Category: Save Our Super Articles

Retiree time-bombs

By Jim Bonham and Sean Corbett

www.saveoursuper.org.au

1 Abstract

The complexity of superannuation and the age pension conceals at least 6 time-bombs – slowly evolving automatic changes to the detriment of retirees – caused by inconsistent indexation: Division 293 tax, currently only for high income earners, will become mainstream.Shrinking of the transfer balance cap relative to the average wage (which is a measure of community living standards) will reduce the relative value of allocated pensions.Shrinking of the transfer balance cap, relative to wages, will increase taxation on superannuation in retirement. Prohibiting non-concessional contributions when the total superannuation balance exceeds the transfer balance cap will constrict superannuation balances more over time.The age pension will become less accessible, as the upper asset threshold shrinks relative to wages.Part age pensions, for a given value of assets relative to wages, will reduce.


 For PDF version click here

2 Introduction

The Terms of Reference of the Review of the Retirement Income System require it to establish a fact base of the current retirement income system that will improve understanding of its operations and outcomes.

 Important goals are to achieve adequate retirement incomes, fiscal sustainability and appropriate incentive for self-provision. The Retirement Income System Review will identify:

  • “how the retirement income system supports Australians in retirement;”
  • “the role of each pillar [the means-tested age pension, compulsory superannuation and voluntary savings, including home ownership] in supporting Australians through retirement;”
  • “distributional impacts across the population over time; and”
  • “the impact of current policy settings on public finances.”

For the detailed Terms of Reference follow the link at https://joshfrydenberg.com.au/latest-news/review-of-the-retirement-income-system/.

Terrence O’Brien and Jack Hammond have made a number of suggestions for the Review to consider (http://saveoursuper.org.au/save-our-super-suggestions-for-review-of-retirement-income-system/).  In particular, at the close of their paper they wrote:

9. Let the modelling speak

“Only long-term modelling can show which measures are likely to have the best payoffs in greatest retirement income improvements at least budget cost. Choice of which measures to develop further are matters for judgement, balancing the possible downside that extensive policy change outside a superannuation charter may only further damage trust in retirement income policy setting and in Government credibility. “

This paper expands on that point, by presenting the results of straightforward but informative modelling which shows how the age pension, superannuation and voluntary savings (including home ownership) operate and interact – particularly over extended time periods.

A disturbing problem, because it is not obvious, arises from the inappropriate, or no, indexation of various parameters within both the superannuation system and the age pension system. This was briefly mentioned by Sean Corbett (https://www.superguide.com.au/retirement-planning/politician-greed-destroying-super), but has otherwise gained little or no attention.

Over the medium to long term, this inappropriate indexation will result in higher taxation, reduced age pension and superannuation for many people and a generally worse retirement outcome.  If this is the deliberate intent of the government, it should be declared.  Otherwise the problem should be corrected.

These indexation issues are the retiree time-bombs.  The Review must come to grips with them, whether or not they are intentional, and they are the focus of this paper.

3 The importance of the average wage

The impact of superannuation on an individual typically extends from the first job, through retirement to death; or perhaps even further until the death of a partner or another dependent.  For many, the age pension provides critical income through all or part of their retirement.

Accordingly, formal analysis of retirement funding often must extend over many decades, making suitable indexation an extremely important matter.

The full age pension is indexed to the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index, or to Male Total Average Weekly Earnings (MTAWE) if that is higher, which it usually is.  In May 2019 MTAWE was $1,475.60 per week or approximately $76,730 per annum.

This method of indexing is intended to allow retirees receiving a full age pension to maintain their living standard relative to that of the general community – MTAWE being taken as an indicator of that standard – and it is critical to the design of the full age pension.

For long term modelling ASIC’s Money Smart superannuation calculator suggests a combination of 2% for CPI inflation, plus 1.2% for rising living standards, giving an inflation index of 3.2% (https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/superannuation-calculator).  In this paper, that figure of 3.2% is assumed to represent future wages growth. 

This is a modelling exercise, not a prediction, so the precise value of wages growth assumed in this paper is not particularly important – use of a somewhat different figure would only change details, not the big picture – but the distinction between CPI growth and wages growth is important, the latter usually being higher.

4 Division 293 tax

Division 293 tax (see https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Division-293-tax—information-for-individuals/) is a good place to begin this analysis because the problem is straightforward.

Division 293 tax has the effect of increasing the superannuation contributions tax for high income earners.  The details don’t matter here, as we are only concerned with the threshold: $300,000 when the tax was introduced in 2012, subsequently reduced to $250,000 in 2017. 

During this period the average wage has been rising steadily, which means the reach of this tax is extending further and further down the income distribution.  Eventually, if the threshold is not increased, it must reach the average wage, by which time Division 293 will have become a mainstream tax.

Fig 1 shows the actual and projected values (in nominal dollars) of the tax threshold and of the average wage.  The two are projected to be roughly equal within about 30 years.

If Labor had been successful in the 2019 election, the Division 293 threshold would have been further reduced to $200,000 so that, barring further changes, it would have been equal to the average wage in about 25 years.

Fig 2 shows the same data replotted by dividing the Division 293 threshold for each year by the average wage for that year and expressing the result as a percentage.  Expressing data relative to the average wage in each year, as in Fig 2, is often an informative way to show long term trends.

If the Division 293 threshold remains unchanged in nominal dollars, it will continue to decrease relative to the average wage, and so a greater percentage of taxpayers will be caught each year.  They will find their after-tax superannuation contributions, and hence their balance at retirement, will decrease as will their subsequent retirement income from superannuation. 

This will reduce the effectiveness of superannuation as a long-term savings mechanism.  People’s confidence in superannuation will be eroded, as it thus becomes less effective.

Failure to index the Division 293 threshold to wages growth (which would confine its effect to the same small percentage of high wage earners in future years) is taxation by stealth and makes it the 1st time-bomb.

The very simple solution is for the government to commit to indexing the Division 293 threshold in line with wages growth. 

5 The transfer balance cap

5.1       The value of allocated pensions

The transfer balance cap, currently $1.6 million, is the maximum amount with which one can start a tax-free allocated pension in retirement.  Any additional superannuation money must either be withdrawn or left in an accumulation account where taxable income is taxed at 15%.

Unlike the Division 293 threshold the transfer balance cap is indexed, but it is indexed to CPI inflation (assumed to be 2% in this paper) rather than to wages (3.2%), and adjustments are only made in $100,000 increments.

Indexing the transfer balance cap to CPI means that over time the starting value of an allocated pension account will become lower relative to the average wage, because the latter rises faster.

This is illustrated in Fig 3, where projected values of MTAWE are shown in orange; and the minimum (5%) allocated pension drawn by someone starting retirement at age 65-74, with an allocated pension account balance equal to the transfer balance cap, is shown in blue.

Despite the fact that the minimum allocated pension payment amount increases every couple of years, the average wage increases faster.

The following table shows some of the data behind Fig 3, for someone age 65 to 74 retiring in 2019, compared to retirement in 2050:

Year Transfer Balance Cap Allocated Pension (AP) MTAWE Ratio AP/MTAWE
2019 $1.6 m $80,000 $76,730 104%
2050 $2.9 m $145,000 $203,724 71%

This is a big drop in relative living standard for superannuants: 104% of MTAWE in 2019 down to 71% in 2050.

This degradation, relative to community living standards, of the allocated pension provided by the transfer balance cap is the 2nd time-bomb for the transfer balance cap.

5.2 Taxing super in retirement

Because the transfer balance cap will grow more slowly than wages, one expects that in the future an increasing proportion of a retiree’s superannuation will be held in taxable accumulation accounts rather than in tax-free allocated pension accounts.

This is another instance of taxation by stealth.  It is the 3rd time-bomb.

5.3 Non-concessional contributions

Non-concessional contributions (from post-income-tax money) are currently limited to $100,000 per annum.  That limit is indexed to wages growth, like the $25,000 limit on concessional (pre-tax) contributions.

However, non-concessional contributions are only permitted when the total superannuation balance is less than the transfer balance cap which, as we have seen, is indexed to CPI.  The effect of this indexation mismatch is that the ability to make non-concessional contributions will automatically shrink, relative to wages and living standards, in the future.  Those who rely on substantial non-concessional contributions late in their working life will be particularly affected.

This is the 4th time-bomb.

6  The age pension

6.1 Basic structure

The age pension is indisputably complicated, and a brief review may be helpful.

Detailed descriptions can be found at

https://www.humanservices.gov.au/individuals/services/centrelink/age-pension

https://www.dss.gov.au/seniors/benefits-payments/age-pension

https://www.dss.gov.au/benefits-payments/indexation-rates-july-2019

A somewhat simplified description is as follows:

The full pension for a member of a couple is lower than for a single person. 

The full pension is reduced by the application of tests on assets and incomes – whichever test gives the greater reduction is the one that applies. 

Assets reduce the age pension by $78 per annum per thousand dollars’ worth of assets (often expressed as $3 per fortnight per $1,000) above a threshold.

Despite frequent claims to the contrary, including on the Human Services website quoted above, the retiree’s home is assessed by the asset test.

The assessment is achieved by applying an asset test threshold which is lower for homeowners than for renters (currently by $210,500 for singles), but the effect is exactly the same as using the renter threshold and treating the home as a non-financial asset worth $210,500 – indexed to CPI.

Regardless of how the process is defined mathematically, claiming that the home is not assessed is simply false.

Income reduces the age pension by 50 cents per dollar of income earned above a threshold, except that

  • The first $7,800 per annum of employment income is not counted
  • Income from financial assets (bank accounts, shares, superannuation accounts etc) is deemed to be 1%, for asset value below a threshold, and 3% above that; then the deemed income is used in the income test.

The full age pension, for singles or members of a couple, is usually indexed to MTAWE as discussed previously.  Every other relevant figure (the income test deeming threshold, the asset test threshold, the assumed value of the home – or, equivalently, the homeowner’s asset threshold) is indexed to CPI.

Apart from the home, the most significant asset which pensioners own is likely to be their financial assets, so a convenient way to describe the age pension graphically is to plot the value of the pension against the value of financial assets – as shown in Fig 4 for a single renter and for a homeowner, with no significant assets or income other than the financial assets.

Additional non-financial assets would shift the asset-test-controlled region further to the left.  Additional income lowers the income-test-controlled part of the curve.  For example, in Fig 5, each person is assumed to earn $20,000 per year.

Graphs such as Fig 4 allow visualisation of the complex behaviour of the age pension, which can otherwise be very confusing.  For example, a quick glance at Fig 4 shows that for the case considered, owning a home will reduce the age pension by nearly $20,000 per year for a single age pensioner with around $600,000 worth of financial assets but the effect is far less with $400,000 worth of assets.

The curves also show the steep asset-test-controlled region, where the age pension decreases at a rate of 7.8% ($78 per annum per $1,000 of assets), which tends to overwhelm the increase in actual earnings from the assets.  Although it is a major problem in itself it will not be discussed in detail here, in the interest of brevity.

6.2 The age pension time bombs

Figs 4 and 5 give snapshots at a particular point in time.  To examine the behaviour of the age pension over extended periods, however, it is best to relate asset values and income to the average wage.

This is done in Fig 6 which shows the projected curves over the next 4 decades for a single renter, with no other assets, and in Fig 7 for a member of a homeowner couple.  Note that each curve is calculated using the projected average wage for that year.

Except for part of the full age pension area of the curves, where they all overlap because the age pension is indexed to wages growth, the curves show a steady trend towards lower age pension for a given financial asset base.

Because only the full pension is indexed to wages growth and other parameters are indexed to CPI, it is mathematically inevitable that the structure of the system will automatically change slowly over time.  Relative to living standards, as indicated by the average wage:

  • Part age pensions will become harder to get, as the upper asset threshold shrinks.
  • Part age pensions for a given value of financial assets will reduce.

These are the 5th and 6th time-bombs.

What we are seeing here is universal: if different components of the system are indexed in different ways, the structure of the system will automatically change over time – even if the age pension is radically restructured.

6.3 A case study: effects of indexation on the individual retiree.

It is obvious in Figs 6 and 7 that someone beginning retirement in future years will receive less age pension for a given value of assets, when both are expressed relative to the average wage. i.e. to community living standards.

Fig 7 shows how the 5th and 6th time-bombs  work for a specific case: a single homeowner who retires at age 67 with 8 times MTAWE ($614,000 in 2019) in an allocated pension account, from which only the age-based minimum is withdrawn, and who has no other income or assets.

Four cases are shown, for retirement in 2019, 2030, 2040 or 2050.

The allocated pension is assumed to be invested in a “balanced” fund returning 4.8% nominal, less 0.5% investment fees (these values are taken from the ASIC Money Smart superannuation calculator, neglecting the small administration fee).

Because it is assumed that the retiree in each case starts with 8 times MTAWE in the allocated pension account, both the account balance and the minimum withdrawal, as a percentage of MTAWE only depend on age.  Thus, there is only one line for allocated pension income in Fig 8.  It falls fairly steadily as capital is depleted in the account.

As the asset value falls, the retiree eventually becomes entitled to a part age pension.  Starting in 2019, this retiree would begin getting a part age pension within a couple of years.  The retiree starting in 2050 would have to wait a few years longer.

Thereafter, the later retiree always gets a lower age pension, relative to MTAWE.  The full age pension – which each of these retirees approaches in their mid-80s – is, however, constant as a percentage of MTAWE as already discussed.

The cause for the different treatment of full and part age pensioners is that the full pension is indexed to wages growth, while most of the factors controlling the part age pension are indexed to CPI.  If Fig 8 is reworked for a different set of assumptions (for initial balance, investment returns and withdrawal rate), the detailed shapes of the curve will alter, but the general conclusions will be unaffected.

The obvious solution is to index all parameters to wages growth, and then all the curves for part age pensions in Fig 8 will be the same and the system will be stable over time.

As it stands, the part age pension is designed to slowly become harder to get, and less generous (for a given asset value relative to living standards) – another demonstration of the 5th and 6th time-bombs.

7 Conclusion

This paper, based on relatively straightforward spreadsheet modelling, has exposed a number of time-bombs in the structure of superannuation and age pension.  These time-bombs are not particularly obvious, but they have the effect of surreptitiously increasing taxation, decreasing superannuation pensions and making the age pension harder to get and less generous.  This will reduce the prosperity of retirees and hence of the country as a whole.

