Category: Newspaper/Blog Articles/Hansard

Why superannuation should be nationalised

The Australian

20 March 2017

Alan Kohler

Last night industry super funds launched a new TV ad showing a besuited arm, obviously a banker, letting foxes into the henhouse. The industry funds are understandably sick of defending themselves against constant political attack, even though their investment performance and governance are clearly superior to the bank-owned retail funds that the Coalition supports.

So they’re fighting back.

According to ChantWest, the 10-year performance figures are 5.5 per cent per annum for industry funds and 4.6 per cent for retail funds. An Industry Super Australia presentation puts the 20-year performances at 6.3 per cent for industry funds and 4.5 per cent.
As I have written many times, the Government should be asking why the bank funds are performing so badly, instead of trying to nobble the better performing industry funds.

But there is a deeper problem here in my view: those figures are averages of a very wide dispersion of results. There are 43 industry funds, more than 100 retail funds and 110 MySuper products.

So quick, tell me which of those 270 or so super funds is going to provide you, or your staff, with the most comfortable retirement in 40 years’ time?
Nobody has any idea of course — not the employee, the employer, the funds themselves, or any expert financial adviser for that matter. It’s impossible to know because, as the warnings always state: past performance is not a reliable guide to future performance. The future is unknowable.
In any case, past performance data is not provided to individuals when they have to choose a fund; it’s possible to get it, but not easy. So even if the data were meaningful it’s not readily available.

The only meaningful data concerns fees, but that’s not readily available — or comprehensible — either, and it’s not the main thing anyway. The only thing that matters in the end is how much money you end up with, which is all about the return and compound interest.

Superannuation is the only product where choice and competition are not only completely pointless, they are counter-productive.

From July everyone will have a personal super transfer balance cap

Australian Financial Review

22 March 2017

Sam Henderson

Hi Sam, I understand that a little known aspect of the new superannuation rules is that if someone has two super funds, with $1.6 million in each, then they can have $3.2 million in a tax- free pension. Can you please confirm this. Andrew

 

Unfortunately Andrew, this is not true for an individual. A couple may each have $1.6 million of assets supporting a super pension, giving rise to a combined tax-free pension of $3.2 million, but the individual level is set at $1.6 million. This comes into effect on the July 1. After that date, any amount in excess of the $1.6 million “balance transfer cap” will need to be placed back into an accumulation account, where earnings will be taxed at 15 per cent and capital gains at 10 per cent or 15 per cent, depending on how long the asset is held for. From July each person will have their own “transfer balance account”. Like a bank account, you will have credits when you transfer super interests into your tax-free pension. The only situation where some dispensation may arise is in the event that someone receives a reversionary pension, as they will be given 12 months before a super inheritance is counted towards the beneficiary’s transfer balance cap to allow the beneficiary to organise their financial arrangements.

Your tax file number will link all of your super funds. It does not matter how many you have. According to the Australian Tax Office, “the transfer balance cap applies to the total amount of superannuation that has been transferred into the retirement phase. It does not matter how many accounts you hold these balances in.”

Super fund providers will be required to report all movements of customers into pension phase, and no doubt those already in pension phase as at July 1.

 

Hi Sam. I am 70 years of age, my wife is 66. Can we use the existing $540,000 three-year bring forward rule, or are we stuck with our annual non-concessional $180,000 limit? Ian

Ian, because you are over 64, you can only utilise the annual non-concessional cap of $180,000 this

financial year. That amount drops to $100,000 from the next financial. The only time a person over 65 is able to utilise the three-year bring-forward provision is if they have turned 65 during the financial year and they have continued to meet the work test in the same year in which the non-concessional contribution was made. For example, if I turned 65 in December 2016, I can still make a $540,000 non- concessional contribution by June 30, as long as I work 40 hours over 30 consecutive days.

 

Hi Sam, my question concerns super contributions in the financial year in which a wage earner, aged between 60 and 64, retires. Is it permissible to salary sacrifice into super before retirement in the first part of the financial year, and then after retirement make an after-tax contribution to super on which a tax deduction is claimed, all within the same financial year? If so, are there separate caps for each type of contribution? And will the current rules be unchanged after July 1? Robert

 

Robert. Yes, the rules are changing on July 1 for this too. This is currently covered in Section 290 of the Income Tax Assessment Act 1997, which details what you can claim as a tax deduction for super contributions.

