Category: Media Releases

Remarks to the COTA Australia National Policy Forum on Retirement Income

26 February 2021

Senator The Hon Jane Hume

To see the speech on Jane Hume’s website, please click here

Acknowledgements

Thank you for that introduction. The Council on Aging has shown great initiative bringing this event together. It is such an important policy area, and it’s terrific to be part of a national forum dedicated to retirement income. 

This venue has witnessed countless debates – many which have guided policy and spurred progress. Contributing to this broader conversation is a privilege and not something I take on lightly.  

But before I go on – in keeping with the Press Club’s traditions – I would like to acknowledge joint panellist the Shadow Assistant Treasurer and Shadow Minister for Financial Services and Superannuation, Stephen Jones MP. 

Introduction

The measure of society is how it treats its most vulnerable members and our retirement income system is one of the greatest indicators of the values our society holds dear. It is a system that bolsters Australians’ financial security, peace of mind, quality of life and wellbeing in their retirement. 

As the system matures, Australians are retiring with more retirement savings than ever before, which has enabled us to have one of the most sustainable, viable and fair retirement income systems in the world.

By the recommendation of the Productivity Commission, the Government established an independent Retirement Income Review that would look into, not just superannuation, but the three pillars of Australia’s retirement income system including the Age Pension, compulsory super and voluntary savings. 

The Review confirmed our system is delivering adequate retirement incomes for the majority of Australians, and will be viable for generations to come. 

Australians should be reassured that our retirement income system is ‘effective, sound and its costs are broadly sustainable’. 

Indeed, across the world, Australia’s system is a front runner, ranking higher than most other international retirement income models. And during the pandemic, we saw first-hand that our system is well placed to handle economic volatility and as well as an increasingly aging population. 

However, as robust and effective as our system is, the review confirmed there is room for improvement.

Indeed one of the key observations within the Review was that the system more generally could benefit from clearer direction and a better framework for measuring its performance.

And it also found that higher standards of living can be achieved in retirement with more efficient use of all three pillars of our system.

Superannuation and SG

A key theme of the Retirement Income Review was adequacy of the retirement income system. In measuring adequacy, the review used a benchmark of 65-75 per cent of working life disposable income and found most people who start work today would be at or above the benchmark once they retire – even if the SG rate were to remain at 9.5 per cent.

But the crucial information for policy makers is in the detail. The Review found that ‘more efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the SG’.  

The key evidence for this finding was that many retirees live solely on the returns generated from their super balances and eventually die with – on average – 90 per cent of their savings still intact. 

Of course, decisions taken by the current generation of retirees are their own.  But as policymakers considering what is the appropriate level of SG going forward, we must have consideration for our current workers who are our future retirees.

Indeed the Review found if people currently in their working lives and currently contributing to super via the SG were able to use their superannuation more efficiently when they get to retirement in the future, they would have higher replacement rates and better retirement outcomes than if the SG was lifted to 12 per cent.  

And of course, they’d have the benefit of more money in their pocket during their working lives, to boot.  

This is the point the superannuation industry lobby never mentions.  Ever increasing amounts of superannuation contributions for your future retirement savings come at the expense of slower wage rises in your working life.  Whether we are talking about the rise to 10 per cent scheduled for July this year, or 12 per cent per future legislated rises, or even the 15 per cent that Stephen Jones will surely confirm the Labor party is committed to.  It represents wages foregone today.

In the context of the SG, which is a compulsion to take todays’ wages and defer them for 40 years, that’s where the question comes in. As a Government with this knowledge we must consider the implications of compelling people to sacrifice more during their working lives – by forgoing the wages they could be taking home today – that they could spend today – that they could use to pay off a home today – the forgo all that so that their balances are larger at retirement. 

Because the trade-offs are real.  The evidence is incontrovertible that increases in the rate of SG – deferred wages – lead to a slower rate of wage growth over time.  There’s no magic pudding.  The Retirement Income Review said it.  Grattan has said so.  The RBA has said it.  Heck, even the ISA’s own economist has said it.

Now, the Prime Minister has consistently noted that the planned increase in the SG to 12 per cent is already legislated, and if there was to be a decision to change this, it would be made much closer to the time, and in the context of economic circumstances at that time.  

So much of the discussion around retirement is about accumulation – and that’s been understandable in an industry that has spent the last thirty years growing and maturing. But very soon we will have as many dollars in decumulation phase as in accumulation phase.

Let me be clear here – we want more people to have better standards of living in retirement. But the retirement income review notes that much of that hinges on flexibility of retirement income stream products, improved understanding and confidence. 

