17 November 2016
SUBMISSION ON SUPERANNUATION BILLS TO SENATE ECONOMICS LEGISLATION COMMITTEE
Terrence O’Brien and Jack Hammond QC,
on behalf of themselves and Save Our Super
|According to Treasurer Scott Morrison:
“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.”
Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016 (emphasis added).
Declaration of interests:
Terrence O’Brien is a retired public servant receiving a super pension from a defined benefit, ‘untaxed’ fund.
Jack Hammond QC is in the process of retiring.
Both would be adversely affected by some of the Government’ s proposed measures.
- Key points………………………………………………………………………………………………………………………….. 3
- Introduction and background…………………………………………………………………………………………. 7
- Inadequate consultation………………………………………………………………………………………………….. 8
- Anti-thrift rhetoric……………………………………………………………………………………………………………. 9
- ‘Effective retrospectivity’ is pervasive throughout the measures……………………………….. 9
- Super tax increases without grandfathering change the moral landscape – and the revenue gain 13
- More super saving, or less? Fewer age pensioners, or more?………………………………….. 14
- The transfer balance cap……………………………………………………………………………………………….. 15
- Restricting concessional and non-concessional contributions…………………………………. 16
- Utility of Government’s stated objectives………………………………………………………………… 17
- The complexity of the Transfer Balance Caps…………………………………………………………. 19
- Compliance costs and the Explanatory Memorandum’s Regulation Impact Statement 20
- Net benefits, or gross confusion?……………………………………………………………………………… 22
- Faulty arguments for reducing super incentives……………………………………………………..
14.1 Cost: measures not fit for purpose………………………………………………………………..22
14.2 ‘Fairness’: more dimensions than vertical redistribution alone…………………… 23
14.3 Sustainability: an empty concept for super concessions……………………………….. 26
- Complexity and risk for the taxpayer: the case for safeguards……………………………… 27
- Innovative income streams illustrate costs of ‘effective retrospectivity’……………… 28
- Conclusions…………………………………………………………………………………………………………………. 28
1 July 2017 will be the tenth anniversary of the most extensive, best-researched, most carefully costed and extensively prepared super tax reform in living memory, the Costello simplification of 2007. It will also be the implementation date for the Morrison reversal of the key strategic direction of the Costello super simplification, by measures so baroque they will make the super landscape in 2017 arguably more complicated than it was 20 years ago.[i]
The proposed tax increases and contribution restrictions are ‘effectively retrospective’ changes to the rules that penalize some already retired, and many late-career savers who aimed through ‘catch-up’ concessional or non-concessional contributions to super to become self-funded retirees.
Because they will be implemented without grandfathering, the measures will destroy confidence in super as a career-long, 40 year commitment to a highly restricted saving instrument.
By rejecting grandfathering, the Government approach inverts the practice of the last forty years since the Asprey Committee first codified how any tax increases that damaged retirement incomes should be fairly implemented. The consequent destruction of trust in super rule-making by the new measures and their accompanying anti-thrift rhetoric will poison voluntary contributions to super, even for the great majority of savers not immediately affected.
The tax increases take effect when global growth prospects are poor and falling, and many interest rates are near-zero or negative in real terms. Self-funded retirees now face an era of ‘return-free risk’, so the increase in complexity, compliance cost and taxes is particularly badly timed.
The Morrison measures are absurdly complicated, especially their central concept of a $1.6 million General Transfer Balance Cap, with its extravagant ornamentation of Personal Transfer Balance Caps, Transfer Balance Accounts, Total Superannuation Balance Rules, First Year Cap Spaces, Crystallised Reduction Amounts, Excess Transfer Balance Earnings and Excess Transfer Balance Taxes.
Consider one rough ‘complexity indicator’. In 2006, Treasurer Costello took an excessively complex super law which taxed retirement income in up to 8 different parts in 7 different ways, and explained how to transform it into today’s system in just 144 paragraphs in his measure’s Explanatory Memorandum. In 2016, the corresponding part of Treasurer Morrison’s re-complication of the taxation of retirement income — chapter 3 of the Explanatory Memorandum (EM) outlining the transfer balance cap — takes 379 paragraphs, about 160% longer.
The Senate Economics Legislation Committee should carefully assess the workability of these measures, the feasibility of implementing them by 1 July 2017 and their likely impact, especially in the light of the recent release of 125 public submissions to the Treasury on the three tranches of exposure drafts of the Bills. Submissions that we have had time to digest so far from technical experts seem to us to identify problems with the proposals that are at least very costly and time-consuming to address, if not insuperable.
It is more important for the Committee to assimilate those inputs (including our three earlier submissions to Treasury) than to invite additional submissions with four working days’ notice, for the Committee’s closed-session consideration (or not) over a further 4 working days. That is not a consultation with electors; it is a bad joke at the expense of super savers who have entrusted their life savings to a legislative framework whose alteration should be the least rushed and best considered of all legislative changes.
The Government states as reasons for its measures the allegedly high cost of existing concessions, unfairness in their distribution, and ‘unsustainability’ over time. All three claims are strongly disputed, and should be reexamined open-mindedly.
Super saving will be significantly discouraged in net terms by the package. Restrictions on those sufficiently affluent to be able to put savings aside untouched for 40 years will reduce growth in super by more than encouragement to lower income earners who struggle to save much will increase it. Lower income savers will properly remain reticent to lock their modest saving buffers against adversity away untouchably for 40 years, over which time taxation on ultimate benefits can change unpredictably and (on the precedent of the current measures) without grandfathering.
Contrary to repeated Government claims that only 4% of affluent super savers will be adversely affected by the measures, it is widely understood that every super saver who seeks to build significant life savings for the retirement phase will be adversely affected by having to create a transfer balance account and to monitor their personal transfer balance cap relative to a general transfer balance cap, at considerable compliance cost.
The proposed reductions in both concessional and non-concessional contribution caps increase the obstacles to current workers ever reaching the Government’s $1.6 million cap (or any lesser target of their choosing), and reduce welfare by restricting savers’ flexibility to accumulate super savings as their circumstances permit.
For example, consider a hypothetical worker in mid-career who might by retirement age be able to save about $300,000 in super with moderate effort, or could save more with higher effort. ($340,000 is the ‘sweet spot’ that maximizes the combined retirement income from a super pension and a part age pension.) The proposed reduction in the non-concessional contribution limits increases the time taken to save up to the super balance cap of $1.6 million by almost 90%, to 13 years, compared to 7 years under the existing contributions cap.[ii] There is an important message in these numbers for many middle income savers wondering whether to aim for self-funded retirement or to settle for the ‘sweet spot’ : just settle for the sweet spot plus the part pension.
Because the government grossly underestimates the numbers adversely affected by its measures, it wrongly estimates compliance costs as ranging between “low” to “medium”, but totaling a disturbingly high $80 million a year. If true, that would be about $1 of compliance cost for every $9 of revenue assumed to be gained.
But $80 million a year is clearly much too low an estimate of compliance costs. Submissions from experts knowledgeable about the ‘back office’ systems and administrative set-up costs of the large super funds, such as the Tax Institute and the Australian Institute of Superannuation Trustees, estimate first year implementation costs within the large funds alone of around $90 million. Additional compliance costs imposed on super savers in the large funds seeking ongoing expert financial advice will also be very large. For Self-Managed Super Funds, implementation costs could easily total $1.5 to $2 billion in 2017, with lesser recurrent costs annually thereafter.[iii]
For the forward estimates period to 2019-20, it is quite feasible that the set-up and recurrent compliance costs on savers and funds will total more than the net revenue from the measures.
The transfer caps and associated measures give draconian powers to the Taxation Commissioner, and impose heavy penalties on taxpayers who may be defeated by the complexity of the measures. If the measures proceed, Parliament should require that the Commissioner provide a safeguard to all savers with personal transfer balances over $500,000 by issuing binding advance statements of their transfer balance cap, personal transfer balance cap and unused cap space well before the starting date of the measures, and with timely notification every year thereafter. (This broad approach was also recommended by Mercer in its submission to Treasury.)
