain tax free superannuation income up to the asset limit $1.6 million limit by not working will be attractive. In simple terms: Don’t work and have tax free superannuation or alternatively work and pay the superannuation tax.

For people with relatively small sums in superannuation it really won’t be an issue but for those with larger sums it will certainly become an issue and will cause many to leave the workforce. Already accountants are looking at ways you might be able to gain some working arrangement and still be able to get a superannuation pension from tax-free funds.

I might add that people aged between 60 and 65 can still take money out of their superannuation in the pension mode fashion — the difference is that as long as they work they must pay the 15 per cent superannuation income tax.

I can understand why the Australian tax office has structured the superannuation this way. They want to gain as much revenue from the 15 per cent tax as possible. But we have created a very strange situation and one that is not good for the community. Unfortunately that’s the way of governments in these times.

An even better example of poor policy is the aged pension gymnastics where people who have found themselves with assets in the vicinity of $400,000 and $800,000 are rewarded at 7.8 per cent when they spend their savings. Newspapers are absolutely studded with cruise advertisements to help people to reduce their assets and gain increased aged pensions. I don’t think the superannuation situation will be as dramatic but it shows that in Canberra they don’t understand how important to society it is to have people working in their later years. If they give up work in their 60s it is highly likely they will not return at 65. And they are more likely to end up on the government pension.

The current rules were established because the politicians of the day understood how important longer working would be for society. Someone needs to explain to the people in Canberra what happens in the real superannuation and pension world.

Investsmart

16 June 2017

Robert Gottliebsen

This weekend I want to take you back to June 2006, which is Australia’s last experience of a rush to thrust money into superannuation before the rules changed. It is worth recalling what happened in the subsequent months as a note of caution.

And we can also learn from the adventures of Lachlan Murdoch and James Packer in their investments in the Ten Network, showing how it can be very dangerous for small investors when major players are pursuing big strategic objectives.

I remember 2006-07 very well, when I was involved in a website start-up and had invested in the project. In the years leading up to 2006-07, the rules for putting money into superannuation were very flexible and you could invest very large sums. But the then Treasurer Peter Costello wanted to restrict superannuation investment – tax paid or so called non-concessional contributions – to $150,000 a year. And, as a bonus, he allowed investors in the nine months to June 30, 2007 to invest $1 million each on a tax-paid or non-concessional basis. For a couple, that meant $2 million.

Lots of people could access $1 million, and a great many borrowed money on their house to take the opportunity to invest in superannuation which would be tax free for those in pension mode.

I don’t think we have ever seen such a rush of money into superannuation in a short period of time, and it so happened that at that very time world stock markets were surging (the Dow reached a then peak of 14,000 in July 2007) and Australia hit highs that have not been reached since.

And so, given we were in a boom, a large amount of that superannuation money went straight into the stock market around June 30, 2007. Looking back there were signs that the US subprime market was in a very dangerous phase. The balloon went up in August 2007 and, in the months that followed, it led to the global financial crisis. Those that took up Peter Costello’s invitation to put their savings and or borrowings into superannuation and then bundled their money into the share market lost a fortune.

Looming super changes, and market jitters

And so now, exactly a decade later, in the period leading up to June 30, 2017, we are about to further restrict the money that can be put into superannuation on a tax-paid or non-concessional basis. This time the limit is to be $100,000. But you can invest $540,000, or three years’ contributions, at the current rate if you make the investment before June 30, 2017.

It is very clear that many thousands of Australians are doing just that, and have not waited until June 30. Some who have boosted their contributions are already buying shares in high-yielding banks and infrastructure stocks. It would seem that, as the superannuation buying pressure pushed up stock prices, so the shorters panicked and began to cover. I suspect short covering in the case of banks has eclipsed the super money demand.

A lot of international institutions are short Australian bank stocks, so would have been alarmed at the super driven buying. That cocktail triggered demand swings, so the upward thrust was interrupted during the week.

Once June 30 passes our stock market will perform in a more normal way and follow the US and local trends. At this point I can’t see a global financial crisis about to hit us, but it is fascinating that the US bond market is reacting in a way that is totally different to what most predicted six months ago.