 

Right now, if you are employed (and not self-employed), you can only make super contributions as you earn the money via your salary, hence the term salary sacrifice. However, someone who earns 10 per cent or more from self-employment (or investment earnings if retired and under age 65) is able to make a lump sum contribution and claim a tax deduction for it. For those over 50 that amount is $35,000 and its $30,000 for those under 50.

From July, everyone will be limited to a $25,000 concessional contribution limit and the 10 per cent rule will be abolished. This will mean employees can make lump sum super contributions any time during the financial year without having to meet the 10 per cent rule.

In your case, if your earnings from being an employee exceed 10 per cent of your reportable assessable income (including fringe benefits tax and super contributions) then you will not be able to make a lump sum, or personal, contribution.

If you’re retired and under 65, we often use this opportunity to help reduce a clients’ capital gains tax liability by maximising their concessional contribution limits. This reduces their taxable income and thus their tax payable. You get a double-shot benefit for couples when assets are held in joint names.

APRA figures: superannuation changes hit contributions

The Australian

22 February 2017

Glenda Korporaal

The superannuation industry continues to be hit by the federal government’s tax and contribution changes with figures out yesterday from the Australian Prudential Regulation Authority showing a 19 per cent plunge in net contributions in the year to the end of December.

A combination of declining new contributions and a continued increase in payouts as the baby-boomer generation retires is cutting into the growth of the super sector. Net contribution flows were down from $38 billion in 2015 to $31bn last year.

Total contributions, which includes compulsory contributions, were down by 0.2 per cent to $103.7bn while total benefit payments rose by 8.2 per cent to $67bn in 2016.

Total personal post-tax contributions, the biggest discretionary sector, were down from $22bn in 2015 to $19.3bn.

While the total assets in the industry grew by 7.4 per cent to a record $2.198 trillion over the year, the increase was largely driven by higher investment returns and compulsory super contributions.

“The strong markets have been holding up the figures,” ClearView chief executive Simon Swanson said yesterday.

“We wouldn’t have seen much increase without the investment returns.”

He said one of the biggest issues facing the industry was Australia’s changing demographics as the population aged and more people took money out of super.

He said the figures showed that people were still reluctant to be making extra one- off contributions to superannuation because of the federal government’s superannuation changes.

“People are now investing a lot more outside of superannuation than they used to because of the changes to the system,” he said.

The increase in total assets in superannuation came after a 6.8 per cent rate of return for super funds (excluding self-managed) for the year to December and a five-year average annual rate of return of 9.2 per cent.

The government announced broad changes to super in the May budget, including plans to cut the caps on concessional contributions to superannuation from $30,000 a year and $35,000 a year for people over 50 to $25,000 a year from July 1.

It also announced a $1.6 million cap on the amount of money that can be moved into a tax-free superannuation account and moves to cut out most of the attractions of transition-to-retirement schemes.

It also announced a $1m cap on post-tax contributions dating back to 2007 applicable on budget night. But complaints over the severity of the proposal saw it drop this measure in November, replacing it with plans to cut the post-tax contribution limit from July 1.

Yesterday’s figures show the self-managed super sector grew by 8.3 per cent to $653.8bn in the year to December, while assets in industry funds increased by more than 12 per cent to $500bn.

But the assets in life office statutory funds were down by 7.9 per cent to $51.3bn.

For many super fund members who have the money, there is now an incentive to put extra into super to take advantage of the contribution caps before the changes come into force on July 1.

“The growth in SMSF assets to $653.8bn is a strong result for the SMSF sector,” the head of policy for the SMSF Association, Jordan George, said yesterday.

“It shows continued growth through a time of regulatory change and volatile markets.”

He said the flat growth in contributions was to be expected as many fund members held off while waiting for government policy to be finalised.

Super funds deny $5m in payments to Labor-aligned unions donations

The Australian

20 February 2017

Michael Roddan

Australia’s biggest employer- and union-backed industry superannuation funds have doused suggestions they donated millions to Labor-aligned union groups, after an analysis of election funding disclosures showed industry funds paid nearly $5 million to ALP-associated entities.

AustralianSuper, the country’s largest industry fund, said the more than $550,000 that the fund paid to unions including United Voice, the Australian Manufacturing Workers Union, the Media Entertainment and Arts Alliance and the AWU over the 2016 financial year were not donations but receipts for commercial payments for member engagement, such as paid advertisements in union magazines.

“AustralianSuper does not make donations to any organisations,” said the fund’s spokesman, Stephen McMahon.

“These are normal commercial payments for commercial services with the purpose of engaging with members. We undertake advertising and marketing activities with unions, employer associations and other commercial organisations to attract and retain members.’’