How has the Government arrived at its policy? Perhaps because the thinking behind the EM’s Regulatory Impact Statement (Chapter 14) including its Cost Benefit Analysis (pp293-327) is a confused mélange that serves neither purpose.
The presentation estimates unrealistically low increased costs to savers for financial advice (Table 14.1). It apparently counts as benefits (to society?) increased business for financial advisers, and increased business for other financial institutions as savings flows leave super (para 14.142). It wrongly assumes that funds leaving super will be slight (para14.136) and will flow overwhelmingly to other, higher-taxed financial instruments (para 14.118), rather than being in part spent or moved into real assets that are not taxed (like the family home) or lightly taxed.
Though the presentation is very opaque, repetitive and disorganised, the EM seems to count as a social benefit (rather than merely a transfer) the funds taken from super balances lawfully saved under today’s rules (para 14.137) and passed to government in additional tax revenue under new (effectively retrospective) law. But what are apparently the decisive ‘benefits’ are totally unquantified and merely asserted: revenue raised from super could be spent by the government on other things (para 14.121); the super system would be made ‘fairer’ and more ‘sustainable’ (para 14.127); ‘tax minimization’ and ‘estate planning’ would be limited (14.164). And most importantly to the Government (and very repetitively) only a few people are affected, and they are rich (paras 14.163, 14.180, 14.185, etc). In short, the policy is said to deliver net benefits simply because it is assumed to work as the Government asserts it will, with no downsides on trust in super or in rule-making for super.
We are not reassured by the EM’s final assessment of consultations to date:
14.410 No significant challenges to implementation have been identified. …
14.411 These changes occur within the context of the tax and superannuation system which is constantly changing. …
14.412 While these changes are significant in targeting the superannuation system towards the objective of providing income in retirement, they impact only a small number of individuals within the superannuation system. High wealth individuals that are mainly affected by these changes typically seek professional advice in managing their affairs or are financially savvy enough to manage these changes.
It is difficult to see how the assertion of para 14.410 can be sustained, when para 14.367 (on transition to retirement measures) reports that:
Most stakeholders who made substantive comments on this measure in the legislation stated that the start date of 1 July 2017 was not possible, due to administrative complexities.
Similar reporting of consultation inputs on all aspects of the measures suggest gross understatement by the authorities of the warnings they have been given.
The capacity of high wealth individuals to pay for financial advice in a “superannuation system which is constantly changing” is beside the point of designing good policy. Rather, the issue is the destruction of trust in super and in super law-making by constant changes that are no longer grandfathered. This affects all super savers, and expensive financial advice is not an antidote.
The Government should go back to the drawing board on its measures. If, having reviewed the weak basis of claims about the cost, unfairness and unsustainability of super concessions, the Government still wants to raise more revenue from self-funded retirees, it should do so more fairly by appropriate grandfathering.
The Senate Economics Legislation Committee has sought submissions on superannuation law amendments amounting to almost 150 pages of legislation and some 360 pages of Explanatory Memorandum (EM). Submissions were sought with four working days’ notice, by 17 November 2016. The Committee plans to report within a further 4 working days, by 23 November, and there is apparently no plan for public hearings.
In the extremely limited time made available, we must mostly rely for the Committee’s purposes on submissions we recently made to Treasury (under similarly prohibitive time limits) on the three tranches of exposure drafts of the legislation and their more limited explanatory materials. Our major concerns with the legislation remain unchanged from the exposure drafts to the current Bills. Our three submissions and other key documents cited in them are attached to this submission. The three submissions are also available electronically:
In the time available since the introduction of the Bills to the House of Representatives on 9 November 2016, we have not been able to analyse the texts of the draft Bills themselves, but have had to rely on the EM’s account of their intent. We assume the Bills give legal effect to the ideas asserted in the EM, which is of course an undesirable way to proceed. We trust the Committee and indeed all Parliamentarians voting on the Bills will be able to assure themselves of the legal efficacy of the drafting.
In this submission, we recapitulate in abbreviated form several themes from our earlier submissions that are central to our concerns with the Government’s intended changes to the super law. We seek to explain why those issues are likely to have adverse impacts on trust in superannuation and on Australia’s retirement income system. We are apparently in good company; the EM notes:
Following the release of the legislation stakeholders tended to not raise concerns with the draft legislation itself, but the policy. (para 14.341)
Concern at the direction of the policy is legitimate and well-founded, and limited comment on the technicalities of the draft legislation may simply mean they are second-order issues when the direction of policy is wrong, and there has been insufficient time to analyse the Bills.
This submission also comments briefly on several aspects of the Bills that are elaborated for the first time in the EM’s treatment of compatibility of the intended measures with the Government’s intended legislated objective for superannuation (EM Chapter 13), and in the Regulation Impact Statement (EM Chapter 14).
The Senate Economics Legislation Committee has allowed four working days for submissions. The invitation follows just a few days after Treasury made publicly available 125 submissions (including three from Save Our Super) on earlier exposure drafts of three tranches of legislation. In turn, those exposure drafts had been available for earlier public comment for only derisorily brief periods. We have not yet had time to study the large majority of others’ submissions on the exposure drafts.
Our three submissions to Treasury, and several other submissions on the exposure drafts that we have been able to examine in the time available since their public release, noted that it had been impossible to respond to the detail and complexity of the proposals in the time available. Several experts — full time professionals in the superannuation sector — reserved their assessment of many technical issues they had not had time to analyze.
Government and Senate Committee processes constitute an alarmingly offhand way to approach superannuation law changes. Superannuation tax is arcane, and is probably the most complex exposure most individual taxpayers have to the income tax law. Parliament is now rushing its consideration of complex changes to increase taxes on the life savings of some self-funded retirees, and to restrict the rate of saving by those aspiring to be self-sufficient in retirement. Savers are entitled to expect legislators should consider the issues carefully and with the benefit of considered input from experts.
To rush a very large body of complex changes to intricate super tax arrangements risks further damaging trust in super as a repository of long-term savings.
In our view it is highly likely, given warnings to Treasury from expert groups such as the Tax Institute and the Australian Institute of Superannuation Trustees, that rushed legislation that makes impossible demands on superannuation administrative systems will lead to chaotic implementation and future, cascading legislative changes seeking to correct impracticalities and errors in the current Bills. The resultant turbulence will further damage trust in superannuation, reduce private saving effort towards self-financed retirement, and increase future reliance on the age pension. The net effect is more likely to damage budget sustainability than improve it.
The Committee should be concerned that Australian super lawmaking processes have deteriorated to the cost of public confidence in super. Contrast the current exercise with the planning for, and consultation around, the last major change of strategic direction in Australian super law, the Costello Super Simplification exercise of 2006 and 2007.[iv] A substantial discussion paper was issued with the May 2006 Budget announcement of the measures, with an extended consultation over four months until September 2006.[v] There was keen interest to comment: more than 1,500 written submissions and more than 3,500 phone calls from across the community. Modest revisions to the original ideas were incorporated into revised costing for the forward estimates period and incorporated into legislation introduced by end 2006, with effect from 1 July 2007.
Paul Keating once observed “You do not expect much from conservative governments, but you do expect them to believe in thrift.”[vi]
The Government’s rhetoric in support of its revenue measures is now anti-thrift. The EM claims its measures “… still allow individuals to contribute more than is needed for an adequate retirement …” (para 14.54)
The Government cites the Grattan Institute as its only example among ‘think tanks’ for the claim that current super incentives (which sees super savings yield over $6 billion tax a year) are “poorly targeted and unsustainable” (para 14.12). If it is aware of contrary analyses from the Institute of Public Affairs[vii], or the Centre for Independent Studies[viii], there is no evidence of it.
In 2007, the Costello reforms focused super tax like the tax on bank accounts: taxed on contribution, taxed on accumulation, but no third layer of tax at the withdrawal stage.