Federal Reserve chief Janet Yellen is lifting interest rates, but instead of the bond rate rising in response it fell this week because investors are jittery about President Trump’s ability to ‘make America great again’ by tax cuts, sucking US funds held offshore back to the US and create spending on infrastructure. American and global funds are pouring into the US bonds. In other words, the bond market is telling us the US revival is going to be much tougher than was expected, and that is not good for global share markets. My contacts in the US say that the car market is weak, and the burst of oil drilling in the US is receding with the fall in the oil price. Those fortunate enough to have $540,000 to invest in super should be careful about repeating the mistakes of 2007 and plunging it into the share market.

The Age

16 June 2017

Noel Whittaker

Pensioners have long prized the pensioner concession card. For years, the government of the day has allowed any person receiving even one dollar of age pension to be eligible for this precious card and all the benefits that come with it.

Then came January 1, 2017, when the asset test taper rate was tightened. This caused many pensioners to lose not just the pension, but also the pension card.

Of course, there was a predictable outcry. The government responded by promising that any pensioners who lost the pension card as a result of the asset test changes would receive an automatic health card to replace it. Many did receive the card, but some unlucky pensioners missed out.

Any pensioners who owned their own home with assets above $817,000 for a couple or $542,500 for a single lost their pension. Non-homeowners are allowed an extra $200,000 in assets. The pension is calculated under an income test and an asset test: whichever test gives the lower amount is applied and that amount of pension paid.

Under the income test you are allowed six fortnights when your income can be temporarily above the limit and still retain your pensioner concession card and its entitlements. When your income drops again the pension payments resume.

Take the example of Mary, a 66-year-old widow who owns her own home and does some part-time work earning

$375 per week. Mary had $500,000 in investments, a car worth $20,000, household contents of $5000 and $25,000 in the bank – a total of $550,000 or just over the asset threshold.

Last year Mary was receiving a part-pension of $365 per fortnight and a pensioner concession card.

Her employer asked Mary to do some extra shifts over Christmas and this lifted her wages to $775 a week. This meant she received no pension at the end of December because her income was above the limit.

Mary knew she wouldn’t receive any pension after January 1 because of her assets but expected to receive the automatic health card to compensate for the loss of her pensioner concession card.

This didn’t happen, because of an obscure pension rule that said she was affected by the income test, not the asset test, on January 1 even though her assets were above the new limit.

So Mary now has to pay $40 every time she goes to the doctor because she has lost bulk billing. She has to pay an extra $1100 a year for pharmaceutical scripts. And her rates have gone up by another $235 because she no longer has a pensioner concession card. All this because she earned an extra $800 over Christmas.

Mary is much worse off financially: had she known about this rule, she could have not worked the extra time and received the automatic health card. But there was no information on any government websites and it seems few people knew about it.

In the latest budget the government has proposed to return the pensioner concession cards to those who lost them on January 1. However, if the same rule is applied, Mary will miss out again.

When it comes to cards, some former pensioners continue to be dealt a lousy hand.

My advice is to take this up with your local federal member. As I see it, it’s an unexpected and unintended consequence. It’s now up to the government to make matters right.

This story was found at: http://www.theage.com.au/money/planning/unlucky-seniors-still-caught-in-the-pension- card-trap-20170615-gwrmke.html

The Australian

20 May 2017

James Gerrard

Relief is on the way for at least 100,000 retirees who recently suffered age pension cancellations. On January 1, Centrelink reduced the maximum assets retirees could hold and be eligible for the age pension.

The cut shaved hundreds of thousands off the assets test and resulted in this relatively large group having their pension concession card cancelled.

But courtesy of the federal budget, this group of retirees will now be issued with new pension concession cards to restore some of the benefits lost. So what is the pension concession card and why do so many people want it?

It is the most important card in many people’s wallets and can result in discounts and concessions worth thousands of dollars per year. The pension concession card gives people cheaper healthcare and lowers the costs of some goods and services.

Discounted prescription medicine through the Pharmaceutical Benefits Scheme is a key feature for those with the card and Sydney certified practising accountant Luke Star, from Star and Associates, says “even though some retirees have substantial savings north of $500,000, as we get older, our health changes and it seems to provide a level of comfort in knowing that medical costs will not rapidly eat into retirement savings due to the medical concessions afforded from the pension concession card”.