Analysis of the Australian Electoral Commission data, carried out by financial research group Rainmaker’s Financial Standard publication, alleged industry super funds “donated” more than $4.8m to unions and ALP-associated entities during the last financial year.

The AEC, which requires political parties and associated entities to disclose all receipts above a $13,000 threshold, distinguishes between “gifts and donations” and “other receipts”.

Unions must disclose receipts for commercial services from industry funds and other organisations. The Australian Prudential Regulation Authority has only recently started collecting advertising spend as part of its superannuation data collection. Super fund payments for advertisements in other media, such as television and newspapers, are understood to account for a much greater share of the sector’s advertising spend.

Hostplus, which looks after hospitality and tourism workers, was the biggest- spending industry fund, with a payment of more than $850,000 to United Voice. The fund did not respond to requests for comment.

The big four banks, which operate in the rival retail super fund sector, donated

$352,000 last financial year to the Coalition and $310,000 to the ALP. Westpac, Commonwealth Bank of Australia and NAB have since pledged to end the practice of donating to any political party.

Last financial year, the Construction Forestry Mining and Energy Union’s branches donated more than $1m to the ALP, while United Voice donated a combined $1.67m.

The government is trying to force not-for-profit funds to increase the number of independent directors on their boards, and last week Financial Services Minister Kelly O’Dwyer blasted a long-overdue report on fund governance by former Reserve Bank governor Bernie Fraser as a “shame” and a “lobbying document to kill off legislation”.

Ms O‘Dwyer said government reforms would ensure all super funds put the interests of members first, “ahead of their own interests or the interests of any other related entity, including unions”.

Construction and Buildings Union Superannuation, Cbus, made the second-largest payment during the prior financial year to ALP entities, with about $630,000 going to the CFMEU and the AMWU, among others.

A fund spokesman said it understood the potential for conflicts of interest and all payments were subject to an independent audit.

SMSF trust deeds need review as July 1 looms

The Australian

14 February 2017

James Gerrard

The sweeping changes to superannuation put through late last year are likely to result in thousands of out-of-date SMSF trust deeds from the July 1 start date.

Though the changes have had wide coverage and many investors know they need to update their understanding of the system, the impact on SMSF trust deeds has not yet been made plain to the wider public.

But changes to super may alter previous advice on how to operate a super fund and should be a catalyst for all SMSF trustees to review their trust deeds.

In fact, all SMSF operators should review their superannuation arrangements anyway.

Indeed many are now questioning whether previous advice on superannuation is still valid in regards to it being the preferred asset structure when planning for retirement.

Here’s what you need to know when reviewing this issue. The alternatives

Timothy Ricardo, small business and SMSF specialist from Ricardo Accounting on the NSW Central Coast has recently experienced a spike in inquiries on SMSF alternative structures.

“The government’s ongoing changes to superannuation had the unintended side effect of undermining confidence in the system,” he says.

“When you keep changing the goalposts, people eventually lose trust and start reviewing their options.”

The main alternatives to SMSFs are trusts and companies. Sydney financial adviser Xavier Lo says, “unfortunately there is no one-size-fits-all option when it comes to choosing between a company or trust”. People are drawn to these structures because, unlike superannuation, funds can be accessed at any age.

But there’s a catch: “The downside is these structures pay a higher level of tax than a superannuation fund,” Lo says.

Investment companies are set up for individuals to build wealth outside their personal name. The company is taxed at 30 per cent on income and gains. There is no capital gains tax discount, however land tax thresholds can be used. Ricardo says: “In retirement, a self-managed investment company can pay out franked dividends to investors, potentially refunding tax paid on earnings throughout the investment period.

“For people who do not need money now, and are on a high individual tax rate, this can present a benefit both in the short term and throughout retirement that could see a low-as-zero tax rate for investment earnings from the self-managed investment company.”

An addition to the company option is to create a hybrid structure where a trust owns shares in the company. This allows profits to be taken out before retirement and distributed to lower-income beneficiaries such as a non-working spouse or children.

The alternative to a company is a discretionary or “family” trust. They enjoy access to the 50 per cent capital gains tax discount but gains must be distributed proportionately to beneficiaries.

One of the key complications in family trusts law is state-based land tax treatment. For example, NSW has no land tax threshold whereas land tax is levied in Queensland after a $350,000 exemption. The major disadvantage of a trust is that it cannot retain profits without paying the highest marginal tax rate, currently 49 per cent.