The time-bombs all have their origin in failing to index all parameters in the same way.  The natural choice for an index is wages growth, because that is directly related to living standards, but if some other index is used it is still important that it be used consistently throughout the system to maintain stability.

Even if the superannuation and age pension schemes are radically altered, it remains important to index all relevant parameters in the same way.  Otherwise these time-bombs will be inevitable.

8 Disarming the time-bombs

The Review of the Retirement Income System panel is scheduled to produce a consultation paper in November 2019.

The 6 time-bombs discussed in this paper merit consideration because they touch directly on so many of the issues flagged in the Terms of Reference: “adequate retirement incomes”, “appropriate incentives for self-provision”, “improve understanding”, “outcomes”, “the role of each pillar”, “distributional impact … over time” and, most importantly, “establish a fact base”.

Identification of these time bombs is a contribution to the establishment of a fact base on retirement incomes.  Fortunately, the time bombs can be disarmed by regularising indexation throughout the superannuation and age pension systems.

30 October 2019

***********************************************************************

For PDF version click here

Save Our Super suggestions for Review of Retirement Income System

BY TERRENCE O’BRIEN AND JACK HAMMOND on behalf of themselves and Save Our Super

28 June 2019

When more individuals save for self-funded retirement above Age Pension levels, their savings contribute funds and real resources for reallocation through the financial sector to fund investments. Such an economy will be more dynamic and efficient than one which relies more on incentive-deadening taxes for redistribution through the Age Pension.

For PDF version click here

Table of contents

Save Our Super suggestions for Review of Retirement Income System

Save Our Super offers the following preliminary ideas for the Review of the Retirement Income System. We regard such a review as highly desirable and potentially path-breaking if well directed, but fraught with dangers for the Government and threatened with futility if not properly handled.

1. Embed a clear statement of Government retirement income objectives in the Review’s Terms of Reference

The Superannuation (Objective ) Bill 2016 attempted to legislate an objective for superannuation, as if that would somehow guide future governments’ detailed regulatory and tax decisions for superannuation. It did not identify the objective for the Age Pension, nor explain how the two elements ought to interact in the overall retirement income system.

Both Save Our Super and the Institute of Public Affairs criticised that attempt, and suggested improvements.

The effort to define objectives is much better set in the broader retirement income framework now envisaged.

Saving is a contested issue of philosophical vision.

To most Australians, saving is the process by which those prepared to delay gratification and consumption make real resources available to those with an immediate need for them. Savings are not just a pile of money that Scrooges sit over and count.  From the dawn of history, when families saved some of autumn’s grain to provide seed for next spring’s planting, saving in every culture has been the means by which living standards have grown and the next generation has been given more opportunities than their parents.

Saving funds investment. In the modern economy, it provides both the finance and, indirectly, the real resources that are allocated through capital markets to the businesses or loans that produce the biggest increase in the community’s living standards. If Australian investment cannot be financed by Australian saving (either by households, companies or governments running budget surpluses), it has to be financed by borrowing from foreigners or accepting direct foreign investment in Australian projects.

Viewed against that backdrop, household saving is good. Raising household savings, just like eliminating government budget deficits (ie stopping government dis-saving), reduces Australian reliance on selling off assets to foreigners or contracting foreign borrowing. People should be able to save as much as they wish, ideally in a stable government spending, taxation and regulatory structure that does not penalise savings or distort choice among forms of saving.  In such an ideal framework, they should be allowed to save for retirement, for gifts, for endowments, for bequests or for any purpose for which they choose to forgo consumption.

Specific tax treatment of long term saving (such as capital gains tax, and tax treatment of the home and superannuation) is necessary to reduce the discouragement to saving from government social expenditures and from levying income tax at rising marginal rates on the nominal returns on saving. But critics regard such specific treatment as ‘concessions’ to be reduced or eliminated. They want to limit what saving can occur, and tax what does occur. Critics think of private saving not as the foundation of investment, but as the wellspring of privilege and intergenerational inequity.

We suggest the Terms of Reference for the Review should in its preamble set the Government’s practical and philosophical aspirations for household saving and the retirement income system. We suggest the preamble to the Terms of Reference should highlight:

  • The retirement income system as a whole should aim to ensure that as the community gets richer, retirees should through their own saving efforts over a working lifetime, both contribute to and share in those rising community living standards.
  • The Age Pension should be focussed as a safety net for those unable to provide for themselves in retirement because of inadequate periods in the workforce or otherwise limited earnings and saving opportunities.
  • As the population ages, superannuation saving for retirement is likely to be a growing part of the national savings effort. Buoyant growth in superannuation finances investment and lending, and helps support rising living standards. (Conversely, a rising dependence on the Age Pension would spell only a higher tax burden).
  • The design of the retirement income system must be:
    • stable;
    • set on the basis of published, contestable modelling; and
    • evaluated for the long term, namely, the 40 or so years over which lifetime savings build, and the 30 or so years in which retirees can aspire to enjoy whatever living standards they have saved for.
  • The Age Pension and superannuation systems and the stock of retirement savings should be protected as far as practicable by grandfathering assurances against capricious adverse changes in future policy. Such changes create uncertainty and destroy trust in saving and self-provision for retirement.

2. Avoid policy prescription of savings targets or permissible retirement income standards

Some commentators have proposed the idea of a ‘soft ceiling’ on levels of retirement income saving acceptable to policy. That approach derives a level of acceptable retirement income by working backwards from the observed historical pattern of retirees’ spending, which declines with age, especially after age 80. According to those views, the fact that some retirees continue to save even after retirement is regarded as a sign of policy failure and excessively generous tax treatment (rather than of recently rising asset values). Saving is treated, in effect, as allowable to those of working age, but to be discouraged beyond a certain point, and prevented for retirees. According to this analysis, we already have “more than enough” money in retirement.

The Grattan Institute suggests a savings target such that all but the top 20 per cent of workers in the earnings distribution achieve a retirement income of 70 per cent of their pre-retirement income over the last five years of their working lives. For those in the top 10 per cent of the earnings distribution, a replacement rate of 50-60 per cent of pre-retirement earnings is “deemed appropriate”. (Approved retirement income for the second decile is not specified.)

Even after discouraging saving in this way, Grattan also recommends the introduction of inheritance taxes.

The Terms of Reference should make it clear that the Government does not support such ideas. It should emphasise it regards saving for retirement as beneficial to the community, and does not wish to limit it by arbitrary targets.

3. Prevent another ‘Mediscare’

Possible changes to the Age Pension, its means tests, compulsory superannuation contributions, superannuation taxation or regulation will be inevitably contested.

There is now zero public trust in the stability and predictability of retirement income policy. That results from the reversal, in 2017, of Age Pension and superannuation policies which, after extensive research and consultation, were introduced as recently as 2007. In addition, public trust has been eroded by the 2019 Labor election platform to make wide-ranging increases in taxes on long-term savings (that is, the Capital Gains Tax, franking credit and negative gearing proposals).

No other area of policy has more complex interactions and regulations from policy changes than the retirement income field. Complexity is such that legions of financial planners specialise in advice on the interaction of income tax, superannuation, the Age Pension and aged care arrangements.

No other area of policy takes longer lead times (40-plus years) to produce the full effect of policy change, and has the capacity to impose irrecoverable losses in living standards on vulnerable people that they can do nothing to manage or avoid. People, late in their working career or those already retired, are rightly extremely cautious about policy-induced reductions in retirement living standards they have long saved towards. It is easy for political opportunists to exploit that caution.

No review of policy will get to first base if it can be misrepresented by political opponents as creating uncertainty, destroying lifetime saving plans or retirement living standards.  Given recent experience, many voters are understandably receptive to a fear campaign of misrepresentation, including those forced to make compulsory savings throughout their working life; those dependent on the full or part Age Pension; wholly or partially self-funded retirees; and indeed all those presently retired, close to retirement, or those who have responded lawfully to legislated incentives to save as previous governments intended. If aroused to uncertainty, these groups can destroy a government.

Many of the changes that would usefully be addressed by a review of retirement income policy are potentially political third rail issues if poorly handled.  To take just one example, consider how the family home is treated under the Age Pension asset test and in the structure of Age Pension payments. Think tanks of the left and right alike have recommended that treatment be changed to take more account of wealth in the family home. Without insurance against ‘Mediscare’-type attacks, a potentially important avenue of reform would instantly be used as a scare. Government would have to either instantly rule out any change (compromising the review) or watch the reform exercise die while still suffering the political fallout as ‘the party that wants to tax your home’.

So even sensible proposed changes in policy would be discounted as untrustworthy, disruptive and unlikely to endure without careful protections. No assurance by any political party that “it is not intending to make any change” will be believed for a minute. However, these problems are avoidable with the good management sketched below.

4. Disarm scaremongering by an absolute, up-front guarantee of grandfathering

The simple, tried and proven way to disarm the ‘Mediscare’ tactic and ensure an open, constructive and intelligent Review is to make an upfront, unconditional guarantee: the Review of retirement income will be instructed to avoid any recommendations which would significantly adversely affect anybody who has made lawful savings for retirement, and who is presently retired, or too close to retirement to make offsetting changes to their life savings plans.

That grandfathering guarantee should be absolute and unconditional, referring to the use of similar practices in Australia’s history of superannuation changes from the Asprey report in 1975 through to 2010. The force of any guarantee would be increased if the Government now grandfathered some or all of the 2017 measures initially introduced without grandfathering, in the manner discussed below.

Such unconditional grandfathering would not destroy the retirement income, economic or fiscal benefits of undertaking reform. The very reason that retirement income policy changes take a long time to have their full effect is a good reason for starting policy change early, grandfathering those who made their retirement income savings under earlier rules to ensure implementation of the reforms, and letting the benefits of reform build slowly over time.

5. Propose means to rebuild and preserve confidence and trust in future consideration of retirement income policy changes

Recent policy design efforts have tried to encourage new superannuation products, such as those to address longevity risk. But such effort, necessarily focussed on the distant future of individuals’ retirements, is futile if no one trusts superannuation and Age Pension rule-making any more. If savers cannot trust the Government from 2007 to 2017, or even from February 2016 to May 2016, why should they trust the taxation or regulation of products affecting their retirement living standards 40 years in the future?

To restore the credibility of any changes emerging from the Review, the terms of reference should encourage renewed examination of ideas such as the superannuation charter recommended by the Jeremy Cooper Charter Group, or possible constitutional protection of long term savings and key parameters of the retirement income system.

6. Rebuild credible public, contestable, long-term modelling of the effects of change on retirement incomes

Retirement incomes are the result of complex and slowly developing interrelationships between demographic change, growing community incomes, rising savings, government budget developments, and Age Pension and superannuation policies. Formal, published, long-term modelling of these relationships is an essential tool to understand the impact of demographic change and of policy settings. Formal modelling facilitates public understanding and meaningful consultation, and helps build support for future retirement income reform.  Such public modelling was integral to the development of the Simplified Superannuation package in 2006, implemented from 1 July 2007, but was lacking from the 2017 reversal of those reforms.

In about 2012, the Commonwealth Treasury stopped publishing long-term modelling in this field with the last of its published forecasts using the RIMGROUP cohort model. The then-projected impacts on the Age Pension through to 2049 from the Super Guarantee measures of 1992 and the Simplified Superannuation reforms of 2007 were for a large decline in uptake of the full Age Pension accelerating from about 2010, but an increase in the uptake of part Age Pensions. There was projected to be only a small rise in the proportion of those age-eligible for the Age Pension who were fully self-funded retirees (Chart One).

The reason that the projected growth in self-funded retirement was slow is instructive: people who would, on pre-2007 policies, have been eligible for a full Age Pension could only slowly build their superannuation savings in response to the 2007 changes. Some of the first cohorts reaching retirement age would have sufficiently larger superannuation savings to be ineligible for the full Age Pension, but would still be eligible for a part Age Pension. Moreover, as they aged and exhausted modest superannuation savings, they would become eligible for a full Age Pension in later life.

Chart One: Treasury’s 2012 projected changes in pension-assisted and self-financed retirement, 2007-2049  

Source: Rothman. G. P., Modelling the Sustainability of Australia’s Retirement Income System, July 2012.

The 2017 reversals of the 2007 reforms have never been properly justified. There was no published modelling to suggest costs to the budget were higher than projected, or transition to higher self-funded retirement incomes was slower than projected. As Save Our Super warned at the time, the 1 January 2017 increased taper on the Age Pension asset test created a ‘death zone’ for retirement savings between about $400,000 and $1,050,000 for a couple who owned their home. For every extra dollar saved in that range, an effective marginal tax rate of up to 150 per cent sent the couple backward. (Similar death zones arise for other household types and single persons.)

Superannuation balances at retirement for males of $400,000 or more are common, so the practical burden of the 1 January 2017 perverse de facto tax increase could only be mitigated if a saver could quickly traverse the death zone through utilising high concessional and non-concessional contributions to accelerate late-career super savings.  But then the 1 July 2017 reductions in superannuation contribution limits scotched that hope, and compounded the damage of the 1 January 2017 change.

The longer those perverse 2017 incentives are left to operate, the stronger the incentives to build a retirement strategy around limiting superannuation savings and maximising access to a (substantial) part Age Pension. That will negate the objective of the Howard/Costello reforms to defeat adverse demographic budgetary impacts by encouraging rising self-funded retirement, growth in retirement living standards and reduced use of the Age Pension.

Outsiders will probably never know how the policy advice to make the 2017 policy reversal arose, but we speculate that the failure to publish long-term, contestable modelling since 2012 contributed to policies perversely destructive of retirement savings and encouraging tactical exploitation of access to the part Age Pension.

7. Highlight accelerated success in retirement income policy

As a result of the policies that applied up to 2017, we were witnessing a remarkable evolution of Australian retirement income outcomes that is passing unnoticed, because it is poorly explained and reported, and its end-point is still decades in the future. The combined effects of the 1992 Superannuation Guarantee process and 2007’s Simplified Superannuation are beginning to strongly reduce expenditures on the Age Pension much faster than was earlier projected.

The most recent projections of retirement developments, though only for 20 years out to 2038, were published in 2018 by Michael Rice for Rice Warner actuaries: The Age Pension in the 21st Century. (Treasury had a team leader on secondment to Rice Warner’s team of actuaries for the exercise.) The current trends are remarkable in themselves, but more remarkable in contrast to previous projections of how growing superannuation savings were changing the take-up of the Age Pension only slowly.