There are also other significant discounts outside medical benefits. Exact discounts vary state to state and also depend on which local government area you reside in, but below is a list of some of the main expenses that receive discounts:

• Council property rates and charges;
• Electricity and gas bills;
• Water bills;
• Vehicle registration;
• Licence renewal;
• Public

Even if you are not of pension age and have a high level of savings, there are a few strategies to posture and manoeuvre assets in such a way to fall under the limits for an age pension when eligible in the future. The reason to consider doing so is to receive the highly desirable pension concession card. Star says “the benefits can add up to thousands of dollars per year. So for many people, particularly those with health issues, the difference in receiving this card or not is substantial in retirement”.

In terms of deliberately reducing assets to fall under the assets test to receive the age pension and the pension concession card, Sydney financial planner Xavier Lo says “even after Centrelink reduced the maximum asset level in January 2017, the limits to receive a part age pension remain generous. There are legitimate strategies people can employ if they are just over the cap test to fall below it to receive the age pension and associated benefits”.

Even though the age pension payment may only be a few dollars per fortnight, the bigger benefit comes from receiving the pension concession card, issued to recipients of the age pension.

Lo says there are a few common ways for people approaching or in retirement to reduce assessable assets and increase the chance of being eligible for an age pension. “Gifting is one popular strategy, however gifting limits need to be kept in mind.” A limit of $10,000 per year can be gifted up to $30,000 over a five-year period to reduce assets. Any money gifted above these limits are treated as deprived assets and still counted in the asset test calculation for five years, even though the money has already been gifted away.

Of course, gifting large chunks of your retirement savings for the sole purpose of getting an age pension and pension concession card may not be a prudent move as it may leave you short in retirement.

Another popular strategy is to spend on renovations to the family home, which is not counted in the calculation when Centrelink work out your level of assessable assets for the age pension.

Lo says “doing those long overdue kitchen and bathroom renovations may not only give you a nicer house, but may result in being eligible for age pension benefits”.

The federal budget measure to reinstate the pension concession card to the 100,00 people who lost it earlier in the year comes as welcome news, however it is subject to the passage of legislation before being rolled out.

For those who are over the assets test, there are ways to reduce wealth and sneak under the maximum caps. However, one must consider whether it is sensible to do so and whether it will backfire over time, with not enough savings left to enjoy a full and financially secure retirement.

The current maximum assets people can have to be eligible for a part age pension are $546,250 for singles and $821,500 for couples who are homeowners. For non- homeowners the limits for singles are $746,250 and for couples it is $1,021,500.

James Gerrard is the principal and director of independently owned Sydney financial planning firm FinancialAdvisor.com.au.

The Australian

17 June 2017

Andrew Heaven

Q: I have read commentary suggesting that SMSFs which exceed the $1.6m super limit should consider opening a second SMSF. What would be the benefit of such a strategy?

A: July 1, 2017, marks the introduction of $1.6 million limit on the amount of superannuation savings that can be transferred into an income stream to receive the tax exemption on investment earnings and capital gains.

This should not be confused with the general transfer balance cap of $1.6m, which also comes into effect from July 1. For people with a total superannuation balance greater than or equal to the general transfer balance cap of $1.6m, they will be unable to make any further non-concessional contributions.

Opening a second SMSF will not assist with avoiding the general transfer balance cap of $1.6m as it operates on a total superannuation balance across all funds.

For SMSF members who have superannuation savings in excess of the $1.6m limit, the tax exemption on investment earnings will be reduced as the assets of the fund will be required to be unsegregated. This means earnings on the assets of the fund are proportioned between the tax-exempt portion within the income stream and the taxable portion with the superannuation fund in accumulation phase. Should an asset (such as property) be sold, only a portion of the capital gain will be tax-free, not all of it.

SMSF members who might be considering a second fund would be doing so presumably for tax reasons. This strategy would allow the accumulation and pension phases to be held in separate SMSFs. This separation means $1.6m would be contained within an income stream within a SMSF and all excess funds above the $1.6m limit would be contained in another SMSF. Thereby theoretically negating the change in rules around segregation of assets.

