Aaron Hammond

Australian Financial Review

24 May 2019

John Kehoe and Phillip Coorey

Treasurer Josh Frydenberg will commission a review of the retirement income system, including the interaction of superannuation, government pensions and, potentially, taxation.

In an interview with AFR Weekend, Mr Frydenberg said he would consult with cabinet colleagues and Treasury to act on the Productivity Commission’s recommendation to conduct a review of retirement incomes.

“My intention would be to establish that review,” Mr Frydenberg said.

“I am positively disposed to a review of the retirement income system as recommended by the Productivity Commission.”

Mr Frydenberg also signalled that the Morrison government was likely to rekindle its campaign to force a dilution of union and employer group representatives on the boards of industry superannuation funds.

“There are a number of superannuation reforms that remain outstanding from the last term of government,” Mr Frydenberg said.

Mr Frydenberg said it was “clear” from both the Productivity Commission and the Royal Commission findings “that there is a strong case for reform to strengthen accountability and governance, improve member outcomes and the overall efficiency of the system”.

Recommendations from the mooted retirement income system review could give the re-elected Morrison government, which faces criticisms for having a light policy agenda beyond cutting income taxes, foundations for a reform package to take to the next election.

An examination of retirement incomes could trigger anxiety among seniors and the superannuation industry, who have endured ongoing changes over several years to super tax breaks, pension payments and Labor’s failed plan to end cash refunds of dividend franking credits.

Superannuation a policy agenda

The Productivity Commission’s review of the efficiency and competitiveness of superannuation, released in December, recommended to the Morrison government that it initiate a broader review of the retirement income system, including super, pensions and taxation.

Prime Minister Scott Morrison during the election pledged not to change the taxation of superannuation.

Federal budget savings from paying lower pensions will only exceed the cost of superannuation tax concessions by 2060, or 2100 including the accumulated debt the system is racking up now, according to the Grattan Institute think tank, using Treasury’s long-term projections.

The Productivity Commission wanted an independent assessment of whether the compulsory superannuation system set up 27 years ago was achieving its original stated objective of raising national savings – by increasing private savings and taking pressure off the government budget.

The commission wanted an inquiry to explore if any reduction in reliance on the government pension helps the federal budget, given that higher-income earners receive big superannuation tax breaks.

The commission also wanted to see if compelling workers to forgo a portion of their salary in favour of deferred superannuation savings benefits the poor and wealthy fairly.

Low-income earners make a relatively large immediate sacrifice of forgone income they could spend today, while the wealthy receive big superannuation tax concessions.

The PC said the inquiry should be conducted before compulsory super is increased from 9.5 per cent of wages to 12 per cent, due to be phased in between 2021 and 2025.

Mr Frydenberg said the government had “no plans” to change the superannuation guarantee (SG) rise.

The Abbott government delayed the scheduled compulsory compulsory superannuation increase employers pay employees.

Higher super contributions are paid for through lower wage increases, according to numerous economists, including former Treasury secretary Ken Henry’s tax review and the independent Parliamentary Budget Office.

Increasing compulsory superannuation to 12 per cent of wages will cost Australian workers $20 billion a year in take-home pay and exacerbate sluggish wage growth, according to Grattan Institute analysis.

Grattan Institute fellow Brendan Coates said a retirement income system review was needed.

“We still haven’t worked out what the purpose of the system is and how the different parts of it work together,” Mr Coates said.

“We need to work out the target for an adequate retirement income and what the trade-off should be between living standards while working versus in retirement.

“We are still providing such large super tax breaks too.”

Before the planned longer-term review reports, more immediately Mr Frydenberg said the government will implement the banking royal commission’s recommendation to “staple” a single default superannuation account to new employees entering the workforce to save consumers millions of dollars in fees from unintended multiple super accounts.

He would also “move quickly as possible” on making life insurance inside superannuation opt-in, rather than default – a move resisted by the industry.

Dilute union influence

Mr Frydenberg indicated the government would revisit plans to dilute the influence of unions and employer groups on the boards of industry super funds.

After being unable to secure enough Senate support, the government, in August last year, shelved plans to mandate one-third of independent directors for all super fund boards.