The proportion of those age-eligible for the Age Pension who draw a part Age Pension is still rising. (That growth comes from those previously eligible for a full age pension but now partly self-financing their retirement. So there is a net saving to the budget from this trend).  But the rise in the take up of the part Age Pension is not as much as earlier projected (Table 1, Panel 5).

What was originally projected to be only a very slight decline in the proportion of the age-eligible receiving any Age Pension (from 81 per cent in 2018 to 80 per cent by 2038), now looks likely to be a very large decline, to about 57 per cent (Table One, Panel 3, and Chart Two).

Table One: Rapid decline in Age Pension uptake projected to 2038

Notes: Intergenerational Report projections quoted are for years closest to 2018 and 2038. 2018 numbers were projections where earlier reports are cited, but are estimates of current data where a 2018 source is cited.
Sources: Intergenerational Reports for 2002, 2007 and 2015; Rothman. G. P., Modelling the Sustainability of Australia’s Retirement Income System, July 2012 (published again in the Cooper Report, A Super Charter: fewer changes, better outcomes, 2013); Rice, M., The Age Pension in the 21st Century, Rice Warner, 2018; Roddan, M., Pension bill falling as super grows, Treasury’s MARIA modelling shows, The Australian, 24 March 2019.

Put the other way around, the proportion of those age-eligible for the Age Pension who are instead totally self-funded retirees will have risen from some 31 per cent in 2018 to about 43 percent in 2038. This is a 12 percentage point rise in those totally self-funding, instead of the earlier projected 1 percentage point rise.

Reflecting this continuing gradual maturation of the system as it stood up to the 2017 policy reversals, spending on the Age Pension has already commenced declining as a share of GDP, instead of rising significantly as had been projected in early Intergenerational Reports. By 2038, spending on the Age Pension will be almost 2 percentage points of GDP lower than originally projected in the first Intergenerational Report in 2002.

Projections will doubtless evolve further. But the remarkable trends noted here are already surprising those working with current expenditure data.  The December 2018-19 Mid-Year Economic and Fiscal Outlook noted spending on the Age Pension had been overestimated by $900 million for reasons yet to be fully understood. The shortfall seems likely to involve the trends noted here, among other factors.

Chart Two: 2018 Projected proportions of the eligible population receiving the Age Pension, by rate of Age Pension

Source: Michael Rice, The Age Pension in the 21st Century, Rice Warner, p 31.

To most, the evidence of rising living standards in retirement, more self-funding through lifetime savings, less reliance on the Age Pension, a falling share of Age Pension spending in GDP and the disarming of the demographic and fiscal time bombs identified in earlier Intergenerational Reports would look like a policy triumph.

Further to this private sector modelling, in December 2018, an FOI request led to the first fragmentary public evidence of the initial uses of a new Treasury microsimulation model, MARIA , a “Model of Australian Retirement Incomes and Assets”. The model uses advances in data and computing power since Treasury’s 1990s RIMGROUP model was built to move from cohort modelling of age and income groups to microsimulation modelling of the population. This first report indicated Age Pension dependency falling markedly. Subsequent reporting of FOI information in March 2019 adds to public information that spending on the Age Pension is now falling towards 2.5% of GDP by 2038, a remarkable 1.6 per cent of GDP lower than was projected in the Intergenerational Report of 2007, the year the Costello Simplified Super reforms were enacted.

To give a sense of scale, 1.6 per cent of 2018 GDP is about $29 billion dollars. Even if GDP grew by 1% a year to 2038 (which would be a lamentable shrinkage in per capita GDP), spending on the Age Pension would be by then about $36 billion a year lower than previously projected, apparently wholly as a result of more people saving more in superannuation than was projected in the Intergenerational Report of 2007.

On 24 June 2019, more evidence of superannuation policy success became available. Analysis by Challenger, Super is delivering for those about to retire, noted that the average newly retired Australian is not accessing the Age Pension at all. Only 45% of 66-year-olds were accessing the Age Pension at December 2018 and only 25% of them were drawing a full Age Pension.  Of course, many of those might fall back on the Age Pension in later life when they exhaust their superannuation capital. Thus, if retirees are to remain wholly self-funded during their whole retirement, superannuation balances at retirement will need to keep rising. Other things being equal, 2017’s imposition of a $1.6 million cap and tax at 15% on amounts above that balance reduce the time that retirees can remain independent of the Age Pension.

Every additional person who wholly self-funds their retirement is, prima facie, achieving a better retirement living standard than they could have enjoyed by arranging their affairs to access only the Age Pension and to send the bill to working age taxpayers. This is not merely a budget success. An economy in which individuals save for retirement, contributing funds and real resources for reallocation through the financial sector to fund investments will be much more dynamic and efficient than one more dependent on the Age Pension, in which people pay incentive-deadening taxes for redistribution through the welfare system.

It is bewildering to us that the accelerated success of superannuation policy, which has helped people save for their desired retirement standard of living, is not being trumpeted from the rooftops.  Instead, the facts are dribbling out without explanation and context from FOI applications. Those facts are lost against the backdrop of incessant criticism from some commentators of More than enough saving and excessive revenue forgone from the tax treatment of superannuation.

It is vital for protecting the Government from a repeat of the backward steps on retirement income policy in 2017, for restoring the legacy of the Howard-Costello reforms and for timely identification of sustainable future reforms, to re-establish regular published, contestable and peer reviewed modelling of how retirement income policy is working. 

8. Commission initial modelling of three scenarios

We suggest Treasury should use MARIA to model three scenarios over a long-term time frame such as 2000 to 2060 to clarify the starting point for the Review of Retirement Income Policy.

Rather than study retirement income policy solely as a Commonwealth budget issue of the revenue hypothetically forgone in tax incentives for superannuation and the expenditure on the Age Pension, the modelling needs to be set in the fuller context of the Howard Government’s 2006-2007 analysis of Simplified Superannuation. Its output ought to include impacts on retirement incomes, the ‘RI’ in MARIA, not just on the budget. 

As noted above, the overarching objective of policy ought be to enable higher lifetime saving and rising living standards in retirement for those in a position to save for self-funded retirement, while preserving the Age Pension as a safety net for those unable to save for a better retirement living standard. Modelling should project implications for average self-financed and Age Pension retirement incomes under each scenario, as well as for government revenues and expenditures.

a) A baseline scenario

We suggest the first scenario for long-term modelling should be the projected effects by 2060 of the continuation of Age Pension and superannuation policies as at end 2016. That would be comparable against the earlier 2012 Treasury modelling, and would show the impact of another 6 to 7 years’ data on the maturation of the Super Guarantee (including scheduled future increases) and the Simplified Superannuation reforms of 2007.

b) A current policy scenario

We suggest a second useful scenario would be to model the current policies. When the current policy scenario is compared to the baseline scenario, that would give an indication of the effect of the change in the taper rate of the Age Pension asset test, the imposition in the retirement phase of a 15% tax on earnings on superannuation balances above $1.6 million, and tighter restrictions on concessional and non-concessional contributions. Effects on individual retirement incomes, as well as comparisons of effectson government revenue and expenditure over time, should be made between the two models.

It might be objected that the behavioural responses to the 2017 changes are too recent to have shown up in data and thus too difficult to model. But to assert that we can have no estimate of the likely effect of those policy changes on retirement incomes would be in effect to concede that they should never have been proposed or implemented.

c) Future policy change scenarios

A third useful scenario could involve empirically testing policy changes the Government wanted to explore, including grandfathering the changes introduced in 2017 and summarised in Table Two.

Any mix of measures selected should cohere around the Government’s retirement income strategy, to allow those who can save to raise their retirement living standards, to protect the efficacy and affordability of the Age Pension as a safety net for those who cannot, and to ensure as many as possible are in the first group.  The selection of measures must rest on the evidence of public, contestable, long-term modelling of outcomes on both retirement living standards and the government budget.

Because of these strategic and empirical imperatives, Save Our Super advocates that the grandfathering of all the measures of Table Two be enumerated and modelled, as well as the 2017 change to the means testing of the Age Pension and the impact of Superannuation Guarantee changes.

Table Two: Options for grandfathering 2017 superannuation changes

We illustrate one possible, strategically coherent path forward but without any implied prioritisation. Some potentially useful measures might:

  • Reduce the burden of the Superannuation Guarantee on the youngest (who have longest to fund their own preferred retirement living standards and face the highest competing demands on their early-career budgets) and the poorest (who will in any event accumulate insufficient savings over their working lifetimes to become ineligible for the Age Pension). This could involve either raising the cut-in point for the Superannuation Guarantee, halting its programmed rate increases, or both.
    • Against the merits of the Superannuation Guarantee must be set the cost that it forces a constant rate of saving for employees by their employers over the employees’ working lifetimes. In any event (but especially if the Government raises the Superannuation Guarantee rate), this is a particular burden on the young, those in tertiary study, those seeking to buy their first home, those establishing a family and those with low or punctuated career earnings.
    • One curious and little noted feature of the Superannuation Guarantee is that (broadly speaking) it applies to any employee over 18 who earns $450 gross or more a month. This extraordinarily low threshold has not been altered since the Super Guarantee was introduced at 3 per cent in 1992 – over a quarter of a century ago. At that time, the monthly $450 trigger corresponded to the then annual tax-free threshold in the income tax of $5,400. With the Superannuation Guarantee now at 9.5 per cent and scheduled to increase to 12 per cent, it is now a significant impost that falls as forgone wages on young and/or poor workers, when they have priorities of education, housing and family expenses much more pressing than commencing saving for retirement more than 40 years in the future. If the Superannuation Guarantee cut in at the monthly gross earnings equivalent to the current tax-free threshold, the trigger would now be $1517 a month, not $450 a month.
  • Remove the discouragement of saving from effective marginal tax rates of over 100%, encouraging saving by those who can save to escape reliance on the full Age Pension. This would require reversing the increased taper on the Age Pension asset test imposed on 1 January 2017 and reinstating the Costello reform of 2007.
  • Allow those who are able to save for their desired retirement standard of living, in the latter parts of their career, access to higher concessional and non-concessional superannuation contributionlimits, as shown in Table Two.
  • Acknowledge that self-funding a retirement standard of living which is higher than the Age Pension requires a large capital sum at retirement – the Age Pension for a married couple is estimated to have an actuarial value of over $1 million, with the costs rising in an environment of near-zero interest rates. At present, all political parties say they want an end (increased self-funding of retirement), but seem to attack the means to that end: a large capital sum accumulated at the end of the saver’s working career. With the continuing drift of interest rates towards zero, whatever unexplained calculations arrived in 2016 at the $1.6 million cap on superannuation should be re-examined, with a view to grandfathering the cap as shown in Table Two, raising it or abolishing it. The interest earnings from a $1.6 million sum is now almost 40% lower than it was in early 2016. Abolishing  the $1.6 million cap would re-capture many of the simplification benefits of the 2007 Simplified Super reforms, which were destroyed by the 2017 changes.

d) Strategic direction of future policy change scenario

These four classes of change have clear strategic directions: they are pro-choice, pro-personal responsibility and support rising living standards in retirement. They reduce emphasis on forced savings at a high and constant rate over the whole of working life from the earliest age and the lowest of incomes. They increase emphasis on saving at the rate chosen by individuals over their working careers in the light of their circumstances. The shift would likely result in faster late career savings after educational, family formation and mortgage commitments have been met. The shift would be pro-equity, in that it would avoid reducing the living standards of the youngest and poorest in the workforce, without ever helping many of them achieve retirement income living standards above the Age Pension. And it would reduce the constituency of voters denied growth in their own disposable incomes and supportive instead of increased government transfers to them for their early-career expenditures (such as childcare and other family benefits).

e) Budget effects of future policy change scenario

Of these four classes of change, the Superannuation Guarantee changes would raise significant revenue for the government budget, since higher incomes paid as wages would be taxed under normal income tax provisions, rather than at the lower rate for superannuation contributions. The other three measures would have a gross cost to budget revenue relative to the current measures, but would continue and likely accelerate the recent and faster-than-projected exit of retirees from dependence on the full Age Pension. That will save some future budget outlays, and it is unclear until public, contestable long-term modelling is published what the net effect on the budget would be, and its time frame.

Recall, however, that the origins of this debate were the demographic time-bomb facing Australia, and the intrinsically long-term challenge of building life-time savings for long-lived retirement. A measure that ‘breaks into the black’ even decades hence might be counted a success.

f) Retirement income effects of future policy change scenario

Whatever the net budget effects and their timing, it is clear a package such as sketched in scenario 3 will raise Australian’s retirement incomes and protect the sustainability of the Age Pension

9. Let the modelling speak

Only long-term modelling can show which measures are likely to have the best pay-offs in greatest retirement income improvements at least budget cost. Choice of which measures to develop further are matters for judgement, balancing the possible downside that extensive policy change outside a superannuation charter may only further damage trust in retirement income policy setting and in Government credibility.

*******************************************************

For PDF version click here

Reversionary pension v BDBN: which one wins?

By Bryce Figot, Special Counsel, DBA Lawyers and Daniel Butler, Director

There is a misconception that reversionary pension documentation will always apply before a binding death benefit nomination. If the SMSF deed is silent on the question, it can be entirely possible at times that the binding death benefit nomination (‘BDBN’) will apply before any reversion pension documentation.

The reasoning is to do with several often overlooked laws. This article aims to address some of these laws, as well as offer a practical solution.

If the SMSF deed provides that reversionary pension documentation overrides any BDBN, that may well be the case for that particular SMSF. However, that might not be in anyone’s best interests, and could result in significant liability for advisers.

The relevant law

Ultimately, what matters is what a judge thinks.

An analogous Queensland decision from 2007 provides insights. In Dagenmont Pty Ltd v Lugton [2007] QSC 272 the trustee of a discretionary trust executed an instrument stating that it would pay a person an amount of $150,000 annually. The validity of this was challenged.

Chesterman J summarised the law behind the challenge as follows:

According to the Law of Trusts by Underhill and Hayton 16th edition (p 690):

… it is trite law that trustees cannot fetter the future exercise of powers vested in trustees ex officio …  Any fetter is of no effect.  Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.