The advantage of this strategy is being able to dispose of assets held within the income stream SMSF with no capital gains tax. Furthermore, if the asset increases in value once the income stream has been commenced, again no capital gains tax on disposal. As an example: John (age 62 and retired) and Julie (age 64 and retired) each commence a pension within their original SMSF for

$1.59m as at August 1, 2017. In October, they transfer any remaining member balances to another SMSF. They also decide to retain the existing investment property within the original SMSF. The property was purchased in 2009 for $720,000 and valued at $1.02m at August 1, 2017, when commencing the pensions. Due to a surge in the property market in early 2018, the value increases to

$1.35m. John and Julie can sell the property and no capital gains tax will apply. Prior to July 1, 2017, a SMSF could achieve this outcome within one fund using the segregated pension method. The change in the legislation has removed the segregated pension method, therefore creating interest in the strategy of having two SMSFs.

The Australian Taxation Office has flagged the potential for this strategy to be considered a tax avoidance measure under Part IVA of the Income Tax Assessment Act. A dual SMSF strategy cannot be done purely for tax reasons. Other reasons need to exist, such as estate planning, investment opportunities or complying with the maximum number of members, which is four or less. It is very important to seek advice and document any reasons as to why a second SMSF is appropriate.

Visit the Wealth section at www.theaustralian.com.au to send your questions to Andrew Heaven, an AMP financial planner at WealthPartners Financial Solutions

Canberra Times

18 June 2017

George Cochrane

I have a CSS defined benefit superannuation pension of about $70,000 a year plus a self-managed super fund balance of about $800,000 and my wife has a defined benefit PSS pension of $40,000 and $1.2 million in the SMSF. The assets, shares and bank accounts, are “segregated” i.e. separately listed as assets in either my wife’s or my pension accounts. My wife and I will both be individually above the $1.6 million cap. On June 30, I was intending to partially commute both of our pension accounts and transfer some parcels of shares into an accumulation account so that we are under the $1.6 million cap. I will also open new bank accounts for the accumulation fund. I believe the pension account would continue to be tax free and tax would be payable in the accumulation account. I assume there would be no need for an actuary. Is this correct? M.G.

An SMSF will not be able to use the segregated assets method for determining “exempt current pension income” and MUST use the proportionate method for the full year, if the fund has at least one member of the fund with a total superannuation balance of more than $1.6 million as at June 30.

In other words, if you want to segregate the accounts within the fund for your own purposes e.g. so you and your wife can identify your own benefits, then you are welcome to do so but the fund’s tax returns, used to determine the level of tax exempt pension and the tax payable on the remaining assets, must be calculated using the proportionate method. In an April 23 AFR article, a spokesman said the ATO “would take a dim view” of people setting up a separate SMSF to house assets in the accumulation phase, though I cannot see why the ATO is against people running their affairs in a clear and transparent structure.
The transfer balance of your CSS pension will be around ($70,000 x 16=) $1.12 million, using the daily pension payable at the end of June 30 (and not the indexed value as of July 7) so your total superannuation balance will be some $1.92 million and your wife’s $1.76 million.
According to the Tax Office’s Law Companion Guide 2016/8, available on its website, your fund “might require an actuary’s certificate to support its use of the proportionate method, which would be a new compliance obligation for funds that previously only had segregated current pension assets.” You would do best to obtain a certificate.

Our Pensioner Concession Cards (PCC) were withdrawn January 1, 2017, because we had marginally failed the assets test. We understand that the government has plans to return these cards to people such as us. We wonder if you can explain the situation as it stands now? R.M.

People who lost their PCC as a result of that change in the assets test will have it returned from July 1. The Low Income Health Card that was one of two cards issued will be cancelled.

Two questions, please:

• What valuation date will be used in establishing the $1.6 million valuation for the superannuation cap?

; and

• My daughter is understandably anxious about what appears to be a 17 per cent death duty in disguise that applies on the winding up of a self-managed super fund on the death of the members. She has heard that there are ways that this can be avoided or minimised. If she is right could you please enlighten me? G.R.Existing income streams will be valued at “the end of June 30” and the individual’s new “Transfer Balance Account” will be credited on July 1.