Currently the boards are comprised of an even mix of union and employer group representatives.

As well as not having enough Senate support, the politics of chasing industry super became toxic after the sector emerged from the banking royal commission with a clean bill of health whereas the retail finds were hammered.

The Coalition government also needs to figure out if and how the default superannuation system is removed from the industrial relations system – as recommended by the Productivity Commission and resisted by Labor and trade unions.

The last national savings inquiry was concluded in 1993 by economist Vince FitzGerald and a team of Treasury officials for the Keating government.

John Kehoe writes on economics, politics and business from the Canberra press gallery. He is a former Washington correspondent. Connect with John on Twitter. Email John at jkehoe@afr.com

Phillip Coorey is The Australian Financial Review’s Political Editor based in Canberra. He is a two-time winner of the Paul Lyneham award for press gallery excellence. Connect with Phillip on Facebook and Twitter. Email Phillip at pcoorey@afr.com

The Australian

22 May 2019

Glenda Korporaal

The re-election of the Morrison government means people saving for their retirement can focus on what they need to do before June 30 instead of worrying how they might be hit by a slew of changes under a Shorten government.

In theory at least, the basic framework of superannuation as well as negative gearing, capital gains tax, the taxation of trusts, and dividend imputation — and even the tax-deductibility of accounting fees — is now protected from government intervention for the next three years.

“We now have some certainty in terms of government superannuation policy,” said Peter Burgess, the general manager technical services with AMP’s SuperConcepts.

“Now off the table are the Labor Party’s proposals to remove refundable franking credits which clearly would have impacted many SMSFs, reductions in contribution caps and other superannuation concessions.”

If Labor had been elected, the abolition of cash refunds for franking credits, which would have kicked in from July 1, would have made some savers think twice about investing in Australian shares, particularly those with self-managed super funds. It could have encouraged more ordinary Australians saving for their retirement to take the riskier path of ­investing in offshore shares.

Uncertainty about the treatment of super under Labor could have discouraged people with SMSFs from putting in extra post-tax dollars into their super before June 30. (Some 1.2 million Australians now have SMSFs in both ­accumulation and pension mode with total assets of $726 billion, a sizeable chunk of the $2.65 trillion in super as of December.)

But even for those without SMSFs, savers on lower incomes with blue-chip Australian shares would have worried about losing potential cash refunds once they moved into retirement.

Labor had decided to exempt people on the age pension from their proposed abolition of cash refunds for franking credits.

But the question is whether those in this situation actually knew of the distinction or, if they did, were prepared to believe it.

And if they did, they could have been encouraged to spend some of their savings to qualify for the age pension and still retain the potential for cash refunds from their franking credits after July 1.

Whichever way you cut it, Labor’s proposals were set to distort the system and generate concern that more tax hikes on savers and changes to the super system could be on the cards from a party focused on “taxing the rich”, including retirees.

A generation ago few ordinary Australians even had shares.

But now it is common for ordinary Australians heading to retirement to have a small portfolio of blue-chip shares including some such as Commonwealth Bank and Telstra held since their privatisations.

With its roots in the English class warfare mythology (which must be a mystery to a generation of aspirational new Australians from non-English backgrounds), the Labor campaign harked back to another era when ordinary Australians did not own shares.

Australian shares are the biggest single component of SMSFs which benefit from cash refunds once they move into retirement mode where their investments are tax-free. The fact is that the cash refunds from franking credits only benefit people whose tax rate is below the company tax rate of 30 per cent. People with marginal tax rates of 30 per cent or higher would never get franking credit tax refunds anyway.

Superannuation is not a big deal for the very rich and the poor rely largely on the age pension.

But the development of the compulsory super and the evolution of SMSFs created a new generation of middle-of-the-road Australians who had set their sights on managing their affairs for a self-funded retirement.

Constantly changing the goalposts to reduce the ability to contribute to super and reduce its attraction has already eroded some confidence in the system.

Labor was prepared to go another step further with its policies.

To be fair to Labor, the party decided that retirees and near-retirees with shares and those with SMSFs were easy targets, unable to organise themselves politically to oppose their proposed changes.