In 2016, the Government now claims that arrangement “disproportionately benefits people with high account balances, providing significant incentives for wealthy individuals to use earnings tax exempt retirement phase accounts as a tax minimisation vehicle to accumulate excessive amounts of wealth.” (para 14.35) Of course high income earners get more tax relief from tax concessions, because they pay more tax. So the worth of the concession is disproportionate to income, but remarkably proportionate to income tax paid. (See section 14 below.) The government has fallen for the Duncan Storrar fallacy.[ix]
The lawful use of the simplified tax introduced by Howard and Costello (which matched the super tax structure to the structure of taxation on savings accounts, with tax on the contribution and accumulation phases, but not the withdrawal phase) is said repeatedly to amount to “tax minimization and estate planning” (p 9 and passim).
But from the EM’s perspective, some taxpayers are proving annoyingly slow to get the message:
Some individuals (mainly high wealth individuals) may consider that some of the measures limit their ability to save for their retirement and obtain no or concessional tax rates to the same extent to which they had wished,[ ie, the extent to which Parliament passed laws to encourage them to lock up their savings in super in the first place] notwithstanding the fiscal pressures such desires place on the taxpayer. (para 14.111, emphasis and square bracketed comment added)
If there were no concessional taxation arrangements for superannuation, there would be no voluntary savings into super. A progressive tax on nominal income[x] and a generous age pension heavily penalise long-term saving, and there is no form of saving of longer term or more restricted access than superannuation. A saver’s consumption is locked away over some 40 years of a working life, and must then sustain living standards for some 30 year thereafter.[xi]
To counteract these discouragements to long term saving, the tax treatment of super is specified in law over all three stages of the super life cycle: contributions, accumulation and retirement. Savers penalised by the Budget measures would not have accumulated such high balances locked untouchably into superannuation if they suspected tax on the retirement phase would be increased after they had locked their savings away, or still worse, had retired and were dependent on super savings for their livelihood.
The Budget measures are not just changing the rules after the game has started; they are changing them well into the fourth quarter. That is the context in which Treasurer Morrison coined the useful term ‘effective retrospectivity’:
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. (Emphasis added.)[xii]
Because of the typical 40-year length of commitment to making super contributions and the unique restrictions on accessing super savings, people need a lengthy adjustment period to respond to any adverse changes to policy. The same is true of the closely related issue of age pension changes. That is why past successful significant changes to retirement parameters – such as tightening the means test for the age pension, raising the pension eligibility age, raising the superannuation preservation age or increasing the tax on the retirement phase of superannuation – have generally been undertaken gradually, with advance notice, extended consultation and often with ‘grandfathering’ of existing arrangements to prevent disadvantaging workers close to retirement, or retirees who have limited or no opportunity to change their lifetime savings strategies.
To induce savers to lock away savings on the basis of an existing tax package over all three stages and then to raise tax on those already retired or too close to retirement to change their savings plans, not only reduces the living standards of those directly affected; it also destroys every saver’s trust in super (and in government law-making). That in turn reduces everybody’s preparedness to risk unpredictable future legislative penalties on self-funded retirement, and increases the risk-management attractions of blending lower super balances with more reliance on the age part-pension.
The challenges of facilitating gradual increases in super taxes while not destroying confidence in super were addressed most thoughtfully by the late Justice Kenneth Asprey, whose 1975 report outlined the case for grandfathering significant super tax increases, and developed principles for how to do that while preserving necessary policy flexibility to respond to changing circumstances. (See the following Box.)
More recently, the Gillard Government’s Superannuation Charter Group led by Jeremy Cooper addressed concerns about the future of the super savings and the way policy changes have been made.[xiii] The Charter Group reported to the second Rudd Government in July 2013 with useful proposals in the nature of a ‘superannuation constitution’ that would codify the nature of the compact between governments and savers, including:
- In order to promote confidence in the long-term benefits, no change to superannuation should be regarded as urgent.
- People should have sufficient confidence in the regulatory settings and their evolution to trust their savings to superannuation, including making voluntary contributions.
- Relevant considerations, when assessing policy against the principle of certainty, include the ability for people to plan for retirement and adjust to superannuation policy changes with confidence.
- People should have sufficient time to alter their arrangements in response to proposed policy changes, particularly those people nearing retirement who have made long-term plans on the basis of the existing settings.
Box: Grandfathering principles: Asprey Taxation Review, Chapter 21, 1975
21.9. Finally, and most importantly, it must be borne in mind that the matters with which the Committee is here dealing involve long-term commitments entered into by taxpayers on the basis of the existing taxation structure. It would be unfair to such persons if a significantly different taxation structure were to be introduced without adequate and reasonable transitional arrangements. ………
21.61. …..Many people, particularly those nearing retirement, have made their plans for the future on the assumption that the amounts they receive on retirement would continue to be taxed on the present basis. The legitimate expectations of such people deserve the utmost consideration. To change suddenly to a harsher basis of taxing such receipts would generate justifiable complaints that the legislation was retrospective in nature, since the amounts concerned would normally have accrued over a considerable period—possibly over the entire working life of the person concerned. …..
21.64. There is nonetheless a limit to the extent to which concern over such retrospectivity can be allowed to influence recommendations for a fundamental change in the tax structure. Pushed to its extreme such an argument leads to a legislative straitjacket where it is impossible to make changes to any revenue law for fear of disadvantaging those who have made their plans on the basis of the existing legislation. …..
21.81. …. [I]t is necessary to distinguish legitimate expectations from mere hopes. A person who is one day from retirement obviously has a legitimate expectation that his retiring allowance or superannuation benefit which may have accrued over forty years or more will be accorded the present treatment. On the other hand, it is unrealistic and unnecessary to give much weight to the expectations of the twenty-year-old as to the tax treatment of his ultimate retirement benefits.
21.82. In theory the approach might be that only amounts which can be regarded as accruing after the date of the legislation should be subject to the new treatment. This would prevent radically different treatment of the man who retires one day after that date and the man who retires one day before. It would also largely remove any complaints about retroactivity in the new legislation ….
These Charter Group suggestions would also appear to support the use of grandfathering in the case of the Government’s proposed tax increases. It observed:
The Charter Group has formed the view that it is changes to tax concessions and entitlements (for example, to the preservation age or the ability to access super) that are most likely to affect member confidence and call for the additional processes and protections proposed by the Charter.[xiv] (emphasis added)
Further details showing how grandfathering adverse changes to superannuation and related retirement income parameters has been used over the last 40 years are contained in Terrence O’Brien’s paper for the Centre for Independent Studies, Grandfathering super tax increases.[xv]
As we argued in our comments to Treasury on tranche two of the exposure drafts, ‘effectively retrospective’ changes in super tax laws alter the moral landscape.[xvi] If a Government passes laws to encourage lifetime savings to be locked in to super, but then changes the rules to suit its budget needs to the detriment of those who relied and acted on the basis of the existing laws, that tells citizens that government will change the law with ‘effective retrospectivity’ to the citizen’s disadvantage whenever it wants to. That Labor and the Greens apparently support ‘effective retrospectivity’ adds to the fear of a race to the bottom in bad super policy making. As David Crowe noted on 12 November 2016:
Labor played the politics of super brilliantly. It denounced the tax increase while embracing it and then expanding it. It said one thing but did another while trying to slip through a tax increase without being called out. This is the “politics as usual” that people despise.[xvii]
The EM suggests that some of the Government measures would
…potentially result in a flow of funds out of superannuation and into other investment vehicles in the financial sector. (para 14.118)
However it believes that shift of funds will be small:
The concessional nature of the superannuation system means that any reinvestment out of superannuation would be small. (para 14.136)
To the contrary, we consider funds will not move as the Government assumes to higher-taxed financial sector investments. Rather, they will be spent, or move to equally low- or lower-taxed alternatives.
How is the citizen to respond? Most likely, citizens will be less likely to concede legitimacy to the Government’s new laws. In a world where citizens can lawfully form discretionary family trusts, buy and equip more expensive principal residences, negatively gear rental property and make other adjustments which lawfully minimize their tax, they will be more inclined to do so under the changed laws than if the Government had grandfathered any changes in them adverse to citizens who had relied on, and acted on, the then-current law.