  Your daughter is quite right in that the “taxable component’ in a super fund (stemming from deductible contributions and the fund’s earnings) is only untaxed in a death benefit lump sum if the money passes to “tax dependants”.

  These are defined in the Income Tax Act as either [i] a current or former spouse or de facto or [ii] a child under 18, including adopted, step or ex-nuptial children or [iii] anyone financially dependent on the deceased or [iv] anyone in an “interdependency relationship” and this exists if they have a close personal relationship, live together and one or each of them provides the other with financial and domestic support and personal care, or have a close personal relationship but are not living together due to physical, intellectual or psychiatric disability.

  If you, Dad, are entitled to withdraw benefits e.g. as non-preserved component or up to 10 per cent of a transition to retirement pension, and are eligible to make non-concessional contributions (or NCC), you can withdraw and contribute up to the NCC caps. Or, if the doctor gives you a time limit, remember that an over-60-year-old can withdraw all benefits without tax as long as you are still clinging to your perch!

  My husband was with the Department of Defence when he died suddenly at a young age in 1981. Ever since then I have received a taxable, defined benefit, widow’s superannuation pension. I also have my own taxable defined benefit superannuation pension. So you can imagine what happens now that both pensions have to be multiplied by 16! Having been in receipt of my widow’s pension since 1981, it astounds me that the government sees fit to alter the rules. Moreover, both pensions are taxable so how is it that they are counted towards a capped tax-free amount? R.F.

  Both pensions will count towards your $100,000 a year “defined benefit income cap” (which is multiplied by 16 when you have, say, an allocated pension as well and need to calculate a “total superannuation balance”). If your pension income exceeds $100,000, then 50 per cent of the excess will be added to your taxable income, but without a tax offset, otherwise available to people over 60.

  The only part of a DFRDB pension paid to a person over 60 that is currently taxed is that portion derived from the Government’s tax revenue each year, known in the jargon as the “element untaxed” within the taxable component. The rest of the pension is currently not assessable in 2016-17 but can result in a reduced tax offset in 2017-18.

  The ATO’s Law Companion Guide 2017/1, available on its website, gives an example (page 9) of a person with a $160,000 defined benefit pension, comprised of $60,000 tax free component and $100,000 “element untaxed”. The latter is currently assessable but provides a 10 per cent tax offset i.e. $10,000 comes off your tax.

  In 2017-18, the $60,000 remains tax-free but, since the total amount of $160,000 exceeds the defined benefit income cap of $100,000, then the current tax offset is reduced by 10 per cent of the $60,000 excess or $6000 i.e. that person’s offset for the 2017-18 financial year drops to $4000.

  The old saying is “The devil is in the detail”. The details are particularly devilish in these July 1 changes.

  If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.

  This story was found at: http://www.canberratimes.com.au/money/ask-an-expert/retirees-alarmed-by-devilish- details-as-they-prepare-for-super-reforms-20170615-gwrkn7.htm

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?”

The Age

16 May 2017

John Collett

A budget measure that allows downsizers to put more into their super will likely see Irene and Tom Han sell their family home.

The retirees live in a five-bedroom family home near Castle Hill in north-west Sydney and have been talking about downsizing for the past five years.

Under the measure, from July 1, 2018, those aged 65 and over will be able to downsize their family home and place proceeds up to $300,000 each into their superannuation fund.

The measure will apply to a principal place of residence held for a minimum of 10 years. This will apply to both members of a couple for the same home. Provided they are 65 and over, they can put a combined $600,000 into super.

Irene, 65, a former chief executive of a disability services company and Tom, 76, a former accountant who moved into management, are fully self-funded retirees who also own an investment property on the Gold Coast.

“The home is just not required any more,” Irene says.

Irene says that she and Tom are not into gardening and then there’s the time spent cleaning a large house and the costs of maintaining the house and utilities.

“I don’t want to spend my life cleaning; there are more interesting things in life,” she says. “It gives us options. We would have preferred to get a reduction on stamp duty to downsize, which would have been something that everyone could have benefited from.”