Meagher and Gummow in Jacobs Law of Trusts in Australia 6th edition para 1616 say:

Trustees must exercise powers according to circumstances as they exist at the time.  They must not anticipate the arrival of the proper period by … undertaking beforehand as to the mode in which the power will be exercised in futuro.

Professor Finn (as his Honour then was) in his work Fiduciary Obligations wrote (at para 51):

Equity’s rule is that a fiduciary cannot effectively bind himself as to the manner in which he will exercise a discretion in the future.  He cannot by some antecedent resolution, or by contract with … a third party – or a beneficiary – impose a “fetter” on his discretions.

Finkelstein J summarised the position succinctly in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628 (para 121).  His Honour said:

Speaking generally, a trustee is not entitled to fetter the exercise of discretionary power (for example a power of sale) in advance:  Thacker v Key (1869) LR 8 Eq 408;  In Re Vestey’s Settlement (1951) ChD 209.  If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 ChD 447), though the trustee may be liable in damages for breach of contract …

Also, judges often consult from leading texts such as legal encyclopaedias. Two legal encyclopaedias often consulted by judges are Halsbury’s Laws of Australia and The Laws of Australia.

Firstly, Halsbury’s Laws of Australia states at [430-4185]:

A trustee must not permit others, especially the beneficiaries, to dictate the manner in which his or her fiduciary discretion ought be exercised. For this reason, a trustee must not bind himself or herself to a future exercise of the trust in a prescribed manner which is determined by considerations other than his or her own conscientious judgment at that future time regarding what is in the beneficiaries’ best interests

Similarly, The Laws of Australia states at [15.14.1590]:

Trustees must not permit others, especially the beneficiaries, to dictate to them the manner in which the fiduciary discretion ought be exercised. Trustees must not bind themselves contractually to exercise a trust in a prescribed manner, to be decided by considerations other than their own conscientious judgment at the time, regarding what is in the best interests of the beneficiaries. [2] For example, in Re Stephenson’s Settled Estates(1906) 6 SR (NSW) 420; 23 WN (NSW) 153, Street J held that it was a breach of trust for trustees with a power of sale to enter into a contract binding them to sell trust property for a fixed price at a specified future date.

In other words, if an SMSF deed gives a trustee a discretion (eg, what to do with a member’s death benefits when the member ultimately dies), the trustee must not decide today how it will exercise that discretion in the future. If the trustee does decide today how it will exercise its discretion in the future, that decision will be unenforceable.

Naturally, it is possible for an SMSF trust deed to alter the above ‘default’ position and to instead allow a trustee’s discretion to be bound. (Incidentally, that was exactly what happened in Dagenmont and why the challenge in that case failed.)

Most SMSF deeds drafted in the last 20 years have provisions allowing a member to bind a trustee’s future discretion pursuant to a BDBN. However, there is a lot more variability and vagaries as to what SMSF deeds might provide regarding reversionary pensions.

What if the SMSF deed provides pension documentation overrides any BDBN?

As noted above, if a specific SMSF’s deed provides that pension documentation overrides any BDBN, that might well be the case for that specific SMSF. However, we ask whether such a provision is in anyone’s best interests.

Consider the following situation. You are an accountant with a limited AFSL. Your client has made a BDBN in favour of her estate. Your client tells you that upon her death:

  • she wants her pension to revert to her husband; and
  • she wants her accumulation interest to be paid to her estate (ie, legal personal representative).

You prepare pension documentation stating that her pension reverts to her husband.

Your client dies.

The client’s executor states that had the deceased been fully aware of all relevant information and of all of her legal rights and obligations, she would not have signed the pension documentation. You now face two unenviable options. You can either:

Unenviable option 1 (you have committed a crime): say that you DID advise the deceased of all relevant information and all of her legal rights and obligations and then drafted the pension documentation. If so you have almost certainly engaged in legal practice. In Victoria, it is an offence punishable by, among other things, up to two years in prison for someone who is not an Australian legal practitioner to engage in legal practice (Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 s 10(1)). Similar punishments apply in all other jurisdictions.

Unenviable option 2 (you are negligent): say that you did NOT advise the deceased of all relevant information and all of her legal rights and obligations but you nevertheless drafted the pension documentation. If so you might well have breached your duty of care owed not just to the deceased, but also to the deceased’s dependants, executor and any beneficiaries of the deceased estate (see Hill v Van Erp (1997) 188 CLR 159). You may be liable to them under (among other things) the tort of negligence for any loss, damages and costs suffered.

The practical solution

It is critical to be very aware of the limitations of what a non-lawyer can do.

Consider a client who wants a ‘simple’ BDBN or a ‘simple’ pension reversion. With a proper product disclosure statement, disclaimers, warnings and file notes, it may well be possible for you as a non-lawyer to:

  • determine whether your client is giving you properly informed instructions; and
  • act as a ‘mere scribe’ and populate a template.

However, even then you would be well advised to recommend the client have these documents settled by their estate planning lawyer. The moment things become more complex, it is extremely risky to proceed without a lawyer providing the ultimate advice and the ultimate ‘sign off’ in respect of the pension documentation and the BDBN.

If you are a non-lawyer and you are involved in documentation attempting to direct that, for example, some pension is paid one way upon death (eg, to a spouse) and accumulation benefits are paid another way (eg, to an estate) you should adopt the absolute highest level of caution. You should be extremely reluctant for the ‘buck to stop’ with you or your firm. To properly implement this situation almost certainly constitutes engaging in legal practice and it should a lawyer who bears the final risk (if for no other reason, the lawyer — unlike you — will be covered by appropriate insurance for legal work).

Your firm’s procedures and quality control notes should reflect this.

Why it can be strategic for the SMSF deed to provide that a BDBN overrides pension documentation

There can be significant advantages in having an SMSF deed that expressly states that a BDBN overrides inconsistent pension documentation. We have already written about this in previous articles and no doubt we will write about this again in future articles.

Conclusion

It is incorrect to believe that pension reversion documentation will always override BDBNs.

Ultimately though the SMSF deed will play a very important role. However, an SMSF deed that provides that pension documentation will override a BDBN can cause a non-lawyer to bear significant legal risks.

Other relevant articles

Other recent relevant articles include https://www.dbalawyers.com.au/ato/reconciling-inconsistencies-between-reversionary-pension-nominations-and-bdbns/ and https://www.dbalawyers.com.au/ato/reversionary-pension-vs-bdbn-which-outcome-is-preferred/

*           *           *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.

13 August 2019

An open letter to Prime Minister Scott Morrison – broken super promises

5 May 2019

Dear Prime Minister,

On Wednesday, 17 April 2019, I received an email from Des Moore, a former Treasury Deputy Secretary. It included, amongst other attachments, the AFR article by Andrew Tillett and Tom Mcllroy. It is datelined “Apr 16, 2019 – 9.00pm”.

That article said, amongst other things:

“Superannuation battlefield

Campaigning in the retirees’ haven of Victoria’s Bellarine Peninsula, which is in the marginal seat of Corangamite, Mr Morrison sought to sharpen the differences with Labor, as well as win back the Liberal base, by vowing no more tinkering with superannuation. “I make it very clear, no new taxes, no higher taxes on superannuation under my government ever,” he said. “This gives people certainty to plan for their future. It means that the goal posts will never be shifted.”

….

But Mr Morrison said Labor could not be trusted on superannuation. “I have no idea what Bill Shorten was talking about today when he says he won’t be putting increased taxes on superannuation. That’s his policy,” he said. “But I suppose, if you’ve already racked up $387 billion in higher taxes, he must have forgotten that includes $34 billion of taxes alone on superannuation. “When the number gets that high, he’s either lying about it today or he’s just forgotten the last person he hit with higher taxes.”

….

The Prime Minister rejected criticism of his own record on making unexpected superannuation changes, when as Treasurer he unveiled a number of changes to tackle what he described as “excesses” in the system at the 2016 budget that sparked a backlash among wealthy retirees.”

Unfortunately, you seem to have forgotten your own earlier broken promises.

You made 12 similar promises in May – June 2015 as Minister for Social Services in the Abbott Government:

Scott Morrison’s 12 tax-free superannuation promises : May to June 2015

(1) 3AW – 19 June 2015

“That is why we are so adamant about not having adverse changes to superannuation, that’s why we aren’t going to increase taxes on superannuation, and why we are trying to provide stability and certainty around superannuation for the simple reason that we want people to invest in it.”

(2) Sky News – 17 June 2015

MINISTER MORRISON: What we are not going to do is we are not going to tax those savings, like Bill Shorten wants to do. That is the difference, we will not tax your super, Bill Shorten will.

MINISTER MORRISON: Yes, and there are other taxation arraignments that apply to superannuation already and we are not going to increase those taxes as the Labor Party does and nothing we have done with the Greens has in any way changed the Government’s position on not taxing your super. We will not tax your super.

(3) Question Time – 16 June 2015

And when they get into their retirement, we are going to make sure that their hard-earned savings in their superannuation will not be the subject of the tax slug that those opposite want to impose, … Those opposite see it as a tax nest—a tax nest for those to plunder.

The shadow minister earlier referred to ‘trousering’. The ‘trouser bandit’ sits over there because he, together with the shadow Treasurerwants to come after the hard-earned superannuation savings…

What we will do for them is: we will not tax them like the ‘trouser bandit’ opposite.

(4) Sky News PM Agenda – 16 June 2015

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…

(5) 2GB – 25 May 2015

Well that is right because the tax incentives that are given for superannuation – which we strongly support and we don’t want to take away – the Labor Party wants to take those away. What we want to do is encourage people to save for their retirement but then when you are in retirement that is what you draw on, not the pension. The whole point of putting those incentives in place is so that people don’t have to draw down on a pension.

Under us we think that more welfare and higher taxes is not the way forward. 

(6) Question Time – 25 May 2015

But on this side we think that those who have an entitlement are those who earn income to save for their retirement, the sort of income that they want to draw down in their retirement and which the shadow Treasurer wants to tax to within an inch of its life. On that side of the House it is all about higher taxes and more welfare, but not on this side and not in this budget.

(7) 3AW – 18 May 2015

MINISTER MORRISON: Well we do want to encourage everyone … to be saving for their retirement and particularly when you are drawing down on that when you are retired we don’t want to tax you like Chris Bowen does.

(8) Doorstop – 8 May 2015

Superannuation is there for people who have been saving over their lifetime to provide for their retirement. We don’t think that people who have done that should be punished with higher taxes, Bill Shorten does, and so does Chris Bowen and I think that’s a stark difference between the Government and the Opposition on these issues.”

(9) Press Conference – 7 May 2015

The Government does not support Labor’s proposal to tax superannuants more on the income they have generated for their retirement.

(10) Sky News AM Agenda – 5 May 2015

…what is not fair is if you save for your retirement and you create yourself a superannuation nest egg and the Government then comes along and taxes that income; which is what Labor are proposing to do.

(11) ABC RN – 5 May 2015

It’s the Labor Party who wants to tax superannuation, not the Liberal Party, particularly the incomes of superannuants and I think that’s a fairly stark contrast that’s emerging.

(12) 3AW – 1 May 2015

My own view is that the superannuation system, for example, meant I don’t want to tax people more when they’re basically investing for their own future… That’s why I think Chris Bowen’s idea, …of …taxing superannuation incomes, is a bad idea, I don’t support it…

Source:

Prepared and edited by Save Our Super from:

Labor media release:

CHRIS BOWEN MP

JIM CHALMERS MP

WEDNESDAY, 20 APRIL 2016

Further, in February 2016, as Treasurer in the Turnbull Government, you rightly cautioned against what you called the ‘effective retrospectivity’ of raising taxes or restrictions on the pension phase of superannuation, after attracting and trapping savings in superannuation for some 40 years under the earlier legislated tax rules (http://sjm.ministers.treasury.gov.au/speech/001-2016/). 

Then, in May 2016, as Treasurer, you broke your earlier promises and did just that.

In the May 2016 Budget, you went after people’s superannuation. You imposed higher taxes on those saving for retirement.

You failed to include in the May 2016 Turnbull/Morrison Budget appropriate ‘grandfathering’ provisions which have accompanied every major adverse change in pensions and superannuation tax for the last 40 years.

Why should Australians believe you now?

Many (including those in Higgins), are unlikely to do so.

Regards,

Jack Hammond QC – Founder, Save Our Super

http://saveoursuper.org.au

We remind Scott Morrison of his broken “tax-free super” promises – Updated 4 May 2019

Email dated 16 July 2016 from Save Our Super to Treasurer Scott Morrison in lead up to the Liberal Federal Parliamentary Party meeting to be held on Monday 18 July 2016:

Dear Mr Morrison,

I write to you in your capacity as the Treasurer in the second Turnbull L/NP Coalition Government.

This email relates to the superannuation issue. Therefore, if possible, would you please read it before the Liberal Federal Parliamentary Party meeting to be held in Parliament House, Canberra next Monday 18 July 2016. It may go a long way to explain the anger and dismay felt by many Liberal Party/National Party members and conservative supporters of the L/NP Coalition. I am one of many.

I am a Melbourne QC. I live in Kelly O’Dwyer’s electorate of Higgins in Victoria.

Also, I am the founder of Save Our Super; see: http://saveoursuper.org.au . A brief biography of my background can be found on that website under “Our People”.

Save Our Super is an organisation I formed as a consequence of the Government’s current superannuation policies. Those policies were announced by you on 3 May 2016, when you delivered Budget 2016 on behalf of the first Turnbull L/NP Coalition Government.

It is no understatement to say that those policies were sprung on the Australian public without notice or any real consultation. They were not “evidence-based” public policies by any reasonable use of that term.

Moreover, they were, and remain, in direct contradiction to that which you had told the Australian public on many occasions prior to you delivering Budget 2016.

You made at least 12 “tax-free superannuation” promises in May-June 2015, and in your Address on 18 February 2016 to the Self-Managed Superannuation Funds National Conference in Adelaide. You gave that Address less than three months before you delivered Budget 2016 on behalf of the L/NP Coalition Government.

We have posted them on Save Our Super’s website; (see under the tab “Scott Morrison’s tax-free super” for the source; and see under the category  “Quotes” for the full Address and source).

I have set them out below for your convenience.

You are the one most likely to be accepted by the Governor-General as the Treasurer in the second L/NP Coalition Turnbull Government in about a week’s time.