For those reasons, the estimated revenue gains from the tranche two measure are likely considerably overstated.[xviii]
The government apparently believes that its measures will produce a blossoming of super saving and a decline in reliance on the age pension as low income earners, second-income spouses with interrupted employment history and those desiring insurance against longevity risk through innovative ‘deferred products’ save more in super, while richer savers continue saving in super even with reduced super incentives, or at least keep saving within the financial sector. It assumes any saving displaced from super by a 15% tax will not be spent (often yielding GST revenue at 10%), but will be placed in other financial products that are generally higher-taxed than super. It is as if richer savers are assumed to have an incurable addiction to saving regardless of the general tax system discrimination against it, and are unlikely ever to access the pension. (See, for example, EM p 274, para 14.10.)
Our assessment is the opposite of the Government’s on the foregoing points.
The difference arises mainly because we consider the dominant response to the un-grandfathered super tax increases and contribution restrictions will be a sense that that politicians have torn up the rules of the game for effecting super tax increases. There will be:
- a resultant destruction of trust in superannuation itself;
- a destruction of trust in how super law will be changed in future;
- a departure of funds from super (in part triggered by complexity, higher compliance costs, fear of future changes, and by the $1.6m transfer balance cap);
- a drought in new ‘personal contributions’ into super (i.e. concessional and non-concessional contributions beyond the Superannuation Guarantee’s compulsion); and
- a displacement of saving effort outside the financial sector and into other tax-efficient savings vehicles such as the principal residence and its furnishings, negatively geared real estate, discretionary family trusts and so on.
The Government’s tax increases discourage high use of super by those who are affluent enough to save appreciable amounts, while its new tax expenditures on super try to encourage super for those whose lower incomes mean they can’t save much (and perhaps nothing that they can afford to lock away for 40 years in super). Moreover, the effectiveness of the new incentives for the relatively poor will also be damaged by the overall loss of trust in super and super law-making. When a Coalition Government reverses the strategic direction of the Howard-Costello simplification reforms of less than 10 years ago, branding those who lawfully followed those simplification incentives tax minimisers and estate planners, who would believe that any new incentives are not vulnerable to the same fate within the next 10 years?
How will we know which of the above two perspectives is nearer the mark?
One key piece of evidence will be the quarterly reporting by APRA on personal contributions to super funds with more than four members, and the ATO reporting on funds with four or fewer members (essentially, the self-managed super funds).[xix] If, as we suspect, those personal contribution flows diminish rather than grow stronger as is already apparent in the last quarter of data, one could conclude the net effect of the Government measures has been adverse to confidence in super and has limited super’s ability to reduce resort to the age pension and to support higher retirement living standards. By the time that evidence is confirmed, the damage to confidence in super and its rule-making will have been done. Rebuilding trust will be difficult without a considerable reform to super law-making processes, perhaps of the form recommended by the Cooper Charter Group.[xx]
As for the age pension dimension, events will unfold more slowly, and any increase in resort to the pension will be even more politically difficult to reverse than a destruction of trust in super. But SOS believes use of the part pension will rise despite the Government’s incentives , as there is now a very widespread realization in super, financial advisory and media circles that the ‘sweet spot’ in super saving strategy is to save about $340,000 and access a part age pension. According to Tony Negline, that will yield about 20% more retirement income than $1million in super (and of course, no part pension).[xxi]
The EM argues the $1.6 million transfer balance cap will affect only 1% of savers, and that the cost of complying with it is estimated to be only ‘medium’ at some $32 million a year (paras 14.136 and 137). (If $32 million a year is a ‘medium’ cost, we’d hate to see a ‘high’ cost.)
But specialists aware of the back office systems of both large super funds and SMSF have submitted to Treasury that significant new system development will be necessary to implement the transfer balance cap machinery, and the task will not be possible by the Government’s intended start-up date of 1 July 2017. See the Tax Institute’s submission of 10 October to Treasury, which points out (among many other daunting implementation problems) that funds with 5 million members but only a few directly affected by the cap will nonetheless have to redesign back office accounting for all, at an administrative cost that will be borne by all.[xxii] Critics will doubtless then complain again about the high administrative costs of superannuation funds.
Moreover the notion that only 1% of high-wealth savers will be affected has been widely disputed, for example both in our second tranche submission, and in the SuperGuide of 25 October 2017
The Coalition government claim “very few people will be affected by this proposal. The average superannuation balance for a 60-year old Australian nearing retirement is $285,000 and less than one per cent of fund members will be affected by the balance cap.”
This claim is very misleading and is simply propaganda. The fact that the Coalition doesn’t state the numbers of Australians immediately affected by this policy, and doesn’t state the hundreds of thousands of Australians who will be affected by this cap over the next 25 to 30 years is dishonest, and the millions of Australian retirees who will now need to monitor their transfer balance cap (for periodic indexed increases of the cap), and monitor their transfer balance account for new money going into pension phase, or existing money being removed from pension phase (commuting pensions into lump sums) is irresponsible.
As super balances increase, and the cost of a reasonable lifestyle in retirement increases, the $1.6 million cap (indexed for inflation in $100,000 increments), will be potentially within the reach of a hefty percentage of middle-aged and younger Australians currently in the workforce. Not only will millions of retirees have two lifetime amounts that they may need to be mindful of, but an increasing number of older Australians will have to monitor these figures for the rest of their lives.[xxiii]
Consider, finally, the living standards offered by a super balance of $1.6 million held by one person of a couple retiring today at age 65. They can expect an indexed annual retirement income of some $72,700 (from age 65 supplemented with part pension from age 82 until death or age 100, assuming an optimistic 5% nominal return net of fees and 3% inflation).[xxiv] This is about 90% of average weekly earnings. To retire on 90% AWE hardly seems an indecent aspiration, especially if it motivates those who are hard-working, affluent enough and thrifty enough to save hard and forgo easier options to rely on a part age pension.
The Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill proposes reducing the annual concessional (ie before tax) contribution limit by 17% to $25,000 (or by 29% for those over age 50), and the annual non-concessional (ie after tax) contribution limit by 44% to $100,000.
The proposed reductions in contribution caps increase the obstacles to current workers ever reaching the Government’s $1.6 million cap (or any other target of their choosing), and reduce welfare by restricting savers’ flexibility to accumulate super savings as their circumstances permit.
For example, for a worker in mid-career with about $340,000 in super (the ‘sweet spot’ that maximizes the combined retirement income from a super pension and a part age pension), the proposed reduction in the non-concessional contribution limits increases the time taken to save up to the super balance cap of $1.6 million by almost 90%, to 13 years, compared to 7 years under the existing contributions cap.[xxv]
To combine the general transfer balance cap with lowered annual contribution caps clearly doubles the strength of the message to savers striving to meet their own preferred standards of retirement income. That message is: “Don’t bother”. The Government has for the first time directly prescribed what it considers a super balance sufficient for retirement ($1.6 million), and has tightened contribution restrictions to hinder reaching even that benchmark.
The restrictions are not without their practical limitations. For example, from 1 July 2018, if a saver’s superannuation account balance (or combined balances if they have more than one super account) is less than $500,000 at the end of a financial year, then they will have the opportunity to utilise the unused portions of their concessional caps from previous years (up to 5 years’ worth) in the following financial year, or future years. Trish Power has observed:
In the 29 years that I have been working in, and writing, about super and retirement planning, this is one of the more ridiculous implementation stuff-ups. In most cases, super funds do not have the information available to super fund members about the most recent financial year until 2 to 3 months after the end of the financial year, and this is particularly so for specific account balances.
If you want to make super contributions in the early months of a financial year, when you do not have access to financial year-end information about your account balance, then you either take a punt and contribute anyway, or delay your contribution plans until you have all of the information.
The implementation stage of the catch-up concessional contributions provisions is when the super industry and super fund members will discover that the $500,000 threshold has been devised by Treasury advisers and politicians, with apparently very little connection to the real world. Based on the available information provided by the government, I suggest that the creators of this policy have very little practical knowledge of how super funds operate, and how Australians make decisions on when and how much to contribute to a super fund.