The Morrison Government salutes the thrift and responsibility of retirees who have worked during their economically active years and who have been able to accumulate savings in voluntary savings vehicles and through compulsory superannuation contributions. 

This is why as a government and as an industry more broadly we must turn our minds to more flexible, and more efficient products that allow retirees to use their super for a higher standard of living in retirement. 

But let’s be clear; under the Morrison Government, these products will never be prescriptive. This is not about forcing retirees – current or future – to draw down on savings through rigid policy settings and punitive regimes that restrict choice and agency. 

This is about navigating the barriers that are preventing people from doing so. Which, more often than not, comes down to fear and inaccessibility. 

We know the inherent complexity of our retirement income system – combined with low levels of financial literacy – can make it difficult to effectively use retirement income streams to improve outcomes.

In fact, COTA’s submission to the Review noted:

There is a need for the retirement income system to be structured and communicated so that people are better able to understand and navigate the system to plan and access optimum and appropriate benefits. (COTA, 2020, p. 6).

And COTA is right. Our system is complicated and difficult to navigate which discourages engagement. 

But there is also this all important issue how superannuation is being used. How do we help people have confidence to use their superannuation more efficiently to focus their planning on income streams as opposed to balances

We all have roles to play here. 

The private sector can better innovate and develop flexible products- an area that we are already seeing a significant uptick in – as well as providing financial advice, guidance and information. 

And the Government needs to create an environment that encourages the market to develop retirement income products and provide guidance to deliver better outcomes for members.

Retirement Income Covenant

Increased access to income stream products will play a role in managing longevity risk by paying a regular income stream, giving people greater confidence to spend their retirement savings. 

To enable this, the Government progressed reforms to superannuation regulations and means test rules to support the development of products that can provide more income – and more certainty – to retirees. 

But there was still room for improvement in encouraging the growth of this sector to give retirees – and those nearing retirement – the certainty they need. 

As it stands, superannuation fund trustees have no obligation to consider how they deliver the primary function of the retirement income system for their members: providing income in retirement. 

The Retirement Income Covenant will change that. At its core it will require trustees to have a strategy to generate higher retirement incomes for their members. 

The Covenant allows super funds the flexibility to tailor their retirement income strategy to their specific membership base, while allowing them to deliver solutions they think will work best for the particular cohorts of members in their fund.  

Many trustees are already taking action in this area, and those ahead of the curve should rest assured that the Covenant will be principles based and not prescriptive.  Innovation in financial services is a competitive strength in Australia and one we are not prepared to lose and we want to see the proverbial thousand flowers bloom.   

With proper accountability and frameworks, trustees of super funds are best placed to manage their funds and develop the best products for their members. Very few organisations represent the interests of super fund trustees. And that’s why this Government is still moving forward with a body to represent super fund members and a body that we would expect COTA to share common cause with. The body will be independent and properly resourced to become the voice of consumers in policy debates about super. 

The Age Pension 

Our Retirement Income System is much bigger than superannuation. In discussions about retirement outcomes, we need to be thinking of our system as a whole – and that includes the Age Pension and savings outside of superannuation.

The fact is our system is designed to enable retirees to access both super and a variable amount of the Age Pension, with the pension scaling up as super balances are drawn down. 

Retirees can have confidence to use their retirement assets knowing that the Age Pension will always be there to support them should their savings not last as long as they planned. 

The Age Pension is far from being just a social safety net. It is a retirement income pillar of its own — received by around 71 per cent of Australians over 65. 

The Age Pension provides an important form of insurance against longevity risk and sequencing risk for retirees.

Increasing system equity 

Before I finish up, I want to make some final remarks about increasing equity in our super system. 

The superannuation system largely supports intergenerational equity. It encourages people to rely on their own savings to meet their retirement income needs.

The maturing of the superannuation system will mean more Australians will have higher retirement savings and the proportion of the eligible population receiving the Age Pension will decline. 

This is expected to reduce the cost of the Age Pension borne by the next generation through tax in their working lives.

That said, we know inequity in our system remains. We know that women retire with significantly less superannuation than men.  

This is an inherent structural feature of the system designed 30 years ago.  By men.

Superannuation balances will always be a reflection of a person’s working life. Women have more gaps in employment than men – often to take on caring responsibilities, or work in – on average – lower paid industries. 

This is why the Morrison Government enabled more opportunities for Australians to contribute to their own superannuation savings voluntarily with catch-up contribution provisions.

But the single greatest contributor to equal superannuation balances is equal employment and pay.

We have always focussed on assisting more women into the work, reaching record breaking female participation in the workforce prior to COVID-19 and under this Government the national gender pay gap has declined 4.5 percentage points since 2014, to 14 per cent in 2020.