Weighing the choices

According to Ricardo: “As a tax structure, trusts are good for low-income producing investments such as gold and high-growth companies (with no dividends), this keeps taxable income low and defers tax on capital gains until they are realised, which could be in retirement when personal incomes are lower.”

When property makes up a large portion of the assets, the pendulum usually swings in favour of companies. “Companies benefit from land tax thresholds, they can negatively gear property, retain tax losses and capital gains tax is capped at 30 per cent within the company,” says Ricardo.

But in thinking about a company and trust as an alternative to a SMSF, do not forget the obvious choice, holding assets in your personal name. Ricardo says: “The individual set up is easier and with less costs, but does have limitations such as low asset protection and the inability to split income.

“Still, many accountants make extra money by unnecessarily setting up trust and company structures, which cost thousands of dollars in fees each year. Cheaper options should always be considered on balance.”

Of the major changes coming to super from July 1, including the $1.6 million cap on account-based pensions, the reduction in contribution caps and the removal of the tax-free status of transition-to-retirement pension earnings and gains, perhaps the imposition of the $1.6m cap is the most pressing issue.

One example of the benefit of an updated trust deed is where a SMSF member has a pension balance of more than $1.6m in a mix of term-allocated pension and account- based pension balances. The incoming super changes allow the term-allocated pension to be commuted back to accumulation phase to remove the excess amount above $1.6m. This may be valuable for some trustees who have money locked in the old term-allocated pension, but can only be actioned with an updated SMSF trust deed.

Government changes have no doubt damaged the confidence in Australia’s superannuation system as the premier retirement vehicle. But the truth is that there is no obvious alternative that suits everyone. Expert taxation and financial advice is required to ensure the right structure is matched to individual circumstances. And for those with a SMSF, do not forget to review the trust deed before July 1.

James Gerrard is the principal of independently owned Sydney financial planning firm financialadvisor.com.au

TTR pension issues to tackle before July 1

Australian Financial Review

16 February 2017

John Wasiliev

One of the high-profile changes to super rules from July 1 is transition to retirement (TTR) income streams or pensions no longer being entitled to tax- free earnings on the investment accounts from which they are paid.

Although the change will see the loss of an attractive tax concession that can enhance the yields of super income returns by 15 per cent and capital gains by 10 per cent for the period of time a TTR is in place – a major reason why they have been popular – it’s a modification that needs to be put into perspective, given it can be managed by those who are adversely affected.

There are certainly many who will be disappointed by the change, says superannuation strategist Darren Kingdon, of Kingdon Financial Group. And it won’t just be high income earners who will be affected.

The TTR strategy has been embraced by many everyday mum and dad super savers who have them as part of a pre-retirement strategy, especially those who have sought advice from financial planners. It’s estimated there are about 600,000 superannuants with a TTR pension.

As the accompanying table shows, the change will mean a difference of anywhere between 0.45 per cent and 1.8 per cent where investment returns range between 3 per cent and 12 per cent.

While the investment side of the TTR change is one consideration, there is more to it than that. Based on questions from readers with an existing TTR arrangement or those wondering whether they still have appeal (before and after the July 1 change), there is plenty to think about.

An important thought is what can be involved in converting a TTR to an account-based pension before July 1. One scenario is illustrated by a reader’s situation.

With not one but three TTRs – two of them in industry super funds and one in a self-managed fund – what interests him is that his total super is $50,000 in excess of the $1.6 million pension limit that will apply from July 1. What must he do to reduce this below the limit, he asks, and by when?

His priority, says Daniel Butler of DBA Lawyers, should be to convert his transition pensions into account-based pensions before July as they will be entitled to tax-exempt investment earnings beyond July 1 whereas his TTR income streams won’t be.

From July 1 the investment earnings of any TTR account will become taxable. What will still be tax-free is the pension payments he receives.

The fact that he will be turning 65 next month, says Butler, means he will have satisfied what is described as a “full” condition of release. It’s a condition that will entitle him to convert the TTRs to account-based pensions, so long as the relevant fund trust deeds and pension documents allow this. There is no reason why they shouldn’t.

Since he has three pensions, says Butler, he will need to be mindful of the tax-free and taxable components of each to determine the one he will reduce to bring him below the $1.6 million limit. It is generally beneficial, says Butler, if the pensions have the growth assets.

These are technical considerations he will need to be aware of and if he doesn’t understand them, he should seek some advice.

CGT relief entitlements

As far as the three pensions are concerned, one option is whether he should combine some of these super interests from an investment and cost-saving viewpoint. He could do so by rolling over the pensions from one or more funds into one fund.