We believe you should be reminded of your broken promises, at least for the purpose of the forthcoming Liberal Federal Parliamentary Party meeting to be held in Parliament House, Canberra next Monday 18 July 2016.

Scott Morrison’s 12 tax-free superannuation promises : May to June 2015

(1) 3AW – 19 June 2015

“That is why we are so adamant about not having adverse changes to superannuation, that’s why we aren’t going to increase taxes on superannuation, and why we are trying to provide stability and certainty around superannuation for the simple reason that we want people to invest in it.”

(2) Sky News – 17 June 2015

MINISTER MORRISON: What we are not going to do is we are not going to tax those savings, like Bill Shorten wants to do. That is the difference, we will not tax your super, Bill Shorten will.

MINISTER MORRISON: Yes, and there are other taxation arraignments that apply to superannuation already and we are not going to increase those taxes as the Labor Party does and nothing we have done with the Greens has in any way changed the Government’s position on not taxing your super. We will not tax your super.

(3) Question Time – 16 June 2015

And when they get into their retirement, we are going to make sure that their hard-earned savings in their superannuation will not be the subject of the tax slug that those opposite want to impose, … Those opposite see it as a tax nest—a tax nest for those to plunder.

The shadow minister earlier referred to ‘trousering’. The ‘trouser bandit’ sits over there because he, together with the shadow Treasurer, wants to come after the hard-earned superannuation savings…

What we will do for them is: we will not tax them like the ‘trouser bandit’ opposite.

(4) Sky News PM Agenda – 16 June 2015

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…

(5) 2GB – 25 May 2015

Well that is right because the tax incentives that are given for superannuation – which we strongly support and we don’t want to take away – the Labor Party wants to take those away. What we want to do is encourage people to save for their retirement but then when you are in retirement that is what you draw on, not the pension. The whole point of putting those incentives in place is so that people don’t have to draw down on a pension.

Under us we think that more welfare and higher taxes is not the way forward.

(6) Question Time – 25 May 2015

But on this side we think that those who have an entitlement are those who earn income to save for their retirement, the sort of income that they want to draw down in their retirement and which the shadow Treasurer wants to tax to within an inch of its life. On that side of the House it is all about higher taxes and more welfare, but not on this side and not in this budget.

(7) 3AW – 18 May 2015

MINISTER MORRISON: Well we do want to encourage everyone … to be saving for their retirement and particularly when you are drawing down on that when you are retired we don’t want to tax you like Chris Bowen does.

(8) Doorstop – 8 May 2015

Superannuation is there for people who have been saving over their lifetime to provide for their retirement. We don’t think that people who have done that should be punished with higher taxes, Bill Shorten does, and so does Chris Bowen and I think that’s a stark difference between the Government and the Opposition on these issues.”

(9) Press Conference – 7 May 2015

The Government does not support Labor’s proposal to tax superannuants more on the income they have generated for their retirement.

(10) Sky News AM Agenda – 5 May 2015

…what is not fair is if you save for your retirement and you create yourself a superannuation nest egg and the Government then comes along and taxes that income; which is what Labor are proposing to do.

(11) ABC RN – 5 May 2015

It’s the Labor Party who wants to tax superannuation, not the Liberal Party, particularly the incomes of superannuants and I think that’s a fairly stark contrast that’s emerging.

(12) 3AW – 1 May 2015

My own view is that the superannuation system, for example, meant I don’t want to tax people more when they’re basically investing for their own future… That’s why I think Chris Bowen’s idea, …of …taxing superannuation incomes, is a bad idea, I don’t support it…

Treasurer Scott Morrison, 18 February 2016 – Address to the SMSF 2016 National Conference, Adelaide

One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently.

In light of the above, how can the public trust anything you say in future, let alone superannuants and those who advise others regarding superannuation?

As to the latter, see Jim Brownlee’s letter set out below; (see under “Letters to Save Our Super”, and Save Our Super’s Disclosure).

“Government Destroys Financial Adviser’s Trust in Superannuation

26 June 2016

I have been an ASIC-registered Financial Adviser for more than three decades. Over that time, I have provided my clients with retirement-planning advice. I have promoted the Government’s (both Liberal and Labor) carrot and stick message of (1), the increased long-term vulnerability of the aged-pension and, (2), tax concessions specifically structured to encourage self-funding superannuation retirement savings.

ASIC requires me to give my clients a Statement of Advice (“SoA”). It sets out the Government’s superannuation tax incentives. Those tax incentives underpin my SoA’s recommendations. They are crucial to the client’s decision. I am invariably asked “What happens if the Government changes things?”. UntiI now, I have always answered: “In my long-term experience, Governments have always ‘grandfathered-in’ protection for existing arrangements.”  

But Treasurer Scott Morrison, in his May 2016 Budget, changed all that.

Last year, before that Budget, he said to the Australian people:

“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…”

Not only did the Government not do what the Treasurer promised, they did precisely what the Treasurer promised that the Government would not do.

The Government came after people’s superannuation and announced proposed increased taxes on superannuation.

Furthermore, the Treasurer added insult to injury. He announced those increased taxes without also announcing that Australians who had acted in good faith and saved for their retirement under the then existing rules, would have their superannuation savings protected by grandfathering.

What am I supposed to tell my clients now, when they ask me, as they will, “What happens if the Government changes things?

Am I now to say, “Well, I remember the Liberal Government’s May 2016 Budget. I wouldn’t put my savings into superannuation because you can’t trust the Government not to change the rules, and not protect your savings by grandfathering the existing rules”.

Jim Brownlee

Authorised Financial Adviser Representative.

Berwick, Victoria”

Please let me know your view of the Government’s current superannuation policies and the outcome of the meeting next Monday, 18 July 2016. I intend to publish this email and any replies I receive on Save Our Super’s website.

If you wish to raise with me any aspects of the Government’s current superannuation policies, or any suggested changes to those policies, I am only too happy to discuss them with you.

Please feel free to contact me on 0400 — — or by email on jack.hammond@saveoursuper.org.au

Regards,

Jack Hammond QC

http://saveoursuper.org.au

jack.hammond@saveoursuper.org.au

Scott Morrison’s 12 tax-free superannuation promises : May to June 2015 – Updated 4 May 2019

(1) 3AW – 19 June 2015

“That is why we are so adamant about not having adverse changes to superannuation, that’s why we aren’t going to increase taxes on superannuation, and why we are trying to provide stability and certainty around superannuation for the simple reason that we want people to invest in it.”

(2) Sky News – 17 June 2015

MINISTER MORRISON: What we are not going to do is we are not going to tax those savings, like Bill Shorten wants to do. That is the difference, we will not tax your super, Bill Shorten will.

MINISTER MORRISON: Yes, and there are other taxation arraignments that apply to superannuation already and we are not going to increase those taxes as the Labor Party does and nothing we have done with the Greens has in any way changed the Government’s position on not taxing your super. We will not tax your super.

(3) Question Time – 16 June 2015

And when they get into their retirement, we are going to make sure that their hard-earned savings in their superannuation will not be the subject of the tax slug that those opposite want to impose, … Those opposite see it as a tax nest—a tax nest for those to plunder.

The shadow minister earlier referred to ‘trousering’. The ‘trouser bandit’ sits over there because he, together with the shadow Treasurer, wants to come after the hard-earned superannuation savings…

What we will do for them is: we will not tax them like the ‘trouser bandit’ opposite.

(4) Sky News PM Agenda – 16 June 2015

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…

(5) 2GB – 25 May 2015

Well that is right because the tax incentives that are given for superannuation – which we strongly support and we don’t want to take away – the Labor Party wants to take those away. What we want to do is encourage people to save for their retirement but then when you are in retirement that is what you draw on, not the pension. The whole point of putting those incentives in place is so that people don’t have to draw down on a pension.

Under us we think that more welfare and higher taxes is not the way forward.

(6) Question Time – 25 May 2015

But on this side we think that those who have an entitlement are those who earn income to save for their retirement, the sort of income that they want to draw down in their retirement and which the shadow Treasurer wants to tax to within an inch of its life. On that side of the House it is all about higher taxes and more welfare, but not on this side and not in this budget.

(7) 3AW – 18 May 2015

MINISTER MORRISON: Well we do want to encourage everyone … to be saving for their retirement and particularly when you are drawing down on that when you are retired we don’t want to tax you like Chris Bowen does.

(8) Doorstop – 8 May 2015

Superannuation is there for people who have been saving over their lifetime to provide for their retirement. We don’t think that people who have done that should be punished with higher taxes, Bill Shorten does, and so does Chris Bowen and I think that’s a stark difference between the Government and the Opposition on these issues.”

(9) Press Conference – 7 May 2015

The Government does not support Labor’s proposal to tax superannuants more on the income they have generated for their retirement.

(10) Sky News AM Agenda – 5 May 2015

…what is not fair is if you save for your retirement and you create yourself a superannuation nest egg and the Government then comes along and taxes that income; which is what Labor are proposing to do.

(11) ABC RN – 5 May 2015

It’s the Labor Party who wants to tax superannuation, not the Liberal Party, particularly the incomes of superannuants and I think that’s a fairly stark contrast that’s emerging.

(12) 3AW – 1 May 2015

My own view is that the superannuation system, for example, meant I don’t want to tax people more when they’re basically investing for their own future… That’s why I think Chris Bowen’s idea, …of …taxing superannuation incomes, is a bad idea, I don’t support it…

Source:

Prepared and edited by Save Our Super from:

Labor media release:

CHRIS BOWEN MP

JIM CHALMERS MP

WEDNESDAY, 20 APRIL 2016

Labor’s superannuation and related proposals

Daniel Butler, Director (dbutler@dbalawyers.com.au)

Shaun Backhaus, Lawyer (sbackhaus@dbalawyers.com.au)

The next Federal election, according to our current Prime Minister Mr Scott Morrison, will be held in May 2019 and, if the Labor Government is elected, significant change is likely. Thus, a brief ‘stock take’ of what the superannuation landscape will look like under a Labor Government is set out below.

Cash refunds of franking credits

Labor proposes to deny cash refunds of franking credits from 1 July 2019. This proposal would largely impact individuals and self managed superannuation funds (‘SMSFs’).

In its “Pensioner Guarantee” media release on 27 March 2018, Labor claims that the distributional analysis shows:

  • 80% of the benefit of cash refunds of franking credits accrues to the wealthiest 20% of retirees;
  • 90% of all cash refunds to superannuation funds accrues to SMSFs (just 10% goes to APRA regulated funds) despite SMSFs accounting for less than 10% of all superannuation members in Australia; and
  • The top 1% of SMSFs receive a cash refund of $83,000 (on average) – an amount greater than the average full time salary (based on 2014-15 ATO data).

Under the proposed “Pensioner Guarantee”, Labor claims:

  • Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.
  • SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes. For example, if one member was receiving a part Centrelink age pension of $100 before 28 March 2018, the SMSF will be exempt under the proposal.

Thus, under Labor’s proposed “Pensioner Guarantee” an individual who receives an Australian Government pension or allowance will be exempt regardless of whether their pension or allowance commenced before or after 28 March 2018. However, Labor will only exempt an SMSF if the member receiving the pension or allowance was a member of the fund prior to 28 March 2018. Note that there does not appear to be any sound reason or logic why SMSFs with a member who subsequently becomes entitled to an Australian Government pension or allowance should miss out on a cash refund.

The Tax Institute’s Senior Tax Counsel, Bob Deutsch, in his TaxVine report on 5 October 2018 noted that:

  • Interestingly, of the around 1,160,000 individuals who claim around $2.3 billion in cash refunds, 320,000 of them are expected to be exempt as a result of the “Pension Guarantee”. Accordingly, there will be around 840,000 individuals who will be subjected to the proposal.
  • In the context of SMSFs, there are around 420,000 people involved in such funds, with the funds receiving around $2.6 billion in refunds. Around $1.3 billion of these refunds are received by SMSFs that are in full pension mode with each of these SMSFs on average having assets in excess of around $2.4 million (almost 50% of the $2.6 billion in refunds goes to SMSFs with considerably more than $1.6 million in super savings).

Large industry and retail superannuation funds typically will be able to offset any franking credits received against tax payable in each FY and will therefore generally not be adversely affected by this proposal.

The SMSF Association’s submission dated 29 October 2018 to the House of Representatives Standing Committee on Economics on the inquiry into the implications of removing refundable franking credits stated:

Under the proposed policy individuals with the same circumstances, in the same refundable position, will incur a different results depending on the vehicle they choose to hold their shares. Most notably, SMSF members are worse-off under the ALP policy than other superannuation fund members who are in pension phase and benefit from franking credits. The ALP policy proposes that refunds from dividend imputation are appropriate for almost all investors except for SMSF investors and those shareholders with low taxable incomes.

The SMSF Association’s submission also noted that the proposal will:

  • Result in a change in asset allocation, eg, from Australian franked shares to international equities, property or more risky investments.
  • Result in more members joining SMSFs to assist in soaking up franking credits. Refer to DBA Lawyers’ Admit a Conditional Member offering.

Moreover, some SMSF members will also consider whether having a pension in retirement phase is worthwhile if the fund is ‘burning’ excess franking credits. The example below shows that an SMSF with two members each with $1.6 million are no worse off converting to accumulation phase (ie, commuting their account-based pensions) as they substantially reduce their wastage of franking credits that would no longer result in a cash refund under Labor’s proposal to stop cash refunds. The SMSF also accumulates greater assets for the longer-term in the concessionally taxed superannuation environment by not having to pay out annual pension payments to its members.

In particular, the Dividend Wasted SMSF (see below example) where the two members are both in pension phase (ie, in retirement phase) with 45% of the fund’s investments in Australian franked share investments, has a $24,686 wastage of franking credits under Labor. Under current law, this fund would receive a $24,686 cash refund.

In contrast, the Dividend Offset SMSF (see below example) has the same share portfolio as the Dividend Wasted SMSF but is fully in accumulation mode. This fund only wastes $5,486 of franking credits. Under current law, this fund could also obtain a $24,686 cash refund if both members received a pension in retirement phase.