As a society we should be proud of the progress we have made, and this Government is determined to continue the momentum. 

Closing remarks

On that note, I would like to thank COTA for hosting today’s forum. 

I know that COTA is committed to improving understanding of the retirement income system and had ‘long called for a review’.

Indeed, the purpose of the Retirement Income Review was always about informing public policy debate, and it is terrific to see that in action today.

All Australians — regardless of age — should be confident about the sustainability of our retirement income system.

Address to the COTA Australia National Policy Forum on Retirement Income

26 February 2021

The Hon Josh Frydenberg MP

To see the address on Josh Frydenberg’s website, please click here

Thank you Ian and the Council on the Aging (COTA) for hosting today’s national policy forum on retirement income.

I would like to acknowledge the constructive role that COTA has played – both prior to the Review being commissioned and since its completion. I especially want to recognise that COTA approaches these issues in a calm and considered manner – not seeking to sensationalise but rather seeking a balanced discussion based on the facts.

I also want to acknowledge that the Royal Commission into Aged Care Quality and Safety is due to be released imminently and it too will make an important contribution to policy development in this area.

Australia’s population is ageing.

We are living and working longer.

And the nature of retirement is changing.

It was against this backdrop that I commissioned the first holistic review of the retirement income system since the early 90s.

The Review was conducted over a 10 month period by an independent panel: Mr Michael Callaghan, Ms Carolyn Kay, and Dr Deborah Ralston.

It received more than 430 submissions and produced a report in excess of 600 pages.

I want to thank the panel for their comprehensive assessment of our retirement income system. It is a body of work that will inform policy direction in this area for years to come.

I also note that the next Intergenerational Report will be released in the middle of this year. With the last IGR having been handed down in 2015, this year’s IGR will be especially important in highlighting the wider impacts of COVID-19. No doubt it will also contribute to our continued assessment of the effectiveness and sustainability of our retirement income system.

Today, however, I want to outline my perspective on the Review:

  • first, the significance of the Review and why it matters;
  • second, the Review’s evidence base and what it found; and
  • third, the challenging policy trade-offs the Review identified as being at the core of the system and which we must get right if we are to improve Australians’ quality of life – not just during their retirement.

As many in this room will know, the Review examined the three pillars of the retirement income system: the Age Pension; compulsory superannuation; and voluntary savings, including home ownership.

It looked at each pillar individually and at the system collectively. In doing so it has provided a comprehensive assessment of the system and the outcomes it is delivering for all Australians.

This is vital because it has allowed proper consideration of each pillar within the context of the wider retirement income system. Until now, each pillar was typically assessed in its own right and without consideration of the contribution being made by the other pillars of the system.

It means questions such as adequacy and sustainability can correctly be considered in the context of the system as a whole rather than looked at in isolation.

Establishing a fact base – what did the review find?

The core task of the Review was to establish a fact base of the current retirement income system to improve understanding of its operation and the outcomes it is delivering for Australians.

What then did the Review find?

1 – The system achieves adequate retirement outcomes.

The Review found the three pillars of the system, the Age Pension, compulsory superannuation and voluntary savings deliver adequate incomes in retirement for most Australians and will be viable for generations to come.

In measuring the adequacy of retirement incomes the system delivers, the Review considered that income in retirement should “replace” around 65 per cent to 75 per cent of disposable working life income. This balances living standards over a person’s lifetime, and is in line with the standard used around the world, including by the OECD.

The Review’s evidence suggests that current retirees meet this benchmark, and that future retirees are also projected to meet it – and in many cases exceed it.

The results are consistent across men and women, different incomes, different work patterns and different savings behaviours. The current retirement income system provides an adequate retirement for a wide range of people.

This is a key finding that should reassure the vast majority of Australians that our retirement income system is working to ensure that their living standards in retirement will broadly reflect their living standards pre-retirement.

In the words of the Review: “Most recent retirees are estimated to have adequate retirement incomes”, and for future retirees, “replacement rates are projected to exceed or meet the [adequacy benchmark] for all income levels when considering employees regardless of relationship status or gender.”

2 – The Age Pension is central to our system and is working effectively.

The Review also found that the Age Pension plays a central role in our retirement income system. It is both a safety-net and a supplement. It allows Australians to more confidently use their own savings during their retirement in the knowledge that that Age Pension is there as a back-stop later in life as their savings are drawn down.

Importantly, the Review also finds the Age Pension plays an important role in improving equity by reducing income inequality among retirees, as low-income retirees receive the largest Age Pension payments.