While Irene and Tom enjoy a comfortable retirement, for the more than 80 per cent of retirees who own their own home, many don’t have that much in super.

Asset rich

According to Association of Superannuation Funds of Australia, a home-

owning couple in good health needs $640,000 for a comfortable retirement, yet the typical super balances of retirees is much lower than that.

Jason Andriessen, chief client officer at financial advisers, StatePlus, points out it’s not uncommon, particularly in the property hotspots of Sydney and Melbourne, for retirees to be living in a family home worth well in excess of $1 million, but struggling to make ends meet on the age pension.

He says more than 80 per cent of retirees own their own home, but also have insufficient super.

They can also each contribute up to an additional $100,000 each a year in non- concessional contributions if they are still working and under age 75.Under the change, a couple can add a maximum of $600,000 to their super balance in one year by making non-concessional contributions of up to $300,000 per person from the family home, regardless of whether they are working or not.

Once aged 65 and drawing an income stream from the super, regardless of work status, for most people there is no tax on the earnings and no tax on withdrawals. However, from July 1, they will pay earnings tax on the super savings above $1.6 million.

Well-off

However, the experts warn that the downsizing measure is really only likely to be of help to retirees who are particularly well-off.

That’s because of how the age pension thresholds under the assets test work.

The principal place of residence does not count, but super, savings, shares and almost everything else, including the value of household goods and the car, are included as “counted” assets .

The lower asset threshold for a couple who own their own home is $375,000, meaning they receive the full age pension up to this level of assets.

For assets in excess of that, the age pension is reduced until combined assets reach $821,500, when the age pension cuts out.

Phillip Gillard, a financial planner at Shadforth Financial Group, says part pensioners have to be very careful.

Age pension

By downsizing, they are taking money out of their principal place of residence, which is not counted under the assets test to where it is counted, in either a bank savings account earning very low interest, or in their super.

That would mean a reduction in the age pension. For each $1000 of assets they shift out of the family home, they would receive $78 a year less in pension payments. The effective return on each dollar that is not counted as an asset for the age pension is 7.8 per cent.

That’s a return that would be very hard to beat without taking a higher level of risk, Gillard says.

Jonathan Philpot, a partner at HLB Mann Judd Wealth Management NSW, says another part of the budget measure underlines how it is really of benefit to the upper-end.

That is because from July 1, no more non-concessional contributions to super will be allowed to those with $1.6 million in their super accounts. But extra non- concessional contributions will be allowed for those who have hit this limit if the contributions are from the sale of the family home.

And even for the well-off, this is not necessarily that much of a help. That’s because retirees are able to have significant earnings outside of super before they have to start paying tax.

Next tier of wealth

Gillard says those who stand to benefit are those on the next tier of wealth, who have rental income or other investment income in their personal names.

The measure is useful for those people who, if they released money from the sale of their home, that money would add to their level of income so that they would have to start paying tax or move into a higher tax bracket, he says.

There are also the costs of downsizing that would have to be weighed up.

Gillard estimates that the costs of stamp duty on the new property and other costs, like the moving costs, add up, very roughly, to something like 7 per cent of the sale price – though that will vary depending on the value of the properties and the extent of the downsizing.

Philpot says there will be other factors in deciding whether or not to downsize apart from financial factors.

“It’s not just financial, it’s emotional and about things like where you want to live – close to the beach or close to the grandchildren, for example,” he says.

Australians are living longer than ever, and the generation retiring now is the largest ­cohort in history. The financial costs of an ageing population are significant, even if living longer is a problem we all hope to confront.

There are more baby boomers than any other generation alive, despite their age, which gives them enormous political power — delivered to an activist generation who knows how to use it.

The battleground in focus is superannuation, and ­within the Victorian division of the Liberal Party it became open warfare this week when cabinet minister Kelly O’Dwyer was attacked ­repeatedly for having the temerity to reform superannuation — reforms, incidentally, that after the election last year (and admittedly after a little tinkering to get the settings right) were applauded by the partyroom. Those who claim dissatisfaction with the changes overstate their case.