Example – SMSF converting to accumulation to reduce franking credit wastage

Dividend Wasted SMSF

Dad 1600000 ABP – ECPI
Mum 1600000 ABP – ECPI
Total funds 3200000
Sundry income 70400
Dividends 57600
Total income 128000
Tax thereon 0 ECPI
Franking offsets 24686 wasted

Dividend Offset SMSF

Dad 1600000 Accumulation mode
Mum 1600000 Accumulation mode
Total funds 3200000
Sundry income 70400
Dividends 57600
Total income 128000
Tax thereon 19200
Franking offsets 24686
Franking offsets 5486 wasted

Assumptions:

Australian franked share investments 45% 1440000
Yield (excl franking credits) 4% 128000
Company tax rate 30%
100% franking applies 30/70

Definitions:
Account-based pension (‘ABP’)
Exempt current pension income (‘ECPI’)

Naturally, if a refund is available to individuals or SMSFs prior to 30 June 2019 (but not afterwards), then a greater distribution prior to this proposal being introduced may be more attractive. Thus, there are many companies carefully examining what their optimal dividend distribution policy is prior to 30 June 2019.

There has also been considerable press coverage of Labor’s franking credit proposal since it was announced.

Taxation of trusts

Bill Shorten in his ‘A Fairer Tax System For All Australians’ Media Release dated 30 July 2017 announced that:

  • Labor will introduce a standard minimum 30% tax rate for discretionary trust distributions to mature beneficiaries (people over the age of 18).
  • Under Labor, individuals and businesses can continue to make use of trusts – and trusts will not be taxed liked companies.
  • Labor’s proposal will not apply to certain trusts such as:
    • special disability trusts;
    • testamentary trusts;
    • fixed trusts or fixed unit trusts;
    • charitable and philanthropic trusts;
    • farm trusts (query what these are); and
    • public unit trusts (listed and unlisted).

Broadly, under the current law:

  • Unit trusts do not pay any tax provided the trustee distributes its net income to unitholders prior to each 30 June.
  • Where an SMSF is a unitholder of a unit trust, the SMSF trustee pays a maximum of 15% tax on unit trust distributions.
  • An SMSF will typically only pay 10% tax on unit trust distributions of net capital gains (after allowing for the one third CGT discount) on the disposal of assets held for more than 12 months.
  • An SMSF in pension (retirement) phase does not pay any tax on unit trust distributions subject to each member’s transfer balance cap (‘TBC’) limit.

While the Labor proposal is aimed at levying a minimum 30% tax rate for discretionary trust distributions to adult beneficiaries, this proposal is not supposed to apply to fixed trusts. This is technically a very limited category of unit trust, with the vast majority of SMSFs investing in nonfixed trusts. It is important to consider what is meant by ‘fixed’ and what definition will apply.

Broadly, trusts are divided for tax purposes into fixed and non-fixed trusts for trust loss purposes under schedule 2F of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’). There are strict criteria on what is a fixed trust under this test. Most other trusts fall into the broad category of nonfixed trusts and these trusts are broadly treated as discretionary trusts for tax purposes.

In relation to superannuation funds investing in unit trusts, the ATO currently do not administer the law in this strict manner but without clarity on Labor’s proposal, it is expected that the test that will be adopted by Labor would be the test in schedule 2F of the ITAA 1936, or a similar test.

Labor could therefore, unless SMSFs investing in non-fixed unit trusts are carved out, tax SMSFs at a minimum of 30% on trust distributions received from many unit trusts. This would have a significant impact on the net after tax returns that these trusts derive after the new trust’s tax regime proposed by Labor is introduced.

To explain by way of a brief example:

Non-fixed unit trust distribution to SMSF

A unit trust distributes $10,000 of net income to an SMSF unitholder.

Under current law:

The SMSF will generally pay $1,500 in tax (assuming no net capital gain is included).

Under Labor’s proposal:

The SMSF will pay $3,000 tax (assuming no net capital gain is included).

However, if the unit trust qualifies as a fixed trust, the tax should be $1,500 (ie, as under current law).

It is noted that if the unit trust is non-fixed, the ATO currently administer the law in a more practical manner as outlined in TR 2006/7. Broadly, provided distributions by the unit trust are made proportionately based on unitholding proportions, rather than based on a discretion, the ATO will typically not apply a 45% tax rate under the non-arm’s length income rule in s 295-550 of the Income Tax Assessment Act 1997 (Cth).

Chris Bowen as quoted in the Financial Review on 11 August 2017 stated:

The claim that self-managed super funds could be hit by Labor’s trust proposal (‘SMSFs could be hit by Labor Trust proposal, August 9) is simply wrong…

…Labor’s policy to apply a minimum rate of tax on certain distributions targets income splitting and will not have any impact on fixed unit trusts, including non-geared unit trusts owned by superannuation funds. Technical legal classifications between fixed versus non-fixed trusts are longstanding issues readily resolved within the taxation system and completely distinct from Labor’s announcement to curb income splitting through discretionary trusts.

For guidance on how the ATO currently administers this area, refer to TR2006/7 and PCG 2016/16. Unless an appropriately drafted unit trust is obtained upfront, there can be considerable downstream hurdles with seeking to change a non-fixed trust to a fixed trust, including duty, land tax and other potential implications, especially if the ATO change its current administrative practice.

Broadly, for large public offer managed investment trusts, less stringent tests apply in determining whether such a trust qualifies as a fixed trust.

The Tax Institute’s Senior Tax Counsel, Bob Deutsch, has also noted that it is still uncertain how Labor’s policy on how it proposes to tax trust distributions will apply in practice. For example, will the general CGT discount apply, will any tax offset apply like a franking offset in respect of a dividend from a company, and what types of trusts will be considered fixed and non-fixed?

Moreover, Labor’s policy has created considerable uncertainty for investors and business people seeking to undertake investments or enter into new business structures given this broad brush proposal. A discretionary trust has been a popular ‘structure’ to accumulate assets and to operate a business in but in view of Labor’s proposal many may now want the greater certainty offered by a company given the future outlook for trusts is so uncertain.

Labor should therefore urgently provide clearer guidance on its trust’s tax proposal especially on what trusts will be carved out of its proposal.

Superannuation guarantee

Labor propose to increase the current superannuation guarantee charge rate from 9.5% to 12% as soon as practicable instead of the current gradual increase – which is already current law to 12% from 1 July 2025 – see table below. Should this be achieved, Labor then proposes to achieve its original objective of increasing the minimum rate to 15%.

Period Rate
1 July 2018 to 30 June 2019 9.5%
1 July 2019 to 30 June 2020 9.5%
1 July 2020 to 30 June 2021 9.5%
1 July 2021 to 30 June 2022 10.0%
1 July 2022 to 30 June 2023 10.5%
1 July 2023 to 30 June 2024 11.0%
1 July 2024 to 30 June 2025 11.5%
1 July 2025 to 30 June 2026 and onwards 12.0%

Labor will also pursue policies that seek to reduce the extent of unpaid superannuation in Australia, and seek to improve the ability of workers to recover their unpaid superannuation as an industrial right.

Non-concessional contributions cap

Labor will lower the annual non-concessional contributions (‘NCC’) cap from $100,000 to $75,000.

Naturally, this impacts the bring-forward cap which will reduce from $300,000 to $225,000 (ie, 3 x $75,000).

Naturally, NCCs are subject to the $1.6 million total superannuation balance limit.

Division 293 threshold

The threshold at which high income earners pay additional contributions tax will be lowered by Labor from $250,000 to $200,000.

Rolling 5 year catch-up concessional contribution cap

Members with a total superannuation balance of less than $500,000 are currently permitted to make additional concessional contributions (‘CCs’) where they have not reached their CCs cap in the prior five FYs. This can effectively equate to a rolling five year average CC cap of up to $125,000 that can be made in one FY where the member in year 5 has made no CCs in the prior four FYs commencing after 1 July 2018.

For example, if a member and their employer only contributes $10,000 of CCS in FY2019, the member will effectively have an unused CC carry forward cap of $40,000 in FY2020 (ie, $15,000 unused CC cap in FY2019 plus a $25,000 CC cap in FY2020).

Tax deduction for personal superannuation contributions

From 1 July 2017 the Turnbull Liberal National Government abolished the 10% rule which provides greater flexibility for individuals to claim personal superannuation contributions.

Labor propose to reintroduce this 10% rule to again restrict personal contributions.

By way of background, under current law individuals can make CCs up to the CC cap following the removal of the 10% test on 30 June 2017 regardless of their employment circumstances.

As you may recall, broadly, the 10% test prior to 30 June 2017 precluded individuals from claiming personal superannuation contributions where they earned more than 10% of their overall earnings from employee type activities.

For example, under current law, if an employer makes superannuation contributions of $10,000 on behalf of an employee, the employee may make an additional $15,000 of personal CCs to superannuation, and claim a deduction for this amount despite having 100% of their earnings from being an employee (subject to having sufficient taxable income to offset the deduction).

Note that the $1.6 million total superannuation balance test does not restrict CCs but does limit NCCs when the member’s total superannuation balance exceeds the $1.6 million threshold.

For more information on personal deductions, refer to:
http://www.dbalawyers.com.au/ato/budget-means-right-now-personal-deductible-contributions/

Low income superannuation tax offset

The ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ states that Labor will maintain a low income superannuation tax concession (currently called the low income superannuation tax offset, ie, ‘LISTO’) and will develop policies that will further support low income earners to save for their retirement. Further, Labor will review the interaction between the age pension and superannuation.

Low income earners may receive a tax offset of up to $500 per FY on their CCs to help them save for their retirement. Broadly, to be eligible for this payment, the member’s adjusted taxable income must not exceed $37,000 and 10% or more of the member’s total income must have been derived from business or employment.

Ban new LRBAs

Labor is committed to banning SMSFs entering into new limited recourse borrowing arrangements (‘LRBAs’). As part of Labor’s housing affordability policy, in April 2017, it announced that it would ‘restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry’. A media release by Bill Shorten at this time claimed this would ‘help cool an overheated housing market, partly driven by wealthy SMSFs’.

Pension exemption limit of $75,000 p.a.

Mr Chris Bowen in his ‘Positive Plan to Help Housing Affordability’ media release on 18 January 2019 stated that Labor has already acted to reduce the generosity of tax concessions for high income superannuants – to moderate concessions for Australians with superannuation balances in excess of $1.5 million. This item was published in SMSF Adviser’s news on 23 January 2019 which noted that Labor first announced this $1.5 million limit in April 2014.

If elected, it would appear that there is the prospect that Labor will further limit the tax exemption for earnings on superannuation balances in pension phase that exceed $1.5 million. While it has never been clear how this proposal would actually operate in practice, it is broadly understood that earnings on assets supporting income streams in retirement phase will be tax-free up to $75,000 p.a. for each member (note that a 5% p.a. yield on $1.5 million of pension assets equates to $75,000). However, earnings above $75,000 would be taxed at 15%.

It is also expected, based on a prior Labor announcement, that assets acquired prior to the start of this new regime will be grandfathered for capital gains tax (‘CGT’) purposes. Broadly, under this announcement it would appear that net capital gains on assets acquired after this new regime commences would be added to the income earned subject to the $75,000 exempt earnings threshold in respect of each financial year (‘FY’).

An example from a prior Labor Fairer Super Plan noted that a 63 year old retired lady called Susie with $1.8 million invested in super who received a $90,000 pension (reflecting a 5% yield), would pay 15% tax on $15,000 of her pension amount above the first $75,000 tax free amount, excluding applicable levies.

While there has been recent media coverage of this proposal, I am not convinced this proposal will be introduced as initially outlined. Given the $1.6 million transfer balance cap (‘TBC’) is now firmly implemented with all its associated machinery and appears to be largely working as planned, I suspect that Labor may not want to introduce a whole new system that may prove very difficult in practice to implement and operate. If any further limit on the pension exemption is introduced, I suspect it will be to reduce the $1.6 million TBC amount or to freeze any future indexation of the general $1.6 million TBC threshold. Recall that the $1.6 million TBC amount will be indexed in $100,000 increments in line with CPI.

Limit negative gearing

Labor stated in its ‘Positive plan to help housing affordability’ that it will limit negative gearing to new housing from a yet-to-be-determined date after the next election (which is expected to be 1 July 2019). All investments made before this date are not be affected by this change and will be fully grandfathered.

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

From a yet-to-be-determined date after the next election (which is expected to be 1 July 2019) losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.

Bob Deutsch, CTA and Senior Tax Counsel of The Tax Institute, confirmed in The Tax Institute’s blog ‘Labor’s negative gearing restrictions – how might they work?’ (23 November 2018) that the Labor Party’s proposed changes to negative gearing would apply across the board to all investments. Previously it was thought that Labor’s negative gearing restrictions might only apply to property investment.

Bob Deutsch’s article states:

So, to the proposals themselves – after some interrogation of the Labor party, I have been able to confirm that Labor’s restrictions on negative gearing will apply (after a yet-to-be announced commencement date) to all investments and it will apply on a global basis to every taxpayer. In other words, it will apply to property and shares alike (and any other relevant asset classes) and it will apply by looking at a taxpayer and assessing their overall investment income as measured against their overall investment interest expenses.

Both these points are critical to an understanding of what is proposed, and while Labor has previously hinted at both outcomes, I can now confirm that the policy design will be precisely along these lines.

After examining three different practical examples, Bob Deutsch’s article states:

…, the key to dealing with the proposed fallout from Labor’s restrictions on negative gearing – management of portfolios in order to have regard to the restrictions on negative gearing, will become crucial.

In addition, purchasing properties in the name of the family member best able to manage any negative gearing restrictions will also be vital.

Naturally, this proposal may encourage taxpayers to enter into negative gearing strategies before Labor’s negative gearing restrictions are introduced.

CGT discount

Labor proposes to reduce the 50% general CGT discount available to individuals on asset disposals where the asset has been held for more than 12 months under div 115 of the Income Tax Assessment Act 1997 (Cth) to 25% from 1 July 2019.

Labor has stated in its ‘Positive plan to help housing affordability’ that:

  • All investments made before this date will not be affected by this change and will be fully grandfathered.
  • This policy change will also not affect investments made by superannuation funds.
  • The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.
  • Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.

Bob Deutsch’s article states:

The practical effects of these housing affordability policies are not yet clear. For example, investors might sell properties in the basis that, due to these incoming laws, property investment may be less attractive in the future leading to lower prices. Conversely, investors may decide to hold on to grandfathered assets to enjoy the expected capital gains on that asset rather than sell, which could lead to less properties for sale.