When transferring any excess over $1.6 million back into an accumulation account, he will need to be aware of any possible capital gains tax (CGT) relief entitlements that may be linked to each fund.

This might include asking the trustees of each industry fund if they can provide him with any information on possible future CGT relief entitlements and how any election to reset the cost base of assets should be exercised.

A point to note about CGT relief and TTR income streams is that there is still some uncertainty about how it will apply in the situation where the member does not need to change his TTR but would like the CGT relief even though he plans to continue thesame TTR balance.

The Australian Taxation Office is considering this question, says Butler, and is likely to finalise its draft Law Companion Guideline LCG 2016/D8 covering this and other issues with respect to CGT relief in the near future.

With regard to staying below the $1.6 million transfer balance cap, Butler says, anyone in receipt of an account-based pension (or combination of pensions) on July 1 will have a personal transfer balance cap of $1.6 million.

Where pension balances are above $1.6 million, they will generally be required to reduce their pension assets to $1.6 million by July 1.

However, there will be no extra tax payable if the person’s transfer balance account does not exceed

$1.7 million for a pension that was payable prior to July 1, provided the transfer balance account is reduced to below $1.6 million by December 31, 2017.

Dixon Advisory financial planner Nerida Cole says if a member is up to $100,000 in excess during the six months from July 1, this will not result in penalties.

This is a period of grace designed to cover exactly the scenario the reader describes where he wants to comply but because of market fluctuations may end up over the limit. If the excess is more than

$100,000 or the member stays in excess for longer than six months, the no-penalty clause will cease to apply.

Butler says the reader could therefore reduce his pension to just below the $1.6 million cap or rely on the extra $100,000 cap “leeway” for that six-month period.

Please send any questions or comments to John.Wasiliev@fairfaxmedia.com.au.

AFR Contributor

Real reform to nation’s tax system? Get real

The Australian

18 February 2017

Terry McCrann

Policy rationality forced the Treasurer — and the Prime Minister? — to put the reduction of tax incentives for property investment on the table. Political reality forced the Finance Minister — and PM? — to then immediately sweep them off.

I put a question mark over the PM’s role because the events of the last week indicated we were back to the ‘old Malcolm’ of — if putting it positively — being open-minded and even, dare I say it, innovative; but putting it less kindly, of discursiveness and outright ramble. So who knows: was he a co-driver or merely a facilitator?

Just as elections have consequences, as so many across the Pacific are finding out, and none more shockingly than the panjandrums of the far left wing, so-called, mainstream media of the three TV networks, CNN, The Washington Post and especially The New York Times, so also do policy decisions.

When the government decided to increase the taxation of superannuation it really had no option in policy logic but to also reduce the tax incentives for investment in property.

Now we can argue over ‘tax purity’ until either hell or the earth freezes over — the latter, presumably as the inevitable consequence of global warming — or we can recognise that the only ‘purity’ in our tax, indeed in any tax, system, is that it is inevitably and irresistibly riddled with impurity.

There are of course two big incentives enjoyed by property investment: the ability to ‘negatively gear’ — to deliberately generate operating expenses, mostly via interest, greater than income; to then deduct the net loss against other taxable income, usually wages and salaries; and the way realised capital gains are taxed.

Now one side reasonably argues that the deduction of losses from one activity against other income is the most basic feature of entity taxation. While taxing only 50 per cent of the gross capital gain just as reasonably aims to avoid the inequity of taxing both real and nominal gains.

Indeed, it specifically replaced the mechanism put in place by the CGT creator, then-treasurer Paul Keating, of deducting nominal gains by use of the CPI, to only tax real gains.

The other side can argue that the exact application of the form of entity tax is also reasonably up for grabs. As is the choice of taxing 50 per cent of the gross (real plus nominal) gain.
These things are not some mandate of (the real) heaven. It would not offend tax logic for a government to, say, limit the cross-income deductibility, to, say, two properties. Or three. Or to limit the amount of current expense deduction to income specifically earned by that property, with any excess to be carried forward for later deduction.

Similarly, it would not offend either logic or equity to increase the tax on the gain from 50 to 70 or the 75 per cent purportedly proposed. All these things are a matter of legitimate choice.

And arguably, it was a choice that needed to be exercised. By increasing the taxation of super, the government will further encourage investment in both investment — taxable income generating — property and the family home.

Their after-tax and net social welfare appeal has been significantly enhanced.