But they didn’t count on the well of concern in some circles about changes to super announced by the Turnbull government under Treasurer Scott Morrison before the 2016 election.

The Turnbull-Morrison government did a good job of portraying middle-income people wanting to put extra money into super as being greedy tax avoiders.

Anger at the tax changes, which included the imposition of the $1.6m cap on the amount which could be put into super in the tax-free pension mode, the end of the attraction of transition to retirement schemes and constantly lowering contribution caps — and the rhetoric surrounding the announcement — were all too easily dismissed. Indeed, if anyone knew the anger in some circles about the changes to super it would have been Morrison.

Some argue that anger almost cost Turnbull the 2016 election with otherwise Liberal voters not putting their hands in their pockets for donations or to help distributing how-to-vote cards and opting to make a protest vote for minor parties in the Senate.

Fast forward to this election and the Morrison government was all too willing to find itself back on the side of aspirational savers once Labor announced its policies. And having seen how easy it was for Morrison to change the rules on super a few years ago, there was a cohort of people like Geoff Wilson and Self Managed Super Fund Association chair Deborah Ralston who realised the need to lobby hard against the changes. Hopefully stability of the system can prevail and the results of the election will reduce the power of the Treasury to argue that super is an “easy nick” which can be targeted in the future for more tax revenue.

The Australian

8 May 2019

James Kirby – Wealth Editor

Labor’s controversial plan to scrap franking credit rebates will accelerate the exodus of superannuation investors from existing banks to industry funds and investment platforms.

A new report from stockbroker Ord Minnett suggests the trend — which has seen billions of dollars move out of retail funds and over to union-linked industry funds — will be further accelerated by investors seeking to protect themselves from the ALP franking credit plans.

The report also reveals that so-called “investment platforms” such as Netwealth or HUB24 could be major beneficiaries of this flood of money — the broker estimates both listed companies could double their super assets.

As the report suggests, “the royal commission sparked changes and this wave of change has yet to crest: Labor’s proposed banning of franking credit refunds could see many SMSF assets migrate to platforms or other pooled super vehicles.

“We estimate that more than $200 billion of SMSF assets are in pension phase, and that even more are in accumulation phase but still generating franking refunds.”

The exodus of superannuation money from the banks and self-managed super funds has also been spurred by major changes in the financial advice industry that are yet to fully play out.

It is clear already that advisers fleeing the banks and setting up under new independent licences are taking their clients with them.

The move will often involve a review of the client arrangements again prompting large movements of money which end up at industry funds or investment platforms (where investors can make direct investments).

In terms of major investment flows, the double stimulus provided by changes in financial advice arrangements coupled with the fear of losing out on franking credits once again plays primarily into the hands of the nation’s largest funds, which are classified as “pooled investments”. Under the pooled investment structure big funds will be able to substantially (but not entirely) sidestep the ALP scrapping of franking credits because retirees are only a minority of their members and the franking credits get used at the so-called “fund level”.

The most recent super data shows money pouring out of retail funds and into industry funds even with the very poor conditions of the last quarter of 2018.

Australian Prudential Regulation Authority data shows that industry fund money under management was $607bn at December 2018, versus $605bn at June 2018, with net contributions of $17.5bn. Meanwhile, in the six months to December 2018, retail superannuation money under management fell by $36bn and net contributions were negative.

As Ord Minnett suggests: “Industry data provides us comfort that while there is a strong structural trend toward industry super funds, the specialist platforms are benefiting from the structural trend of advice away from the aligned bank and AMP platforms. We see the exodus of advisers from the banks and AMP benefiting HUB and Netwealth while the exodus of clients is benefiting industry funds.”

The confirmation from stockbroking analysts that industry funds will gain even further advantage from the ALP changes will increase pressure on the nation’s biggest funds to improve transparency.

Though the largest funds have consistently suggested they will not be affected by the franking credits plan, it became clear this week that every fund will have to review their “crediting” arrangements for paying retirees if the changes goes through.

