Call for $5m cap on super balances

The Australian

Glenda Korporaal – Associate Editor (Business)

10 February 2021

The Association of Superannuation Funds of Australia has called for a $5m cap on the amount of money that can be saved in superannuation, with retirees being forced to withdraw funds above $5m.

In its pre-budget submission, which comes ahead of its annual conference on Wednesday, the association argues that $5m is more than enough to allow ­people to live a comfortable life in retirement.

It argues that people over 65 should be forced to withdraw any amounts in super above $5m, from July next year.

ASFA chief executive Martin Fahy said last year’s Retirement Income Review had highlighted the inequities in the superannuation system, with the largest benefits in terms of tax concessions going to people on high incomes or with large super accounts.

“There is a very strong justification to discontinue the tax concessions that those with very high balances are getting,” Mr Fahy told The Australianon Tuesday.

The Retirement Income Review found there were 11,000 ­people in Australia who had super balances of more than $5m.

ASFA argues that a balance of $5m in concessionally taxed superannuation “cannot reasonably be justified as necessary to support a comfortable lifestyle in retirement”.

The submission also argues that the low income tax offset should be expanded to apply to people earning up to $45,000 a year — up from the current level of $37,000 a year.

It says this is needed to ensure they are treated equitably and do not pay more in terms of tax on their super contributions than the tax rate on their income.

“While the superannuation system is well designed and working for the majority of Australians, ASFA acknowledges there is merit in addressing a number of the concerns highlighted in the RIR about fairness in the system in regard to individuals with high incomes and/or relatively high account balances,” it says. “Superannuation is about ensuring ­people are comfortable in retirement, it is not about excessive wealth transfers.”

But it says it is also “crucial to ensure that superannuation is ­delivering for low to middle income earners”.

The earnings from money in superannuation are taxed at 15 per cent for accounts in the accumulation mode. Once the fund is paying out pensions, the earnings from the fund are tax-free for amounts below the $1.6m transfer balance cap.

While the transfer balance caps limit the amount of money a member can put into pension phase, where earnings are tax-free, the ASFA submission argues that the current system means people on 45 per cent tax rates can have money above the $1.6m transfer balance cap in super taxed at 15 per cent — a 30 per cent tax rate advantage.

“This tax concession can be substantial for large accounts,” it says. “While current caps on superannuation contributions limit the ability for members to build up excessive balances in the future, there is a real question regarding the appropriate treatment of high balances achieved in the context of more generous contribution caps in the past.”

The submission argues that people should be forced to withdraw funds above $5m from super once they reach 65.

The recommendation comes after other superannuation lobby groups have argued against major changes to superannuation tax concessions on the basis that constant change will undermine confidence in the system.

The ASFA submission concedes that the need to remove “excess balances” from super funds could have some liquidity implications for some small super funds, especially those with illiquid assets such as property.

It says this could be addressed by allowing a transitional situation for small or self-managed super funds that could see earnings from balances above $5m taxed at the top marginal tax rate.

ASFA is also recommending that the current $1.6m transfer balance cap not be indexed as currently planned.