We already dramatically over-invest in residential property. It seems the ultimate no-brainer: the negative-gearing allows you to both significantly lift the size of your

investment while also having the taxpayer reduce your running cost. Then when you sell you get to keep almost certainly all the nominal increase in value and quite probably a significant portion of the real increase as well.

As opposed to, I might note, the way all the increase in both your real and nominal income is punitively taxed, thanks to the absence of scale indexation and the progressive tax scale.

So by increasing the tax on super, logic demands that the government ‘rebalance the playing field’ by adjusting the tax on investment property.

But merely the prospect of that, to say nothing of any eventual policy reality, would send major shudders through the property sector. There would be, there are, an awful lot of injured interests. And so, the immediate emphatic back-off led by Finance Minister Mathias Cormann.

But further, if you did proceed to reduce the tax incentives on investment property, that would then further distort the market, the dynamics and the value of CGT-free owner-occupied housing. It would become the last refuge for the tax fugitive. Apart from, as I have previously discussed, superannuation reserved for truly rich people.

And there’s the nub. You increase the tax on super; you have to move on to investment property. You increase the tax on investment property; you have to move on to the family home. And at that point, on also to the two-seat oblivion of the Canadian Conservatives after their 1993 election.

The saga tells us a number of things about the sad state of policy formulation and political acuity in Canberra. First, in embarking on the ‘good idea at the time’ of increasing the taxation of high-end super, neither political government nor policy bureaucracy seemed to have a clue about the consequences. Yet again we had (inept) policy in the moment.

This set up a clash between policy need and political reality which was never going to be resolved by the government opting to attack negative gearing. The net effect is to lose more political skin — at 46 to 54 two-party preferred, are we now down to bone? — to emerge with even more, policy dysfunction.

All this only one part of the tax system — a system that was, is, crying out for massive deep and wideranging integrated reform. And that was before President Trump. Can anyone in Canberra get real?

Lower contribution limits may force SMSF re-think

Australian Financial Review

20 February 2017

Ben Smythe

Now that the government’s superannuation changes have become law, much attention has turned to the various opportunities that are available to maximise contributions before July 1, when the new legislation kicks off.

One significant change that may not necessarily hurt too many people on the cusp of retirement but will affect the “wealth accumulators”, is the reduction in the concessional super contribution cap to $25,000 a year. This cap currently sits at $30,000 if you are under age 50, and $35,000 if you are over age 50.

With the reduction in the contribution limit, there is definitely a question mark as to how much you will be able to accumulate within super without the need to top-up your balance with after-tax contributions so you have a meaningful balance at retirement.

The lower limit might also curtail some people’s ability or willingness to set up a self-managed super fund (SMSF). Commentators often cite the figure of $200,000 as a minimum amount required to make an SMSF worthwhile. The lower contribution caps may mean it will take much longer for people to reach this target.

I have run some numbers around what is now possible to accumulate in super with the lower pre-tax contribution ceiling. Assuming someone is employed consistently between the ages of 25 and 60, their starting salary is $75,000, they rely on the 9.5 per cent super guarantee until they are 45 and then start to contribute $25,000 a year, the individual will accumulate approximately $1.5 million by the age of 60.

If you retired today with $1.5 million and your living expenses were $100,000, your super balance would last approximately 20 years, and then you would fall back on to the age pension (not something that I would be recommending clients work towards!).
There are obviously a number of assumptions with this modelling, and it is also only based on one person, no changes to legislation and 3 per cent inflation. However, with a growing majority of people now living beyond age 80, $1.5 million doesn’t go too far these days.

So what are the other implications of this reduced cap? Firstly, the reality is that most people will need to give consideration to making non-concessional, or after-tax, contributions, although given that this money will be locked up for a long time, you would probably not the strategy until you are closer to retirement age.

A bigger issue will be costs. If your super is only growing by way of contributions and earnings, and the contribution multiplier is now going to be smaller, then you need to be very cognisant of the fees you pay because they will detract from returns. This includes administration fees and investment management fees. This may well be a driver for people to take a much closer look at their super and perhaps choose a SMSF for its transparency when it comes to fees.

The administration fee is charged by your fund should really be a fixed dollar amount, as is the case typically with an SMSF. The investment management fee is the fee your fund pays an investment manager, which in a lot of cases is a percentage of your balance. This fee is sometimes hidden and can be quite expensive (more than 1 per cent).