I do wonder if the $500,000 threshold will last, due to the administrative nightmare that it will create for super fund members, super funds and the ATO. In my opinion, the catch-up provisions should be available for all Australians, not just for those with less than $500,000 in accumulated super and pension accounts.
And then there is your responsibility to track your unused concessional cap amounts ….[xxvi]
In our submission to Treasury on the first tranche of exposure drafts, we argued the Government’s intended primary objective for super (plus 5 subordinate objectives, including simplicity) to be legislated by the Superannuation (Objective) Bill 2016 were likely meaningless and impossible to apply. [xxvii] But we encouraged a test of our proposition by application of the Bill to the Budget legislation itself. We are pleased that the Government has taken this suggestion, and a statement of compatibility with the objective is included as Chapter 13 of the EM.
The Government says its Budget measures have been guided by its soon-to-be-legislated primary objective for superannuation,
.. to provide income in retirement that substitute or supplements the age pension.[xxviii]
The problem is, what does that mean? Would a policy change be considered successful if it discouraged super savers from achieving higher savings balances and created uncertainty and costs for future super savings, while encouraging reliance on the super guarantee levy and topping up retirement income with a part pension? That reduction in self-reliance seems to be the likely effect of the proposed measures. The Government also specifies 5 subordinate objectives which include “be simple, efficient and provide safeguards”, to be traded off against each other and balanced against the principal objective using unspecified processes and weights. [xxix]
Compare those bewilderingly ambiguous objectives with the clearer Howard-Costello era objective for superannuation simplification:
The policy objective is to assist and encourage people to achieve a higher standard of living in retirement than would be possible from the age pension alone.[xxx]
Or another possibility, suggested by the Institute of Public Affairs:
The objective of the superannuation system is to ensure that as many Australians as possible take personal responsibility to save for their own retirement. The age pension provides a safety net for those who are unable to provide for themselves in retirement.[xxxi]
We favour adopting the IPA’s suggested alternative, and we encouraged the Government to provide a quantified statement showing the compatibility of the measures with its own stated objectives addressing both the impact on super and on the age pension uptake. Bald qualitative assertions that everything is fine don’t cut it in this area.
We argued that the Budget measures will reduce super self-reliance and increase reliance on the age pension, for reasons briefly summarized at section 7 above.
The EM’s Chapter 10 suggests the legislated objective for superannuation does indeed fail the utility test. Chapter 10 merely asserts, qualitatively, that the measures meet the legislated test of compatibility with the six objectives. But interestingly, the EM articulates at several points (e.g para 13.7) what would have been a much more intelligible and useful objective in place of the Government’s objective: the aim of increasing retirement incomes, increasing self-sufficiency and reducing reliance on the age pension.
It asserts that only 4% of super savers will be affected by the measures (ignoring the much greater percentage that will face significantly higher costs of compliance because the extraordinarily complex balance cap system). It makes no allowance for the consequences for super saving from the destruction of trust by effectively retrospective tax and rule changes. Low income super savers are asserted to save more (but without quantification: para 13.8). High-balance super savers are said to not save less in super, and ‘the majority’ (unquantified) of the 4 % acknowledged to be affected are asserted to be unlikely to increase their call on the age pension (para 13.5).
The effect of the measures on the vast terrain of middle-income super savers above those encouraged by the Low Income Superannuation Tax Offset and below those discouraged by the $1.6 million general transfer balance cap is not addressed. But the EM somehow arrives at the judgement (unsupported and unquantified) that the measures will increase income in retirement and reduce reliance on the age pension (para 13.7)
This first example of the application of the Government’s intended legislated objectives for super suggest the approach is indeed unhelpful.
The Government documentation nowhere explains why the objective of raising more revenue from some self-funded retirees and from those saving to become self-funded, requires the inevitably complex and ‘effectively retrospective’ approach of:
- moving funds already lawfully placed in a retirement account into a new transfer balance account, and
- forcing any excess in the transfer balance account over $1.6 million into an ‘accumulation account’ and taxing the income on that account at 15%.
It is helpful to look below the surface to the reality of the measures. On the surface, the Government argues that there is no real change in the measure: 99% will be unaffected by the balance cap, saved capital is preserved, funds are left inside superannuation framework, etc.[xxxii] But the reality is that the measure reduces living standards from lifetime savings made under existing law and already lawfully funding retirement free of tax (if from a taxed fund and paid by a qualifiying allocated pension to someone over 60); under the new law it reduces the retiree’s living standard by subjecting any ‘excess’ savings over the transfer balance cap to 15% tax on earnings, and without grandfathering.
This new tax on fund earnings within the retirement phase is unprecedented in over 100 years of specific Australian taxation measures governing superannuation.[xxxiii]
The additional tax has the simple effect of reducing retirement income by an ‘effectively retrospective’ change in the law.
The specific means for applying the transfer balance account through general and personal transfer balance caps quickly turns inevitable complexity into absurd complexity.
When the Costello simplification measures were legislated in 2006, the Explanatory Memorandum explained the full gamut of the new taxation of retirement income streams in just 144 paragraphs, most devoted to mapping the previous law’s complicated treatments into the current streamlined treatments under the laws within which retirees have now organized their savings.[xxxiv]
In 2016, the corresponding part of Treasurer Morrison’s re-complication of the taxation of retirement income — chapter 3 of the EM outlining the transfer balance cap — takes 379 paragraphs, about 160% longer.
For the first time, the EM of 9 November 2016 produces a discussion of compliance burdens and a formal Regulation Impact Statement (RIS).
The EM reports that, bizarrely, the Treasury has certified that the discussion paper Re:think Tax: Better tax, Better Australia in March 2015 was an interim RIS for the Budget measures (para 14.5). That seems a stretch, since none of specific measures of the Government package was foreshadowed in that paper, whose discussion of superannuation issues was 3 pages of inconclusive generalities.[xxxv] At the time (and up to February 2016), Treasurer Morrison was still roundly criticizing Labor policy to reintroduce tax on super end benefits as ‘effective retrospectivity’. Perhaps treating Re:think as a RIS for the superannuation tax increases explains how such unworkable complexity got off the ground in super policy advice to the Government.
Assuming the Government approach can ultimately be implemented, the compliance costs will be huge. The EM’s RIS (Chapter 14) offers a disturbingly large regulatory burden estimate: $80 million a year. This would suggest less than $9 of revenue for every $1 of compliance costs imposed on savers.[xxxvi]
We consider, on the basis of submissions from super industry experts and our own estimates in our second tranche submission, that the Government’s estimates are much, much too low.
The Australian Institute of Superannuation Trustees estimates that system implementation costs alone within the large super industry funds (i.e. excluding the SMSF sector) are of the order of $90 million.[xxxvii]
The Government’s compliance cost estimates apparently rest on the oft-repeated propositions that those disadvantaged by the cap are only 1% of super savers, and those disadvantaged by other measures only another 3%, so that 96% are either unaffected, or better off as a result of the measures to encourage low-income super savers.
But the reality is that every potential self-funded retiree who one day seeks to enter the superannuation retirement phase will be adversely affected by the complexity and compliance costs of monitoring their saving relative to the general transfer balance cap and the evolution of their personal transfer balance cap. Costly professional financial advice will again be essential at every superannuation decision point.
The administration costs for the Australian Taxation Office provide one illustration of the complexity of the approach, with a Budget allowance of $4.4 million in 2016-17 to prepare for the transfer balance cap and associated measures.[xxxviii] (Misleadingly, the EM’s RIS treatment asserts that the ATO will largely ‘absorb’ the costs of setting up the new system (Para 14.120).)
For Self-Managed Super Funds, implementation costs could easily total $1.5 to $2 billion in 2017, with lesser recurrent costs annually thereafter. Let’s assume, for the sake of illustration, that all 557,000 self-managed super funds need to seek financial advice on the impact of the new measures by 30 June 2017. The compliance costs for SMSFs are estimated to be $3000-$4000 per fund. [xxxix] The total extra cost for SMSFs in 2017 could be of the order of $1.5 to $2 billion dollars.