With superannuation law demanding that all members in any super fund are treated “equitably”, a change to the tax status of retirees will create a dilemma for funds: if the funds keep paying the retirees as if their special tax status in relation to franking still existed, non-retired members may be disadvantaged. If the funds reduce retiree income there will be major protests.

Either way the funds will be under pressure to detail more clearly how they distribute payments to their members.

The Australian

7 May 2019

Judith Sloan – Contributing Economics Editor

When it comes to monumental policy failings of the Coalition’s period in government, a standout is superannuation.

The changes that were made to the regulation and taxation of superannuation, as well as the ones the Coalition failed to make, in aggregate deserve an F — a big, fat failure.

The Coalition has come close to destroying self-managed super­annuation while giving an epic leg-up to union-sponsored industry super funds. It has paved the way for these funds to dictate the types of companies that will be allowed to operate in this country and how they will operate. Low-income workers continue to be ripped off while genuine superannuation savers have been speared in the eye.

Superannuation now exists primarily for the benefit of the industry rather than the members. It’s been a debacle.

Notwithstanding the clear pledges made in 2015 by Scott Morrison as treasurer that a ­Coalition government would not make changes that would hurt members, the measures contained in the 2016 budget were a repudiation of this.

Without any grandfathering, a cap was set for tax-free super­annuation balances; lower limits were put in place for both concessional and non-concessional contributions; the contributions’ tax was lifted for some members; and other complex restrictions were put in place.

They were essentially the wishlist of the industry super funds. These funds had the ear of influential bureaucrats able to persuade the ill-informed, gullible Coalition economic ministers of these changes.

It has made superannuation a much less attractive retirement ­income option for medium to high-income earners as well as hitting retired superannuants. (Low-income earners will always rely on the age pension and were not ­affected by these budget changes.)

It was hardly surprising that there was such a severe reaction from the Coalition’s base, including some Liberal members. It was a blatant broken promise, yet this didn’t prevent the minister principally responsible for the changes, Kelly O’Dwyer, insisting she was proud of them.

Then again, she had described superannuation tax concessions as gifts from the government, not unlike Bill Shorten’s description of cash refunds for franking credits.

Having made these ill-considered changes — and note that the surge of revenue from superannuation taxes has not been forthcoming in part because they are so dependent on the state of the share market — there were needed reforms to protect low-income workers, particularly those with multiple accounts.

The government faffed around for the next three years, putting forward bills and then withdrawing bills. The key issues were the consolidation of multiple accounts, the enablement of single default accounts, limits on fees, making insurance opt-in for low-balance accounts, the governance of super funds to include independent trustees, and defining superannuation’s purpose.

The end result of this unedifying process was legislating the role of the Australian Taxation Office to merge inactive accounts, a useful if modest outcome. But the great bulk of the Coalition’s super reform agenda was not completed.

Superannuation is a particularly dud product for low-income earners with a number of jobs within a short period of time. They typically end up with multiple accounts and are charged fees and unwanted insurance by each. At 30 they find their overall super­annuation balances trivial.

The obvious answer is to insist that workers are enrolled in a single fund that follows them through their working life unless they choose to change. This was a recommendation of the final report of the banking royal commission. But no progress was made on this.

The final issue on which the Coalition failed was in relation to the legislated increases in the super contribution charge, increases simply impossible to justify. The present rate is 9.5 per cent, but according to the legislated schedule, this rate will increase to 10 per cent on July 1, 2021. The rate will ratchet up over the subsequent years to 12 per cent in 2025.

This is bad news for low-­income earners, particularly with low wages growth.

The Grattan Institute estimates that the increase will strip $20 billion from wages. For a 1 per cent boost in retirement incomes, workers will lose 2.5 per cent of their wages. Moreover, every half a percentage point increase in the super guarantee charge costs the federal budget about $2bn a year.

Unsurprisingly, the father of compulsory superannuation, Paul Keating, has taken exception to the Grattan Institute’s suggestion that the SGC should be frozen at 9.5 per cent. Having previously conceded that the SGC reflects itself in the form of lower wage rises, he thinks the world has changed so that employers will bear the burden of any increase.