The other typical cost you incur is an insurance premium, with most people having some level of insurance inside super. Premiums for life and total and permanent disability cover are tax deductible when held inside super. But premiums rise with age and after 50 your insurance premiums can really take off and potentially erode a large chuck of your contributions. In other words, you need to assess the merits of insurances inside super as you get older. It can be a good idea to reduce cover, as the risk you are trying to protect reduces over time.

Change definitely presents opportunities. For those building their savings there is a new set of parameters to consider when deciding whether to stay in a pooled fund or go the self-managed route.
Ben Smythe is the Managing Director of Smythe Financial Management.

AFR Contributor

Liberals: No good whining about Cory Bernardi’s ‘betrayal’

The Australian

11 February 2017

Grace Collier

Oh boy, karma is such a bitch.

This week, when Cory Bernardi defected to set up his own party, Liberal members of parliament lashed out in fits of pique. Senator Simon Birmingham described the desertion as a “dog act”. Immigration Minister Peter Dutton said: “I think people will be angry about any defection, angry about the betrayal of the Liberal Party values.” Government Senate Leader George Brandis said the defection was “not a conservative thing to do because breaking faith with the electorate, breaking faith with the people who voted for you, breaking faith with the people who have supported you through thick and thin for years, and indeed decades, is not a conservative thing to do.”

Bernardi’s move caused Liberals in Canberra to froth in anger, but elsewhere around the nation, beers were cracked open, popcorn was munched and people huddled merrily around television screens. Every time a Liberal politician moaned about broken faith and betrayed values, Liberal voters, celebrating in a fog of heady schadenfreude, punched the air with delight.

This week, for the first time in a long time, weary foot soldiers in a demoralised army had a bit of a spring in their step. The troops don’t care terribly about Bernardi or his prospects, it is just that someone has made the generals drink some of their own medicine at long last.

Since the time of previous prime minister Tony Abbott, the Liberal Party has betrayed, again and again, the “Liberal Party values” it pretends to hold dear. Yes, Abbott axed the carbon tax and stopped the boats. But he also appointed Natasha Stott-Despoja and Greg Combet to posts, abolished the debt ceiling, introduced a new tax on incomes, wimped out on free speech, tried to foist an expensive parental leave scheme on the nation, promised to match Labor’s unfunded promises on various programs, introduced billions in new spending and spoke to defend the Safe Schools program in the partyroom. None of those actions was in keeping with Liberal Party values and they all infuriated the people who had supported him.

All of the above is why by the time Malcolm Turnbull became leader, the party had no money left. This is why Turnbull donated prior to the last election, but now that is out in the open it raises an interesting point. The Prime Minister can afford to give $1.75 million after tax to the party; so until the budget comes back into balance, he should forgo a salary completely or, like Donald Trump, take payment of only one dollar a year. This would be an innovative move and could repair some broken faith with everyone. And while Turnbull is announcing this, he can explain why he went against Liberal Party values and bailed out Alcoa, a poorly run business that should be left to fail.

Scott Morrison and Kelly O’Dwyer have also acted against Liberal Party values. The Treasurer finds savings in one area but immediately spends the money elsewhere. He makes a grand speech about cutting tax and then never mentions it again. The Minister for Revenue and Financial Services seems obsessed with collecting tax and angry with people who want to get ahead. On TV, she comes across as a cranky private school version of senator Jackie Lambie.

Even Foreign Minister Julie Bishop, once the hope of the side, seems caught up in a whirlwind of social events that have little relevance to us. Designers vie to “dress” her for these events, and she is often photographed partying at them with vacuous celebrities, where she appears to be doing her best impersonation of a mature-age Paris Hilton.

Morrison and O’Dwyer have imposed new taxes and red tape, and seriously impacted on the retirement savings and living standards of many. The original version of their disastrous superannuation policy was passed by cabinet because no one understood it and couldn’t be bothered to look into it. This policy devastated the type of people the Liberal Party is supposed to represent and is most dependent on for support.

In the self-funded retiree ranks the Liberal Party will never be forgiven. As for its recent pension changes, reducing the income of those too old to re-enter the workforce and make up losses with extra earnings is a betrayal, a dog act and cruel.

Too many times, the Liberals have broken faith with their base and betrayed Liberal values. Their problem isn’t all due to their leader. The party has big problems, as do the people sitting around the cabinet table.

Their budget repair strategy seems built around punishing their own constituency to reward voters of other parties. The agenda is difficult to describe and even matters of routine business proceed at a glacial pace.

The Liberals have spent their time slapping their friends in the face and sucking up to their enemies, yet they stand surprised that their mates are running away and they have no money left to play with. Yes, Bernardi has betrayed them all, but how dare they complain! Why do they have the lack of insight and the hide to whine about how betrayed they feel when they have betrayed their supporters, again and again and again?