There are also 14.8 million individual Australians with super accounts. If we assume fund members aged 50 or older and with appreciable super savings similarly seek advice, and that the simpler issues raised for super fund members cost $300-$600 in professional advice, that might add another $0.5 billion to the advice costs incurred by SMSFs.
Of course to that should be added the costs to savers and retirees themselves of providing the organized information on their affairs necessary for financial advisers to ply their trade.[xl] Depending on the valuation of taxpayers’ time, that could easily add another 25% or more to arrive at a total compliance cost.
Taxpayers who may be affected by the tax increases and super restrictions will certainly attempt to get financial advice before 30 June 2017. Even assuming the availability of professional advice in the face of a very large surge in demand, it will be difficult for the large numbers of people with multiple super accounts to obtain a consolidated statement of their exposure to the transfer balance caps in time for the intended initiation of the tax increases. Over 40% of the 14.8 million super savers have more than one account; 8% have four or more.[xli]
While for many, actions will be required by 30 June 2017 or urgently within six months thereafter, there will likely be continuing compliance costs and the need to seek financial advice – in some cases (such as SMSFs, or those near their personal balance caps) perhaps year by year. In other cases, recurrent compliance costs may be less frequent. But the annual compliance costs in perpetuity will certainly be non-trivial, and vastly exceed the benchmark achieved after the Costello simplification reforms.
Let’s estimate, conservatively, that total initial compliance costs amount to $2 billion in 2016-17, and another $1 billion in 2017-18 and annually thereafter. These numbers may be scaled against the Budget measures which are estimated (optimistically) to have a net revenue gain to 2019-20 of less than $3 billion.
So on conservative estimates, the net revenue gains from the Budget measures over 4 years would be roughly equalled by the compliance costs to savers and retirees.
All these administrative and compliance costs are being generated in a legislative package that includes the Superannuation (Objective) Bill 2016, whose explanatory material adds that among five supplementary objectives to the primary objective (“to provide income in retirement to substitute or supplement the age pension”), one that requires that the system should “be simple, efficient and provide safeguards”.[xlii]
How could a policy with such shaky foundations in analysis and such poor trade-offs between revenue and compliance costs have got off the ground?
The EM’s Regulatory Impact Statement (Chapter 14) including what professes to be a Cost Benefit Analysis (pp293-327) is a grotesquely confused mélange that serves neither purpose.
The presentation estimates unrealistically low increased costs to savers for financial advice (Table 14.1). Though the presentation is very opaque, it apparently counts as benefits (to society?) increased business for financial advisers, and increased business for other financial institutions as savings flows leave super (para 14.142). It wrongly assumes that funds leaving super flow overwhelmingly to other, higher-taxed financial instruments (para 14.118, 14.136), rather than being in part spent or moved into real assets that are not taxed (like the family home) or lightly taxed.
Again with due acknowledgement of the EM’s opacity, it seems to count the funds taken from super balances lawfully saved under today’s rules (para 14.137) and passed to government in additional tax revenue under new (effectively retrospective) law as a social benefit, rather than merely a transfer.
But what are apparently the decisive ‘benefits’ are totally unquantified and merely asserted: revenue raised from super could be spent by the government on other things (para 14.121); the super system would be made ‘fairer’ and more ‘sustainable’ (para 14.127); tax minimization and estate planning would be limited (14.164). And most importantly (and very repetitively) only a few people are affected, and they are rich (paras 14.163, 14.180, 14.185, etc). In short, the policy is asserted to deliver unquantified net benefits because it is assumed to work as its proponents assert it will, with no downsides on trust in super or in making rules for super.
The Government claims its measures are all necessary to make super tax treatment less expensive to revenue, more sustainable and fairer — indeed, “even fairer” than initially proposed.[xliii] Those claims have never been properly evidenced or enumerated. The Senate Committee should test those claims.
The foundation of all arguments for reducing super concessions is their allegedly excessive total cost. However super tax incentives are not give-aways. As expressed in the 2009 Henry Review, Australia’s future tax system:
The essential reason for exempting lifetime savings or taxing them at a lower rate is that income taxation creates a bias against savings. The income taxation of savings therefore discriminates against taxpayers who save. They pay a higher lifetime tax bill than people with similar earnings who choose to save less. As savings can be thought of as deferred consumption, the longer the person saves and reinvests, the greater the implicit tax on future consumption …… For a person who works today and saves, taxing savings also reduces the benefit from working.
The increasing implicit tax on future consumption provides an argument to tax longer-term lifetime savings at a lower rate. An individual can undertake lifetime saving through a variety of savings vehicles, but there are asset types that are more conducive or related to lifetime savings: namely superannuation and owner-occupied housing.[xliv]
That distortion is exacerbated by the provision of an aged pension with a generous income and asset tests:
Pension costs as a percentage of wages are at the highest level they have ever been, having nearly doubled over the past 40 years.
The means test has become much more generous: the upper limit of the assets was just under 12 times the full rate of the pension in 1911, whereas today the ratio between the single homeowner assets test cutoff is nearly 35 times the full rate (despite the massive increase in the full rate of the pension over that time).[xlv]
Long-term saving such as superannuation would be non-existent without extensive tax incentives.
However as the Treasurer has noted, the annual (gross) tax expenditures on super may be $30 billion, or they may be $11 billion.[xlvi] Indeed, according to separate studies by Ken Henry and Jeremy Cooper, they may be less still in gross terms, and less again (or even a net budget benefit) once the impact on age pension uptake is considered. As Robert Carling of the Centre for Independent Studies has argued,
Statements often made about the huge fiscal cost of Australia’s superannuation tax concessions are based on the comprehensive income tax benchmark for measuring tax expenditures, but the characteristics of superannuation make it unsuitable for such a benchmark. The most appropriate benchmark is an expenditure tax under which contributions and fund earnings would be tax-exempt but end-benefits fully taxed. When measured against such a benchmark, tax expenditure on superannuation is much lower than commonly believed, or non-existent.[xlvii]
The Treasurer has noted that the top deciles of taxpayers get the most benefit from tax incentives to save in superannuation; this may be called the ‘Duncan Storrar effect’.[xlviii]
You all know high-income earners generally have far more capacity, and inclination, to save for retirement. This is a good thing, this is a very good thing, it’s not something that should be demonised or seen as some sort of nefarious practice. Which is, I think, often a point that is implied when people make criticisms of these things. I think it is great that people are out there saving for their own future. I think it is tremendous.[xlix]
It has fallen to the CIS’s Robert Carling to illustrate that the greater utilization of super tax concessions by the relatively rich – usually reported without any context, as if a self-evident scandal – is roughly proportionate to the contributions of each decile to the income tax take (see charts on following page).[l] Indeed, the richest 10 per cent utilize somewhat less than ‘their share’ of the super concessions.
There is also a mistaken tendency to regard ‘fairness’ as a one-dimensional concept requiring nothing more than vertical redistribution from the relatively rich to the relatively poor. This often seems to be pursued without any logical limit short of perfect equality, and disregarding other dimensions of fairness made worse along the way. In this common view, it is not sufficient merely to maintain Australia’s existing progressive tax/benefit system, even though in comparison with other OECD economies, both tax and benefits components of the system are highly progressive. Every tax incentive has to be progressive too. [li]
In contrast to this one dimensional view of fairness as no more than vertical redistribution, most Australians understand that fairness is a multi-dimensional concept. It is certainly fair that we as individuals and as a community should provide for the indigent. But equally importantly, it is also fair that those who work hardest and bear the greatest risks in economic life should gain the greatest reward after paying their lawfully imposed taxes. It is fair that far-sightedness in providing for the future is rewarded. It is fair that thrift is rewarded. Finally, most consider it fair that people — and governments — should honour their commitments.
It is these broader concepts of fairness that explain why so many are critical of the Government’s claim that it is fair to reduce by ‘effectively retrospective’ tax increases the living standards of those self-funded retirees who have responded as governments have intended to incentives to save in super. They are equally critical of the Government’s intent to restrict, without time to adjust, the savings in super of those older workers too close to retirement to change their life savings plans.