Demonstrating that perhaps Keating’s understanding of economics always was shallow, he quotes misleading figures about wage and productivity growth (using arbitrary starting points and failing to understand the distinction between consumer and producer wages) to suggest that employers can absorb an increase in the SGC without having an impact on wages.

But just think this through: if employers are able to restrict productivity gains from flowing through to wages, how can it be the case that employers will voluntarily absorb the impost of a higher SGC? What Keating is saying is ­illogical.

The Coalition has made a complete hash of superannuation policy to the point that the system is a discredited policy when it comes to providing retirement incomes and lowering the dependence on the age pension. It is very bad for low-income earners and it is also very bad for many middle-income earners. For the very wealthy, it is irrelevant.

Things will be worse under Labor given its complete capture by the industry funds. The SGC increases will proceed, there will be more taxation on members, the elimination of cash refunds for franking credits will devastate self-managed superannuation and there will be no progress on the ­establishment of single default funds because the industry super funds don’t want it.

The industry super funds will become more dominant and influential, including by forcing companies to take into account non-commercial considerations under the heading environment, social and governance.

Just don’t forget, it was the ­Coalition started this ball rolling.

The Australian

7 May 2019

James Kirby – Wealth Editor

Some of Australia’s largest superannuation funds risk being caught out by Labor’s planned franking credit shake-up, despite claims they will be exempt from the $6 billion crackdown.

The changes mean super funds could find themselves in breach of tough superannuation rules that demand all members inside a fund are treated “equitably”.

Hundreds of thousands of retirees in funds who are in a pension phase are currently paid a “crediting rate”, which is designed to allow for the special tax status of pensioners who are entitled to franking credit refunds.

But the termination of franking credit refunds under Labor’s planned shake-up will mean funds will have to review how they pay members who are in the pension phase.

Just how any large super fund — including a retail fund — should distribute franking credits between retirees and non-retirees is now looming as a key issue.

“Everyone in the sector is currently trying to work this out,” said John Perri, a technical services manager at AMP.

If funds continue to pay retirees under the current arrangements, they could be allowing for a tax benefit that will no longer exist. This could upset members who have not retired but may find themselves cross-subsidising retired members.

The changes could put the funds in breach of rules to ensure all arrangements in super are “equitable”. But if funds reduce pension payments to adjust for the removal of franking credit refunds, retired members could be affected.

“There are a range of questions unanswered on the franking credits changes,” said John Maroney, chief executive of the SMSF ­Association. “It’s driving uncertainty across the sector.”

The developments came as Treasurer Josh Frydenberg yesterday claimed Labor’s franking credit plan is “starting to bite” in the polls. But in the treasurers debate in Canberra, shadow finance minister Chris Bowen said eliminating cash refunds to retirees who paid no tax was a matter of “fairness”.

Industry funds are generating fast-paced market share growth, partly on the widespread assumption their members will not be ­affected by franking credit changes. The Australian understands most big funds have decided to ­retain existing levels of payments to retirees even if the franking rules change. The bigger super funds have said they will not be ­affected by franking credit retiree refund changes because they have enough non-retired members who can benefit from franking credits (franking credits are not being scrapped, just franking credit ­refunds to retirees).

For example, the $140 billion AustralianSuper has more than two million members generating an income — that is in the accumulation phase — with just a couple of hundred thousand retirees on the accounts. Australian­Super told its members: “The proposed changes are not likely to have a material impact on the investment returns in either retirement or super investment options.”

At face value, the claim stands up at the “fund level” — the funds get franking credits and then use them to benefit members. But different individual tax exposures and investment choices mean the full impact will not be known until draft legislation is passed.

Australian Financial Review

16 April 2019

Andrew Tillett and Tom McIlroy

Scott Morrison has accused Bill Shorten of lying to voters after the Opposition Leader matched a government promise to not to lift taxes on superannuation or introduce new ones despite Labor policies adding up to a $34 billion hit on retirement savings. 

Amid growing fears within Labor ranks the election is tightening, the opposition scrambled to downplay Mr Shorten’s superannuation gaffe by clarifying the commitment meant no new or higher taxes than those already announced. 

Mr Shorten’s difficulties were compounded by an awkward press conference where he repeatedly refused to answer questions about the impact the opposition’s carbon emissions reduction policies would have on the economy.