Fiscal mess calls for extreme grandfathering

The Australian

3 February 2017

Adam Creighton

Extreme grandfathering: it doesn’t quite exude the drama of “extreme vetting”, Donald Trump’s phrase of choice to describe the US’s tough new immigration policy. But it’s an idea whose time has come if the government is to have a realistic hope of arresting Australia’s deteriorating fiscal position.

It’s that time of the year when the government should be thinking of bold ways to save significant licks of money. A few months out from the May budget, we might have expected the Malcolm Turnbull to have dropped some hints in his Press Club speech in Canberra this week. But there was little talk of significant savings.

The Prime Minister briefly mentioned the meagre $21 billion in savings, over four years, achieved since the election, which is barely a rounding error when expenditures amounts to $450bn every year. A further $13bn savings planned are unlikely to meet the same fate as the controversial savings in the Abbott government’s fateful first budget.

The Coalition needs to make savings at least three times as large to prevent a likely ratings downgrade this year.

But so many Australians are now receiving some form of government payment or tax lurk, it has become politically impossible — absent some traumatic, Greece- style crisis — for any government to make the sort of drastic fiscal reforms needed if it wants have a chance of winning re-election. The fact that barely more than half of households are net taxpayers, for instance, means offering tax cuts to make welfare cuts palatable isn’t electorally appealing. And even if a government did propose to, a populist Senate is unlikely to support them.

The government could instead adopt extreme grandfathering. Anyone currently receiving particular welfare payments would have the right to it for the rest of their lives, but others would not. Family tax benefit B, which is costly and unnecessary, could be abolished prospectively. And because children become adults quickly, it wouldn’t be too many years until no-one was eligible at all.

The thresholds for Family Tax Benefit A, meanwhile, could be cut and the payments trimmed. The number of children eligible for a payment per family could be limited to, say, two or three, which would blunt the incentive to have children to boost income. There are economies of scale in raising children.

Any government attempting to foist such changes on current recipients would be annihilated.

At the other end of the spectrum, the age pension, the single largest expense of the government, could be drastically reformed for people currently aged under, say, 50. The entire value of the so-called family home could be put entirely into the assets test — no more shifting assets around to get taxpayers to subsidise inheritances.

Similarly, the ludicrous Seniors and Pensioners Tax offset, which provides over 60s too well-off to even wangle the age pension a much higher tax-free threshold, could be done away with.

Reining in explosive health spending would stand a greater chance if particularly politically powerful voting blocks were effectively bought off through grand- fathering. Coalition and Labor proposals over the years to introduce modest co- payments for highly subsidised medical services has faced massive resistance, largely from pensioners. The current system could be grandfathered for people already of pension age, for instance.

Extreme grandfathering would take advantage of human nature: people become attached to things once they have them. They care far less about the prospect of having things. The government has traditionally grandfathered certain tax changes, such as those applying to superannuation lump sums from 1983. Labor’s policy to reduce the capital gain tax discount included grandfathering existing assets.

But the principle could have much wider application.

Extreme grandfathering is far from ideal: the arbitrary selection of a cut-off date is unfair to people who just miss out. But this problem could be ameliorated. Those inevitably younger voters who miss out on certain payments might be subject to a new, more efficient income tax system with lower marginal rates. Some would bemoan the temporary creation a two-tier citizenry, but perhaps that’s better than being collectively broke.

From the Rudd government’s Henry tax review in 2010 to the Abbott government’s Commission of Audit in 2013, countless reviews and studies have recommended major changes to fiscal policy. Our leaders know what has to be done but can’t. But neither Coalition nor Labor government has been able to achieve much. The Abbott government’s McClure review of social security is gathering dust. This calls for a new approach.

Extreme grandfathering would see a far simpler, cheaper social security system emerge over time, alongside a more efficient taxation system, ultimately making for a more prosperous country.

The sorts of savings possible could be very large, but wouldn’t show up in the four- year budget forecast period. They would nevertheless reassure ratings agencies and instil confidence in public finances, bolster prospects for economic growth.

The Prime Minister staked his claim to leadership on better economic policy, but little has emerged that’s different from previous governments, let alone the savings required to salvage the AAA credit rating.

Cutting company tax by tiny amount over a 10-year period is laughable, especially given the new US government is planning to more than halve their equivalent rate to 15 per cent. The government should take advantage of a political climate that appears to favour “extreme” solutions.

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