There has been no discussion of what the notion of ‘sustainability’ might mean in the case of the Costello-era simplification of super taxation that levied tax at the contribution and accumulation stage of superannuation, but allowed retirees over 60 who had contributed to taxed funds, untouchable during their working lives, to draw down their savings in retirement through an approved allocated pension without further taxation. (This is the same model as for the taxation of bank account savings – no one thinks that if they seek to withdraw $100 from an ATM, they should receive less than that because they should pay a third stage of taxation.)
Of course, if people save more in super and pay more super contributions tax (as they have been doing, following Government compulsion and tax incentives), then they will earn more in the accumulation phase (and pay still more tax on that income). Finally, they will enjoy higher super balances in retirement. In what sense does the lack of a third stage of taxation on higher retirement balances become ‘unsustainable’ as the amount of super savings rise? Would it be argued that the taxation treatment of bank account savings has become unsustainable as bank account balances have grown?
The costing of the Costello simplification reforms was part of a well-considered and consultative process. In the 2006-07 Budget documentation the costs of the super concessions were estimated over the forward estimates period, and those estimates were refined again on the release of the final simplification measures. There is no evidence the subsequent evolution of the costs of super concessions, properly benchmarked, has been in any sense unanticipated or ‘unsustainable’.
For politicians, ‘unsustainable super concessions’ are code for: ‘it’s easier for me to tax more of your lifetime savings than control the expenditure side of the budget’.
The exposure draft explanatory materials note that the concept of the ‘retirement phase’ of super is colloquially well established, but now will be formally re-defined and incorporated into the taxation law.[lii] Unfortunately, this change causes huge complexity and uncertainty, violating the sixth of the Government’s stated objectives for super.
The Commissioner of Taxation is empowered to exercise draconian powers to compel super funds to reduce the saver’s lawfully-established retirement living standards by moving a saver’s funds from a retirement account to an accumulation account. After an initial grace period, the Commissioner can apply severe penalties in the form of an excess transfer balance tax of up to 30% on anyone over their personal transfer balance limit. The revenue assumes notional earnings on any excess transfer balance of the daily interest of the 90-day bank bill yield plus 7 percentage points, compounding daily. Penalty taxes will be based on that formula. Compare that with what super accounts actually earn in the era where savers face ‘return-free risk’. Compare it too with the general advice to self-funded retirees that their portfolios should be low risk and oriented to fixed interest instruments (now yielding about zero real return, and in increasing cases overseas, negative nominal rates, rather than growth).[liii]
Any well-informed and cautious taxpayer with superannuation incomes from more than one source in retirement and making a close reading of draft would be left mystified as to what his or her personal transfer balance might actually be. (Some 40% of super savers have more than one account, and 8% have more than four.) In one passing acknowledgment of the complexity, the Bill specifies that excess transfer balance tax cannot be self-assessed.[liv]
If the measures proceed, Parliament should require that the Commissioner provide a safeguard to all savers with personal transfer balances over $500,000 by issuing binding advance statements of their transfer balance cap, personal transfer balance cap and unused cap space well before the starting date of the measures, and with timely notification every year thereafter. (This broad approach was also recommended by Mercer in its submission to Treasury – para 14.329.) Otherwise there is an indefensible imbalance of risk and cost between the revenue and the taxpayer: the Government can make up new laws with any degree of complexity, uncertainty and compliance cost, and the taxpayer bears the risk of trying to comply with them.
Chapter 10 of the EM in part outlines an intent to actually selectively extend the earnings tax exemption that the Budget removes from those current retirement income streams arising from a transfer balance cap above $1.6 million. The extended concession would apply to innovative lifetime products such as ‘deferred products’ and ‘group self-annuities’ that may emerge in the future. Such products, were savers ever to demand them, would permit a belated start to pension payments, thereby possibly addressing savers’ need to manage longevity risk.[lv]
For example, a super saver aged 55 in 2017 could purchase a ‘deferred pension’ that commences at age 80. Legislation in 2017 would provide an earnings tax exemption on the funds supporting that pension from the date the saver satisfies a condition of release, such as attaining the age of 65 in 2027. Then the retiree would gain tax-free income from the deferred annuity in 2042. The assets supporting the annuity would by then be larger than otherwise by the compounding of 15 years’ earnings growth since 2027 with no tax on the earnings.
In a world where the Government is withdrawing with ‘effective retrospectivity’ the earnings tax exemption on assets already lawfully saved over a lifetime, and destroying a tax-free annuity under existing law to those already retired, why would anyone buy a deferred annuity that would not start payment until a quarter-century in the future? That would merely provide the next 8 governments with 25 years in which to withdraw the new tax concession with ‘effective retrospectivity’.
This problem underlines a dilemma created by the Budget measures. The Government can only offer facilitating a decrease in longevity risk at the same time as it has increased the regulatory risk of future ‘effectively retrospective’ law changes. The net effect is likely zero, or worse.
The example illustrates the unbounded damage caused by increasing super tax without grandfathering. Any government’s ability to induce or facilitate a desired objective depends on citizens trusting that it will play fair, abide by its own laws, and change them only with prospective effect. When a government destroys trust, it destroys all plausible influence on future developments that depend on keeping its word.
By destroying confidence in super through ‘effectively retrospective’ changes, the proposed measures re-weight Australians’ retirement planning towards smaller super balances and higher reliance on a part age pension.
The time allowed by the Senate Committee for public submissions on the Government’s complex measures is derisorily short. History has shown that rushed and ill-considered super changes lead to spiraling complexity and the need for additional changes to correct unintended consequences. The Committee’s report to the Senate should recommend that the time for consultation should be extended, and that the Committee intends to proceed by open public hearings on matters in dispute. This would allow the committee to question officials responsible for the estimates surrounding the cost benefit analysis and Regulation Impact Statement supporting the measures.
The Government should take its super measures back to the drawing board.
The Government should review the misleading but ubiquitous estimate of the high cost of superannuation concessions, and switch to a conceptually defensible measure such as illustrated by Treasury’s 2013 ‘experimental estimate’ of super concession costs. It should address the suggestions in the reports by the Henry tax review and the Cooper Charter Group that when appropriately measured in net terms (ie allowing for the reduction in age pension costs, if only from reduced access to the full pension) the costs of superannuation concessions may be very small or even negative.
The Government should contest the view that use of superannuation concessions is unfair, because allegedly regressive. In fact, use of super concessions is roughly proportionate to super savers’ contribution by decile to overall income tax collections.
The Government should contest the view that ‘fairness’ is a one-dimensional construct requiring redistribution from anyone richer to anyone poorer, to be achieved by conscripting every aspect of every policy until reaching the only logical end point, complete equality. It should emphasise that ‘fairness’ includes ideals of fair reward for effort and fair reward for thrift, leading to self-sufficiency, and reducing dependence on the state and the taxes of one’s fellow citizens. Fairness also involves keeping one’s commitments. To be fair, governments should keep their commitments. Redistributive fairness is certainly also important, but should be judged by the overall progressiveness of the tax and transfer system, which is already very high in Australia.
A revised package should include appropriate grandfathering provisions. That would maintain the sound practice of at least the last 40 years of changes in Australian super law, and maintain trust in superannuation.
In our view, the Government’s super changes are heading for a crisis. The government has received ample warning (albeit within absurdly rushed consultation processes) of the inability of industry to implement the Government’s changes by 1 July 2017 without hugely expensive back-office changes (or perhaps at all). However Treasurer Morrison and Minister O’Dwyer assert in concluding their EM that all will be well:
14.410 No significant challenges to implementation have been identified. …
14.411 These changes occur within the context of the tax and superannuation system which is constantly changing. …
14.412 While these changes are significant in targeting the superannuation system towards the objective of providing income in retirement, they impact only a small number of individuals within the superannuation system. High wealth individuals that are mainly affected by these changes typically seek professional advice in managing their affairs or are financially savvy enough to manage these changes.