As you would be aware, superannuation funds are only entitled to a one third CGT discount on assets held for more than 12 months (broadly to the extent the pension exemption does not apply). Labor has noted that the CGT discount applicable to superannuation funds would not be reduced.

Deductions for tax advice

Labor propose to limit deductions for tax advice to $3,000 a year. Individuals, SMSFs, trusts and partnerships are to be subject to the cap while companies would not be.

We query if this limit will apply on a per entity basis or whether it might apply on an aggregated ‘associated’ entities basis. It can often be difficult, for example, to determine where advice for an individual ends and advice for their ‘associated’ entities begins.

Paul Drum, CPA Australia, head of policy, believes:

… this proposal needs a lot more work as many Australians go through significant one-off life events such as a divorce, inheritance or retirement, when they require specialist advice that could cost well over $3,000. Simply carrying out proper planning for large life events such as commencing a business or working overseas could easily exceed this cap. This sort of planning is necessary to ensure tax laws are properly followed and taxpayers don’t fall foul of the ATO.

In an article available via the Financial Review, the Institute of Public Accountants president Andrew Conway, is said to be ‘vowing to mobilise the large accounting workforce to oppose the measure in the lead up to the next election’ (‘Accountants vow to campaign against $3000 cap on managing tax affairs’, 13 January 2019).

It is yet to be determined if this limit will include litigation costs, ATO audit costs and ATO interest payment costs. There have also been calls for a small business concession to be applied.

With so many other proposed changes to tax laws likely to require advice, many would readily exceed this proposed cap simply trying to understand these changes and manage their affairs accordingly. In Australia, there is one certainty in superannuation and tax law –– constant change.

Invariably the devil is also in the detail. We understand from a number of leading tax academics that Australia has a reputation for being one of the most complex tax systems in the world and probably ranks second to the USA. The constant ongoing complex changes to superannuation and tax rules will keep Australia as a leader in complexity.

In particular, responding to a relatively straight forward ATO review or audit can easily exceed a $3,000 threshold which is becoming increasingly likely for many.

Further policy proposals

Labor also has planned policy releases leading up to the election which are not yet publically available. Namely, as outlined in ALP’s 2018 National Platform, ‘A Fair Go for Australia,’ Labor proposes to:

  • Ensure that the superannuation guarantee is legislated to become part of the national minimum employment standard (NES) so that it is enforceable as an industrial entitlement. Broadly, this will, among other things, give employees access to the Fair Work Commission and pursue other industrial remedies for unpaid contributions.
  • Maintain a low income superannuation tax concession (currently called the LISTO) and will further support low income earners to save for their retirement.
  • Review the interaction between the age pension and superannuation.
  • Implement policies that work towards closing the significant gender gap in superannuation savings, including eliminating the $450 minimum threshold for compulsory employer contributions.
  • Initiate within the first 6 months of taking office an expert review to examine the adequacy of mechanisms to strengthen the superannuation balances of women, including options for government contributions to account balances where the account balance is very low.
  • Legislate to provide superannuation contributions on the Federal Government paid parental leave scheme.

General observations

A number of Labor policies are proposed to commence by 1 July 2019 or when an announcement is made after the election. However, in view of the election being likely to take place in May this year, it may prove difficult for Labor to introduce changes with a 1 July 2019 commencement date.

Naturally, until a proposal or change becomes law, it should not be relied on as law. History has also shown that there is considerable uncertainty with relying on legislation by media release. For example, one of the worst policy blunders that comes to mind here was the lifetime non-concessional contributions (‘NCC’) cap of $500,000 that was proposed to apply from the 3 May 2016 Federal Budget by the Turnbull Liberal National Government with effect from the announcement of the 2016-17 Federal Budget on 3 May 2016. This proposal was scrapped and a $1.6 million total superannuation balance cap was introduced in September 2016 following substantial adverse feedback.

CONCLUSIONS

If Labor are elected, there will be considerable superannuation and tax changes that are likely to have wide ranging impact.

Like the last round of major changes to the superannuation system in mid-2017, these proposed changes may take years to finalise and properly implement.

It was only a few years ago that both major political parties promised stability within the superannuation system, as the $2.7 billion plus of superannuation investments are a major part of Australia’s financial system.

Constant changes to the superannuation rules undermines investor confidence.

DBA Lawyers is continually reviewing developments as they unfold and refining its services to keep on top of ongoing changes. We also offer an extensive range of education (aka CPD) training to keep you ahead of the changes.

Related articles

For further reading, please see the below articles:

* * * * * *

Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit http://www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit http://www.dbalawyers.com.au.

DBA LAWYERS

15 February 2019

The 2016-2017 adverse superannuation changes; a Grattan Institute/Turnbull Government recipe for loss of trust and increased uncertainty?

Address by Jack Hammond QC, founder of Save Our Super.

Tuesday, 18 September 2018 at La Trobe University Law School, City Campus, 360 Collins Street, Melbourne, lunch-time seminar, “Australian Superannuation: Fixing the Problems”.

INTRODUCTION and DECLARATION OF INTEREST

In 2016-17, the Turnbull Government made a number of superannuation policy and legislative changes which adversely affected many Australians. Those changes were made without appropriate ‘grandfathering’ provisions even though they amounted to ‘effective retrospectivity’ (a term coined in February 2016 by the then Treasurer, Scott Morrison). ‘Grandfathering’ provisions continue to apply an old rule to certain existing situations, while a new rule will apply to all future cases.

I am a retired barrister and am adversely affected by those 2016-17 superannuation changes. That, in turn, has led me to form the superannuation community action group, Save Our Super.

The Turnbull Government, assisted and encouraged by the Grattan Institute in Melbourne has, without notice and at a single stroke, changed the superannuation rules and the rules for making those rules. They have turned superannuation from a long-term, multi-decades, retirement income system into, at best, an annual federal budget-to-budget saving proposition. That is a contradiction in terms . It is unsustainable.

Further, it is a recipe for a loss of trust and increased uncertainty for all those already in the superannuation system and those yet to start.

Save Our Super has three proposals which we believe will redress the 2016-17 superannuation policy and legislative changes and prevent a recurrence.

But first, how did we get here and in particular, without appropriate ‘grandfathering ‘ provisions? Those type of provisions have accompanied all significant adverse superannuation changes over the past 40 years.1

BACKGROUND CHRONOLOGY

29 November 2012 Lucy Turnbull appointed a director of the Grattan Institute, Melbourne.2
May to June  2015 Scott Morrison, whilst Minister for Social Services in Abbott Government, makes 12 ‘tax-free superannuation’ promises.3
2014 to 2015 Malcolm and Lucy Turnbull donate funds to Grattan Institute.4
15 September 2015 Malcolm Turnbull replaced Abbott as Prime Minister. Scott Morrison becomes Treasurer.5
24 November 2015 Grattan Institute publishes Report ”Super Tax Targeting” by Grattan Institute CEO John Daley and others. Dismisses need for ‘grandfathering’ provisions6 and observes ‘…that taxing earnings for those in the benefits stage may raise concerns about the government retrospectively changing the rules’. 7

No mention of the possible consequential of loss of trust and uncertainty that retrospective changes may bring.

Note that the Grattan Institute material shows, on its front page, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide.8

We, and other self-funded superannuants, believe that the Grattan Institute’s prominent use of that image of those bronze pigs was not merely a juvenile attempt at humour.

It was a none-to-subtle insulting implication that Australians whom had faithfully conformed with successive governments’ superannuation rules and had substantial superannuation savings were, nonetheless, greedy pigs with their ‘snouts in the trough’.

See also 9 November 2016 entry below.

2015-2016 Malcolm and Lucy Turnbull donate further funds to Grattan Institute.9
18 February 2016 Scott Morrison, as Treasurer, gave an address to the Self Managed Superannuation Funds 2016 National Conference in Adelaide.

Draws attention to ‘effective retrospectivity’ and its ‘great risk’ in relation to super changes.

“Our opponents stated policy is to tax superannuation earnings in the retirement phase. I just want to make a reference less about our opponents on this I suppose but more to highlight the Government’s own  view, about our great sensitivity to changing arrangements in the retirement phase.

One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment.

That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way.

It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.”10

3 May 2016 Scott Morrison, as Treasurer, announces in his Budget 2016-17 Speech to Parliament a number of adverse ‘changes to better target superannuation tax concessions’ .

No ‘grandfathering’ provisions announced.11

See also, Budget Measures, Budget Paper No 2, 2016-17, 3 May 2016, Part 1, Revenue Measures, pp 24-30.12

5 September 2016 John Daley, CEO Grattan Institute, said:
“Winding back superannuation tax breaks will be an acid test of our political system. If we cannot get reform in this situation, then there is little hope for either budget repair or economic reform” (AFR 5/9/16)13
9 November 2016 To give effect to the Budget 2016-17 superannuation changes, Scott Morrison presented the Turnbull Government’s package of 3 superannuation Bills to Parliament.

To publicly explain and justify those superannuation changes to Parliament, Scott Morrison and Kelly O’Dwyer circulated and relied in Parliament upon a 364 page “Explanatory Memorandum”.

The Explanatory Memorandum states on its front page “Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP.

In turn, the Explanatory Memorandum expressly refers to, and provides links to, the Grattan Institute’s 24 November 2015 Media Release and Report (see 24 November 2015 entry, above).

As noted above, that Grattan Institute material shows, on its cover, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide.14

Bronze pigs in Rundle Street Mall, Adelaide 

23 November 2016 The Turnbull Government, with the support of Labor, rushed through Parliament two of its three superannuation Bills.
29 November 2016 Those two Bills were assented to on 29 November 2016 and are now law:

Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016);15

Treasury Laws  Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016)16

The third superannuation Bill, the Superannuation (Objective) Bill, remains stalled in the Senate.17

1 December 2016 Lucy Turnbull retired as a director of the Grattan Institute.18
24  August 2018 Malcolm Turnbull resigns as Prime Minister.19
Scott Morrison becomes Prime Minister.20

SAVE OUR SUPER’S THREE PROPOSALS FOR THE FUTURE
Save Our Super has three proposals which we believe could redress the 2016-17 superannuation policy and legislative changes and prevent a recurrence.

First,  Scott Morrison, in his new capacity as Prime Minister, should request the Treasurer, Josh Frydenberg and/or through him, the Assistant Treasurer, Stuart Robert, to revisit the Turnbull Government’s 2016-17 superannuation changes.

A discussion paper and advice from Treasury should be requested. It should include the effect of the Turnbull Government’s 2016-17 superannuation changes on superannuation fund taxes in 2017-18 and over the forward estimates.

To restore trust and reduce uncertainty in the superannuation system, the Morrison Government should introduce into Parliament legislation which will retrospectively provide appropriate ‘grandfathering’ provisions in relation to the Turnbull Government’s 2016-17 adverse superannuation changes.

Those ‘grandfathering’ provisions to be available to those significantly adversely affected and whom wish to claim that relief. 

Secondly, Save Our Super proposes to create a Superannuation and Retirement Income  Policy Institute, independent of government , funded, at least initially, by private donations/subscriptions.

Its role will be to advocate on behalf of those millions of superannuants and retirees whose collective voice needs to be heard.

Thirdly, Save Our Super will advocate for an amendment to the Australian Constitution, to have a similar effect in relation to superannuation and other retirement income, as does section 51 (xxxi) has in relation to the compulsory acquisition of property.

That section empowers the federal Parliament to make laws with respect to the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws (emphasis added).

Thus Parliament’s power to make laws in relation to superannuation and other retirement income should not be affected. However, any significant adverse change to existing situations will need to be on just terms, for example, by providing appropriate ‘grandfathering’ provisions as part of that federal law.

1. [http://saveoursuper.org.au/super-changes-grandfathering-rules-must-considered]
2. [https://grattan.edu.au/wp-content/uploads/2014/03/Grattan_Institute_Annual_Financial_Report_2013.pdf (pp 2-3)]
3. [http://saveoursuper.org.au/scott-morrison-12-superannuation-tax-free-promises]
4. [https://grattan.edu.au/wp-content/uploads/2015/11/Grattan-Institute-Annual-Report-on-Operations-30-June-2015.pdf (p 19)]
5. [https://en.wikipedia.org/wiki/First_Turnbull_Ministry]
6. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (p 7)]
7. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (pp 68-9, para 6.5)]
8. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (front page)]
9. [https://grattan.edu.au/wp-content/uploads/2016/11/Grattan-Institute-Annual-Report-on-Operations-30-June-2016.pdf (p 24)]
10. [Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide]
11. [https://www.budget.gov.au/2016-17/content/speech/html/speech.htm]
12. [https://budget.gov.au/2016-17/content/bp2/download/BP2_consolidated.pdf]
13. [https://grattan.edu.au/wp-content/uploads/2017/11/Grattan-Institute-Annual-Report-2017-Web.pdf (p 6)]
14. [The Explanatory Memorandum refers to the Grattan Institute’s 24 November 2015 report “Super tax targeting” by John Daley and Brendan Coates: (see page 275, paragraph 14.12, footnote 2). Click on the link on footnote 2, 2 Grattan Institute, media release, ‘For fairness and a stronger Budget, it is time to target super tax breaks’, 24 November 2015,  http://grattan.edu.au/for-fairness-and-a-stronger-budget-it-is-time-to-target-super-tax-breaks/”.
Click on the link at foot of that page Read the report“. That link will take you to the Grattan Institute report “Super tax targeting “ dated 24 November 2015 by John Daley and others. The report’s front page shows the image of those bronze pigs in the Rundle Street Mall, Adelaide. Note: The Grattan Institute’s website has been updated since the publication of that document. However, the article itself and the image of the 3 pigs remain.]

15. [Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016)]
16. [Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016)]
17. [Superannuation (Objective) Bill]
18. [https://grattan.edu.au/wp-content/uploads/2017/11/Grattan-Institute-Annual-Financial-Report-2017.pdf (p 3)]
19. [https://en.wikipedia.org/wiki/Malcolm_Turnbull]
20. [https://en.wikipedia.org/wiki/Scott_Morrison]

Response to Treasury Discussion Paper: Three-yearly audit cycle for some self-managed superannuation funds

Copyright © Jim Bonham 2018

1 Summary

As an SMSF trustee, I am concerned about the proposal to introduce three-year audits for some SMSFs, primarily for the following reasons:

  • None of the three benefits claimed for the proposal (reduction of compliance burden, reduction in audit cost, and rewarding the timely submission of SARs) withstands examination.
  • Audit management will become more complex for the trustee, increasing the risk of inadvertent rule breaches.