We need to be clear when outlining just how insignificant the changes to super have been for most Australians. Ignorance is driving much of the fear in this ­debate.

While baby boomers are, as already mentioned, retiring en masse, most will continue to pay absolutely no tax on earnings in their superannuation accounts. That is the political reality. When I say most, we are talking about upward of nine of out 10 retirees living off their superannuation savings, and that’s before considering all those other over-60s living off the pension.

A small number of retirees will be required to pay a very small share of tax, courtesy of the ­reforms the government ushered through soon after the election last year.

The changes have left a rhetorically loud (if numerically small) grouping of elites very ­unhappy. They believe that years of earning huge salaries, and presumably often minimising their taxes when doing so, have earned them the right to pay no taxes whatsoever in retirement — notwithstanding the costs an ageing society im­poses on the rest of us in policy areas such as health.

Let’s put what they are collectively moaning about into context. How dare O’Dwyer support ­reforms that would see a 15 per cent tax on superannuation invest­ment earnings beyond the earnings on the first $3.2 million invested by couples (half that for individuals). That, according to O’Dwyer’s critics, is an unacceptable reform. I say it continues to be an unbelievably low rate of tax.

Assuming low investment ­returns of 5 per cent a year, $3.2m invested would return at least $160,000 each year. No tax is paid on that by retirees, not before the changes the government made and not after them. All that happens now (which did not happen before) is that 15 per cent tax is paid on any additional earnings. The principal ($3.2m or greater) is not taxed, which is important to be aware of.

So if you have super earnings of $200,000 each year, you now pay the whopping tax total of $6000.

Compare that with every generation X, Y or Z person paying marginal tax rates on their ­income earnings.

And if they are able to save money each year ­towards a home or investment loan, consider what they pay in tax on the earnings from those savings. Such taxes are levied at the marginal income tax rate their earnings fall into.

For example, if you earn $180,000 a year, you have just hit the top marginal tax rate (close to 50c in the dollar when levies are factored in).

If you manage to save $20,000 towards a home deposit, and invest it in a savings account earning you 5 per cent interest, you make $1000 after one year to help top up your deposit.

But ­because your interest earned is taxed at the top marginal rate, you effectively lose $500 of that $1000 interest earned — money that can go into government coffers to help fund the ageing of the population.

It doesn’t seem very fair, does it, when the baby boomer earning $200,000 on their super every year is paying only $6000?

Unbelievably, however, this debate isn’t about whether those baby boomers should pay more tax. Neither major party is suggesting that. The debate is about whether O’Dwyer should be challenged in her electorate of Higgins because she had the temerity to impose any taxes at all on superannuation earners.

This is how broken our political debate has become, and it’s also a sign of how powerful the baby boomer generation is politically. Not that the superannuation changes should exercise the minds of most baby boomers ­because, as already mentioned, the overwhelming majority of them simply are not affected by the government’s new taxes.

Critics of O’Dwyer are out of touch and driven by financial self-interest, yet they are scaring retirees unaffected by the minimal super tax changes into thinking the government is stealing from them — harming the financial ­viability of their retirement.

In irony of all ironies, there are polemic advocates from generations X, Y and Z who do the bidding of elite cohorts among the baby boomers, misunderstanding the changes or happy to attack political enemies such as O’Dwyer when they should know better as policy analysts. It’s so lowbrow.

As an addendum to the far more important policy ramifications of this whole debate canvassed above, I was criticised during the week by Peta Credlin (a colleague on Sky News) for not giving her the opportunity to comment within a comment piece I wrote for this paper. The piece criticised her for fuelling the story that O’Dwyer might be challenged for preselection.

I took the view, as a chair of journalism at a Go8 university, and aware of this newspaper’s editorial guidelines, that seeking comment for a comment piece isn’t necessary (news flash: it’s required for news stories, not comment pieces).

Peta and I can agree to disagree on the matter, but I do note that the following day she wrote her own comment piece on super, taking aim at O’Dwyer. So why wasn’t O’Dwyer given the opportunity to comment for that piece? Not that offering her such an opportunity is required, of course.

Peter van Onselen is a professor at University of Western Australia and a presenter on Sky News

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