14.413 The success of these changes will be monitored through a variety of processes. …
14.414 On an informal basis, Treasury maintains close relationships with key stakeholders and the general public that can provide feedback on the changes, which will then be fed into future advice on possible further superannuation changes. Treasury will formally measure the impacts of some of these changes. Additionally, data may also be obtained on an ad hoc basis on superannuation tax concessions and payments on a variety of parameters from the ATO in response to requests from the Government. This data and information will feed into Treasury’s superannuation policy advice to the Government.
[ii] Tony Negline, Saving or slaving: find the sweet spot for super, The Australian, 4 October 2016.
[iv] Peter Costello, A Plan to Simplify and Streamline Superannuation: Detailed Outline, Canberra, May 2006
[v] Peter Costello, Simplified Superannuation – Final Decisions, Press Release 093 , 5 September 2006
[vi] Paul Keating, The Story of Modern Superannuation”, Address to Australian Pensions and Investment Summit, 31 October 2007
[vii] Rebecca Weiser and Henry Ergas, Strangling the goose with the golden egg: why we need to cut superannuation taxes on Middle Australia , September 2016, IPA Research Essay.
[x] A progressive tax on nominal income discourages savings for reasons explained in our Second tranche submission , p 11.
[xi] Terrence O’Brien, Grandfathering super tax increases, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp4-6.
[xii] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016.
[xiii] Jeremy Cooper, A Super Charter: Fewer Changes, Better Outcomes: A report to the Treasurer and Minister Assisting for Financial Services and Superannuation, Canberra, 5 July 2013.
[xiv] Jeremy Cooper, ibid, p 16.
[xv] Terrence O’Brien, Grandfathering super tax increases, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp3-12.
[xvi] Save Our Super, Submission on Second Tranche of Superannuation Exposure Drafts, 10 October 2016, p 18ff.
[xvii] David Crowe, Shorten makes a clumsy try for the populist wave, The Weekend Australian, 11 November 2016
[xviii] Terrence O’Brien, Examination of proposed super changes, letter of 7 September 2016 to Government members.
[xix] APRA, Quarterly Superannuation Performance.
[xx] Jeremy Cooper, op cit, p 4 and Chapter 5.
[xxi] Tony Negline, Saving or slaving: find the sweet spot for super, The Australian, 4 October 2016.
[xxii] Tax Institute, Superannuation reform package – tranche 2, submission to Treasury, 10 October 2017.
[xxiii] Trish Power, Burden for retirees: Monitoring $1.6 million transfer balance cap SuperGuide, 25 October 2016.
[xxiv] Trish Power, Crunching the numbers: a $1.6 million retirement, SuperGuide, 23 May 2016.
[xxv] Tony Negline, Saving or slaving: find the sweet spot for super, The Australian, 4 October 2016.
[xxvi] Trish Power, Super update: Catch-up concessional contributions from July 2018, SuperGuide, 25 October 2016.
[xxvii] Terrence O’Brien, Submission on First Tranche of Superannuation Exposure Drafts, 16 September 2016
[xxviii] Scott Morrison and Kelly O’Dwyer, Superannuation reforms: first tranche of Exposure Drafts , 7 September 2016
[xxix] Scott Morrison, Superannuation (Objective) Bill 2016, Explanatory Materials, p6, para 1.16
[xxx] Peter Costello, A Plan to Simplify and Streamline Superannuation: Detailed Outline, Canberra, May 2006, p 1
[xxxi] John Roskam, The Turnbull Government Backs An Unprincipled Purpose Of Super, 9 September 2016,
[xxxii] Kelly O’Dwyer, Dispelling myths perpetuated by base politicking, The Australian, 10 May 2016.
[xxxiii] Swoboda, K., Major superannuation and retirement income changes in Australia: a chronology, Parliamentary Library Research paper Series 2013-14, Attachment 2, 11 March 2014
[xxxiv]Peter Costello, Tax Laws Amendment (Simplified Superannuation) Bill 2006, Explanatory Memorandum, C2006B00226.
[xxxv] The Treasury, Re:think: Better Tax, Better Australia, Chapter 4: Savings, pp 67-69.
[xxxvi] This is a rough estimate using the $2.794 billion the measures are claimed to raise over the forwards estimates to 2019-20, and allowing for the fact that many of the regulatory burdens on savers and super funds will have to be incurred in 2016-17, before much revenue flows from the super tax increases and regulatory restrictions. We envisage, in effect, 4 years of compliance costs for the first 3 years of estimated revenue.
[xxxvii] Australian Institute of Superannuation Trustees, Superannuation reform package – tranche two, submission to Treasury, 10 October 2016.
[xxxviii] Scot Morrison and Mathias Cormann, Budget Measures, Budget Paper No 2, 2016-17, 3 May 2016, p 25
[xxxix] Robert Cincotta of Anderson Partners, Chartered Accountants, estimates that the extra annual compliance cost for Self Managed Superannuation Funds affected by the proposed new superannuation law will be approximately $3,000 to $4,000, depending on the circumstances of each Self Managed Superannuation Fund.
[xl] Tracy Oliver and Scott Bartley, Tax system complexity and compliance costs — some theoretical considerations, Treasury Economic Roundup, winter 2005.
[xli] ATO, Super Accounts Data Overview.
[xlii] Scott Morrison, Superannuation (Objective) Bill 2016, Explanatory Materials, p6, para 1.16.
[xliii] Scott Morrison and Kelly O’Dwyer, Even Fairer, More Flexible and Sustainable Superannuation, Media Statement, 15 September 2016.
[xliv] Ken Henry et al, Australia’s future tax system, Report to the Treasurer, Part Two, Detailed analysis, Volume 1, December 2009, p 12.
[xlv] Simon Cowan, The Myths of the Generational Bargain, Centre for Independent Studies, Research Report 10, 1 March 2016.
[xlvi] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016.
Many of you know that there are different ways to measure the size of these concessions; I know ASPRA (sic) in particular take some exception to the way tax expenditures statements are used or, I should say, abused by some in this debate. Tax expenditure statements do not represent costings. They do not truly reflect what the cost to revenue actually is and the way they are combined also inappropriately by some advocates, particularly the Opposition, misrepresents the cost to the Government in what amounts to expenditures that are provided in tax concessions. I think this is an area that we can continue to refine and get right and ASPRA has some excellent suggestions about how we might achieve to do that, as does the SMSF Association. We hope to achieve that together with all of the organisations in the sector. They don’t, these tax expenditures statements, represent the potential revenue gain to the Government as many have claimed.
Some say these concessions are as high as $30 billion. Others believe it could be as low as $11 billion. The task is to weigh up the value of superannuation tax concessions against other uses for how that revenue might be applied.
In fact, these two numbers are not just ‘beliefs’; they are both Treasury estimates. The first uses a comprehensive income tax as a hypothetical benchmark, and the second uses one of several valid expenditure tax benchmarks. Both numbers are gross, not allowing for savings from reduced access to the age pension induced by the concessions.
[xlvii] Robert Carling, Right or Rort? Dissecting Australia’s Tax Concessions, Centre for Independent Studies, Research Report 2, April 2015.
[xlviii]Mark Day, Tax cuts: A lesson for Duncan Storrar and Q&A, The Australian, 16 May 2016.
[xlix] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016.
[l] Robert Carling, How should super be taxed?, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), p 20,
[li] A classic example is the Green’s superannuation policy that concessional (i.e. pre-tax) contributions to super, presently taxed at a flat 15%, should instead be taxed at progressive rates of up to 32%. Moreover, there should also be a welfare payment: anyone earning below the tax–free threshold of $18,200 and locking away savings in super for 40 years should receive a payment from other taxpayers of 15c for every dollar they save.
On the progressiveness of Australia’s tax/benefit system, see Dick Warburton and Peter Hendy, International comparison of Australia’s taxes, April 2006, Section 4.5.
[lii] Scott Morrison, Treasury Laws Amendment (Fair and sustainable superannuation) bill 2016: exposure draft explanatory materials, Canberra October 2016, p 14 para 1.31
[liii] Scott Morrison, ibid, p 19.
[liv] Scott Morrison, ibid, p 67, para 1.259.
[lv] Superannuation (Objective) Bill 2016, Explanatory Materials, ibid, pp 102-109, especially para 8.35