Labor was also forced on the backfoot over revelations it had deleted dozens of paragraphs of details over its negative gearing and capital gains tax policies from its website.

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.”

Under questioning at his press conference, Mr Shorten also ruled out hiking taxes on retirement savings. “We have no plans to increase taxes on superannuation. We have no plans to introduce any new taxes on superannuation,” he said. However, Labor has announced four superannuation policies ahead of the election campaign, which the Coalition estimates would see a $34 billion increase in tax over a decade, hitting hundreds of thousands of workers. 

One policy is to abolish catch-up concessional contributions, which currently allow workers with super balance of less than $500,000 to roll over the unused portions of the annual $25,000 cap on contributions for up to five years so they can pour more money into their funds. Another is removing tax deductibility for personal contributions under the $25,000 cap for self-employed workers such as tradesmen and women. Also on the cards is slashing the non-concessional contributions cap from $100,000 to $75,000, reducing a person’s ability to make a large one-off contribution to their super balance that could come from the sale of an asset or receiving a redundancy payment or inheritance.

Labor also wants to slug high-income earners by reducing the income threshold from $250,000 to $200,000 so they pay a higher 30 per cent tax instead of the concessional 15 per cent rate on contributions. 

‘Either lying or just forgotten’

Mr Shorten put forward these proposed superannuation changes in August 2016, describing them as “generously high-income loopholes”.

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.”

Labor’s campaign spokesman and finance spokesman Jim Chalmers said Mr Shorten’s commitment was referring to additional changes beyond those that had been “on the table for some time now”. “We have no further announcements to make on superannuation taxes in the campaign. So the policy that we announced some time ago we’ll take to the election,” he told the ABC. 

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.

“We have no plans to increase taxes on superannuation,” Bill Shorten said. Alex Ellinghausen “As I said at that time, once we dealt with them, then we were done with them. That’s why I can give the assurance,” he said. 

Mr Morrison unleashed his strongest campaign attack yet on Labor’s separate $57 billion plan to scrap franking credit refunds for retirees. Both Corangamite and Boothby in Adelaide where Mr Shorten campaigned on Tuesday have a high proportion of seniors. About 8500 people in Corangamite are beneficiaries of franking credit refunds and 8800 in Boothby.

Mr Morrison said the refunds were relied upon by retirees to help with the cost of living, such as private health insurance, electricity and even paying to travel to see family. “That’s what Labor’s retiree tax will take away and steal from Australians,” he said. 

Amid the cut and thrust of campaigning, traded barbs with a journalist after refusing to answer questions on the cost to the economy of Labor’s carbon emissions reduction policies, “I’m going to give your colleagues half a go,” Mr Shorten said. Mr Shorten also defended the deletion of information on Labor’s policies on its housing policy website, saying it was being updated. “As new numbers come to light, we update them. “

‘Complete rubbish’

The changed information comes less than a week after The Australian Financial Review revealed that Labor’s negative gearing could be overstated by between $2.5 billion and $8 billion due to inaccurate assumptions on the level of investment in new housing stock. 

Meanwhile, the Grattan Institute’s new “Orange Book” policy manifesto for the next government warns that increasing compulsory superannuation contributions, to 12 per cent from the existing 9.5 per cent of employee income, would lower wages by more than 2 per cent. “The people who will do worse will be low-income earners because they are the people whose wages are really being squeezed and will see their wages go up by not as much,” Grattan Institute chief executive John Daley said. The gradual increase in the superannuation guarantee is due to resume from 2021 and be completed by 2025 and is officially bipartisan, though philosophically more strongly supported by Labor.

Mr Morrison dismissed “complete rubbish” the institute’s claim on Tuesday the Coalition would need to cut spending by about $40 billion a year by 2030 to afford its big personal income tax cuts and deliver on its budget surplus forecasts.  But shadow treasurer Chris Bowen said report exposed how the government’s unlegislated tax cuts would bake in $40 billion of “secret spending cuts”. “This is the latest proof that the Liberals will cut schools and hospitals to pay for bigger tax loopholes for the top end of town,” he said.