I would not opt for a three year audit of my SMSF if this proposal becomes law.

2 Introduction

My wife and I have an SMSF under a corporate trustee structure. The fund was started in 2003 and has been totally in pension mode for several years. The SMSF and some investments outside superannuation will be our only sources of income for the rest of our lives, and this does tend to focus the mind.

Each year, we provide the fund’s financial and share-trading data to our accountant who prepares the tax return etc, sends us a draft for checking and then forwards everything to the auditor. Following satisfactory audit (we have never had a problem), the SAR is then forwarded to the ATO without further intervention by us.

Given the complexity and instability of superannuation rules, we feel the multiple checkpoints in this process provide good protection against unintentional infringements which could see us in trouble with the ATO – a potentially costly and stressful outcome we are very keen to avoid. They can also help protect us against unwittingly increasing our investment risks.

The proposal to introduce an optional three year audit cycle for some SMSFs (which would include our fund) is therefore of considerable concern to us. We see heightened risk with no material compensatory benefit. Given the choice, we would not opt for three-yearly audits.

Below I provide more detailed comments in response to the specific Consultation Questions raised in the Discussion Paper

On 26 July, I had the opportunity to participate in a Treasury round-table discussion about this proposal, which I appreciated very much. I was there to present a trustee’s view point, not that of any organisation, and I made some of the following comments at that meeting.

3 Consultation questions

3.1 How are audit costs and fees expected to change for SMSF trustees that move to three-year cycles?

This is a critical question, there being no point going ahead with the proposal if costs are to rise, so I would like to discuss it in detail with reference to each of the three benefits claimed and the two concerns mentioned on Page 3 of the Discussion Paper.

3.1.1 Benefit 1: “A reduction in the compliance burden …”

I cannot see the basis for this claim, given the following comments from other parts of the discussion paper:

  • “It is proposed that eligibility … will be based on self-assessment” (Page 4)
  • “If the ATO becomes aware that a SMSF trustee has incorrectly assessed their eligibility for a three-yearly audit cycle, … the ATO will notify the trustee that an audit is required and consider further action if necessary” (Page 4)
  • “ .. a number of events can represent a material change to the situation of the fund and may increase the risk of a breach …” (Page 5)
  • “If a key event falls in a year when an SMSF is not otherwise to be audited, the SMSF will be required to obtain an audit … required to cover all financial years since the SMSF’s last audit” (Page 5)
  • Eight “possible key events” are listed on Page 5, with a request for suggestions.

It is crystal clear that moving some SMSFs to a three-year audit cycle will create a more complex compliance landscape.

This must increase the risk of inadvertent breaches. Trustees who opt for three-yearly audits will have to become aware of a greater number of rules, and be vigilant that they do not inadvertently fail to report a key event.

Both these aspects of three-year audits increase the compliance burden, rather than decreasing it.

In addition, the appalling instability of superannuation legislation suggests there is a very high likelihood that, if three-year audits are introduced, the list of key events will change and be extended over time – further exacerbating compliance worry and risk.

It is unlikely that the trustee or accountant will be spared any administrative effort by moving to a three-year audit cycle, because exactly the same set of transactions will eventually have to be presented for audit as with annual audits.

The second part of the first claimed benefit “… while maintaining appropriate visibility of errors in financial statements and regulatory breaches” just does not make sense. How can visibility be maintained if a transaction is not audited for two or three years?

3.1.2 Benefit 2: “A potential reduction in administrative costs due to less frequent audits…”

It is very hard to see where significant savings could come from:

  • Auditing 3 years’ data at once requires examining exactly the same set of transactions as for three one-year audits. The fact that the audit frequency has changed just means that SMSFs will receive one bill instead of three, but the total cost over three years must be at least as high.
  • Audit fees are themselves not a major cost for most SMSFs. Even if some cost saving were to be achieved, its magnitude could only be trivial.
  • There are some obvious ways in which audit costs must increase under this proposal:
    • Both accountants and auditors will find it more difficult to manage a mixture of clients on 1-year, 2-year and 3-year audits, rather than having everyone on a 1-year cycle. This must push costs up for all clients, not just those who opt for three-year audits.
    • Resolving errors, or even simple ambiguities, in data which is 2 or 3 years old will be more difficult, and therefore more costly, than when all data is no more than a year old and issues are still top-of-mind.

3.1.3 Benefit 3: “An incentive for SMSF trustees to submit SARs in a timelier manner”

The only benefit offered is the unsubstantiated hope that some cost savings will result, but even if that turns out to be true the savings will be small.

Such a nebulous offer is most unlikely to influence the trustee who has already indicated a disdain for fulfilling obligations on time and an indifference to potential penalties.

Late submission is really an administrative issue for the ATO, and it is something the ATO must face with every function it supervises. Complicating the audit cycle for SMSFs is not the way to deal with it.

3.1.4 Concern 1: “… increased non-compliance …”

Certainly the risk of inadvertent non-compliance is increased as discussed above.

The risk of deliberate non-compliance may also increase, because a more complex operating environment creates opportunities.

3.1.5 Concern 2: “… alter the workflow of the SMSF audit industry … lead[ing] to a reduction in the number of businesses specialising in SMSF audits”

That certainly seems likely, and if it occurs the reduced competitive forces will probably push audit costs up further across the market.

3.1.6 Mitigation: “… concerns will be mitigated by appropriate eligibility criteria and, if necessary, transitional arrangements”

I doubt that either eligibility criteria or transitional arrangements will address concerns about cost increases and complexity.

3.2 Do you consider an alternative definition of ‘clear audit reports’ should be adopted? Why?

Clear audits and timeliness are proposed as the criteria by which SMSFs would qualify for a three-year audit cycle.

There is an implied assumption here that SMSFs with a history of clear audit reports and timely submissions are more likely than not to continue that behaviour. Intuitively that seems likely, until one considers the very high number (40%) of SMSFs that the ATO says reported late in a three year period. The assumption ought to be tested, and I assume that ATO has the data to do so.

If one were approaching this problem for the first time, without preconceptions, one might expect that the simplicity of an SMSF’s structure and its transaction history would be a far better predictor of whether or not it routinely submits on time and receives clear audits.

However, simple SMSFs are cheaper to audit, reducing the potential (if any) for cost savings.

 

3.3 What is the most appropriate definition of timely submission of a SAR? Why?

I think it is consistent with the spirit of this proposal to require “timely submission” to mean three consecutive years without a late submission.

3.4 What should be considered a key event for a SMSF that would trigger the need for an audit report in that year? Which events present the most significant compliance risk?

I don’t have a view on what should constitute key events, as I think that requires a professional opinion, but the following principles are critical from a trustee’s point of view:

  • The list of key events should be confined to items which, if not audited promptly, may cause serious problems later.
  • Procedures should be put in place to ensure that the list of key events is kept as stable as possible, and is not allowed to grow unnecessarily.
  • If trustees are to be responsible for self-assessment of their eligibility for 3-year audits, then it is essential that
    • key events do not include events which are outside the trustee’s control
    • key events do not include events of which the trustee may be unaware
    • key events are easily understood by trustees
    • it is easy for trustees to keep up to date with the list of key events

3.5 Should arrangements be put in place to manage transition to three-yearly audits for some SMSFs? If so, what metric should be used to stagger the introduction to the measure?

Although I do not support the proposal, if it does become law then the method of introduction of the process should be a business decision for accountants and auditors.

Trying to impose some system (like odd and even number plates in a fuel shortage?) seems likely to make a complex issue even more so.

3.6 Are there any other issues that should be considered in policy development?

The superannuation regulatory environment is excessively complicated and has become severely unstable: grandfathering has been virtually abandoned and frequent changes have become the order of the day, in an area that is supposed to guide investment and income provision on a generational timescale. Such instability is not in the national interest.

In this environment the only way to avoid serious unintended consequences of proposed changes is to engage in a thorough process of socialization before they are introduced. To that end, discussion papers such as the present one are very valuable, and I appreciate having had the opportunity to contribute.

The rider I would add to that, though, is that it would have been far better – from both a political and a process point of view – to have had this public discussion before the Budget announcement, rather than after it.

4 About the author

Jim Bonham is a retired scientist and manager. He is deeply concerned about the way retirement funding has developed in recent years, particularly with respect to frequent changes in superannuation legislation made with inadequate consultation and no respect for grandfathering.

An open letter to Kelly O’Dwyer, MP – the Member for Hypocrisy

22 April 2018

Dear Kelly,

It is with sorrow rather than anger that John McMurrick and I write this open letter to you.

On 4 April 2018 you circulated to “higginsliberals” an email regarding superannuation. It was headed “The choice could not be clearer”.

That email included a link to a speech about superannuation, which you said you gave on that day to the Australian Financial Review’s Banking and Wealth Summit (see attached copy [at bottom of this page]; addressee redacted).

When John and I read your email we were gobsmacked! What you now say sits in marked contrast to your past acts.

In our opinion, for the reasons that follow and for so long as you remain in Parliament, you no longer deserve to be known as the Member for Higgins; you should be known as the Member for Hypocrisy.

Your email and our response

Your email begins: “Fundamentally, the Liberal Party stands for those Australians who work hard to build a better future for themselves and their families. Our superannuation system must reward those who save for their future….”.

Later you say: “ [In my speech] I spoke about the Turnbull Government’s plans to make sure our superannuation system… delivers certainty and stability so Australians can plan for their retirement in confidence”.

However, as you are well aware, in May 2016, by the Turnbull/Morrison Budget, many Australians who had worked hard to build a better future for themselves and their families and who had saved in accordance with successive governments’ superannuation rules (including those made by Coalition governments) were not to be rewarded but were to be punished by the Liberal Party.

You were instrumental in effecting those changes to the superannuation system.

Those changes delivered uncertainty and instability.

Australians can no longer plan for their retirement in confidence.

You have turned superannuation from a long-term, multi-decades, retirement income system into, at best, an annual Federal Budget-to-Budget saving proposition.

That is a contradiction in terms.

It is unsustainable.

Background to Turnbull/Morrison Budget 2016

In February 2016, Scott Morrison rightly cautioned against what he called the ‘effective retrospectivity’ of raising taxes or restrictions on the pension phase of superannuation after attracting and trapping savings in superannuation for some 40 years under the earlier legislated tax rules.

Then, in May 2016, Scott Morrison and you did just that.

Both of you failed to include in the Turnbull/Morrison Budget 2016 appropriate ‘grandfathering’ provisions which have accompanied every major adverse change in pensions and superannuation tax for the last 40 years.

Scott Morrison and you, with the support of the Coalition, destroyed many Australians’ confidence and trust in the superannuation system.

But that’s not all.

By what follows, Scott Morrison and you gratuitously insulted every Australian that had faithfully conformed with the previous superannuation rules and had, in the process, lawfully saved a substantial amount for their retirement.

Explanatory Memorandum for 3 Superannuation Bills, November 2016

On 9 November 2016, to give effect to those superannuation changes, Scott Morrison presented the Coalition’s superannuation package to Parliament. The changes wrought by that package came into practical operation on 1 July 2017.

To publicly explain and justify those superannuation changes to Parliament, Scott Morrison and you circulated and relied in Parliament upon a 364 page “Explanatory Memorandum”.

The Explanatory Memorandum states on its cover page “Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP”.

In turn, the Explanatory Memorandum expressly refers to, and provides links to, a Grattan Institute media release and report (see attached extract [at bottom of this page]).

That Grattan Institute material shows, on its cover, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide [1].

Bronze pigs in Rundle Street Mall, Adelaide

We, and other self-funded superannuants, believe that The Grattan Institute’s prominent use of that image of those bronze pigs was not merely a juvenile attempt at humour.

It was a none-to-subtle insulting implication that Australians that had faithfully conformed with successive governments’ superannuation rules and had substantial superannuation savings were, nonetheless,  greedy pigs with their ‘snouts in the trough’.

Yet there it is in Scott Morrison’s and your Explanatory Memorandum to Parliament which you used to justify and explain your superannuation changes.

Your comment in your email regarding Labor’s proposed changes and our response

In your email you say: “In contrast, Labor plans to make changes that will make it harder for people to be self-reliant in their retirement,….”(emphasis in original).

In our opinion, it is Scott Morrison and you, supported by the Coalition who have made it harder for people to be self-reliant in their retirement, principally by the adverse superannuation changes announced in the Turnbull/Morrison Budget 2016 and its subsequent legislation.

Labor gratefully supported that legislation in which you failed to include appropriate ‘grandfathering’ provisions.

Labor could not believe its luck!

True it is, that Labor plans to make it even harder, than the Coalition has, for people to be self-reliant in their retirement. But surely it is hypocritical to draw attention to Labor’s proposed adverse superannuation changes whilst studiously ignoring those in which you played a major part.

The choice could not be clearer

Finally, the heading of your email, namely “The choice could not be clearer”, may well prove to be true.  But, because of your past actions and that of Scott Morrison and the Coalition, not in a way that you and many of the recipient “higginsliberals” would prefer to see happen.

Sincerely,

Jack Hammond and John McMurrick

On behalf of themselves and Save Our Super (saveoursuper.org.au)
_______________________________________

Attachments to the open letter:
The choice could not be clearer

Explanatory memo superannuation bills 2016 extract – p 275

Footnote to the open letter:
[1] The Explanatory Memorandum refers to The Grattan Institute’s 24 November 2015 report, “Super tax targeting” by John Daley and Brendan Coates: see page 275, paragraph 14.12, footnote 2.
Click on the link on footnote 2, “2 Grattan Institute, media release, ‘For fairness and a stronger Budget, it is time to target super tax breaks’, 24 November 2015,  http://grattan.edu.au/for-fairness-and-a-stronger-budget-it-is-time-to-target-super-tax-breaks/.”
Click on the link at foot of that page “Read the report“.
That link will take you to The Grattan Institute report “Super tax targeting “ dated 24 November 2015 by John Daley and Brendan Coates.
The report’s cover page shows the image of those bronze pigs in the Rundle Street Mall, Adelaide.
Note: The Grattan Institute’s website has been updated since the publication of that document. However, the article itself and the image of the 3 pigs remain.

Load more