In adequacy terms, the Review finds that 11 per cent of retirees are in financial stress, lower than the working-age average. To quote the Review, “the Age Pension combined with other support provided to retirees, is effective in ensuring most Australians achieve a minimum standard of living in retirement in line with community standards.”

Notwithstanding the strong endorsement by the Review of the vital role played by the Age Pension, research commissioned by the Review shows that most young people do not think the Age Pension will be there when they retire.

Clearly we must do more to reassure all Australians that this concern is unfounded. The Review’s findings could not be clearer. The Age Pension is well targeted and sustainable and will remain a key pillar of our system for generations to come.

This leads me to the next key finding of the review which is that the retirement income system is both sustainable and robust.

3 – The retirement income system is sustainable and robust.

In the words of the Review, “the Australian retirement income system is effective, sound and its costs are broadly sustainable.”

The cost of the Age Pension is projected to decline from 2.5 per cent of GDP in 2020 to 2.3 per cent of GDP in 2060. And while the cost of superannuation tax concessions will grow from 2 per cent of GDP to 2.6 per cent over that time, the overall cost of the retirement income system will continue to be relatively low by international standards.

This is remarkable given our ageing population. But the cost-effectiveness of our system is not an accident. It is the product of sound design and prior reforms that have enhanced its sustainability. That includes this Government’s reforms to the Age Pension assets test and the introduction of the transfer balance cap for superannuation.

This means, unlike a lot of other countries around the world, we have a retirement income system that is both sustainable today and well into the future.

Along with being sustainable, the Review also showed that our system is resilient. That is, it can continue to provide adequate outcomes for retirees through economic shocks and downturns – including COVID-19.

By way of example, the Review found that even if the market fell by 25 per cent just before they retire, the income for the median earner would only drop one per cent across their retirement, because the Age Pension is available to support them when they need it.

4 Superannuation plays an important role in the system.

Evidence commissioned by the Review shows compulsory superannuation has increased total household savings. Without compulsory superannuation, many Australians would not save enough for retirement.

The superannuation system also gives people the flexibility to save more if they can. Voluntary contributions to superannuation also provide those outside the compulsory system with an opportunity to contribute, such as the self‑employed and people with interrupted work. Around a quarter of Australians make these voluntary contributions to superannuation.

The benefits of superannuation will grow as the system matures. Median balances for people entering retirement today are around $140,000 but by 2060 are projected to be around $450,000, in real terms adjusted for changes in living standards.

With effective use of those savings, Australians will be increasingly well-placed to achieve financial security in retirement.

5 – Home ownership is critical to quality of life in retirement.

The Review found home ownership was the most important factor for avoiding hardship in retirement. For example, 6 per cent of couples that are homeowners in retirement report being in financial stress. This compares with 34 per cent for couples that rent.

Home ownership lowers living costs and provides financial security in retirement. The Review also found that the home makes up the largest share of wealth for older Australians. This wealth gives retirees peace of mind, and can help retirees cope with spending pressures that they may face.

The Government recognises the importance of home ownership to the financial security and wellbeing of Australians in retirement. To that end, we are continuing to deliver measures that will allow more Australians to buy their first home sooner, including through the First Home Loan Deposit Scheme, First Home Super Saver Scheme and HomeBuilder Scheme.

We are also leveraging the retirement income system to improve supply through the downsizer contribution, which allows people aged over 65 to contribute up to $300,000 to superannuation if they sell their home.

6 – The system is complex and we all need to do more to help Australians make better decisions

While these key findings are overwhelmingly positive, the Review also found that complexity, low financial literacy and limited guidance means too many Australians don’t plan for their retirement or make the most of their savings when in retirement.

Further, many are also not aware of the extensive support they receive from Governments once in retirement, such as through health and aged care services.

The Review considers these factors to be a driver of conservative spending behaviours and misconceptions around how much savings Australians need in retirement to sustain their standard of living.

Improving retirees’ understanding of the retirement income system can assist them to make better use of their retirement savings and improve their living standards in retirement – without sacrificing their living standards during their working life.

This will continue to be an area of focus for the Government.

This is also why the Government’s Retirement Income Covenant is an important reform to the system. The Covenant will establish a requirement for superannuation trustees to develop a retirement income strategy for members. In doing so, the Covenant will require superannuation funds to consider the retirement income needs of their members and how they can assist them to get the most out of their accumulated savings over the course of their retirement.

It is a system that must carefully weigh a series of trade offs

While the Review’s key findings should rightly give us all confidence about the outcomes that the system is delivering as a whole, it also makes clear the difficult trade-offs that are at the core of the system.

These trade-offs represent the key choices that both individuals and Governments must make. And like all trade-offs, there are competing interests that need to be weighed.

The retirement income system is by definition, designed to provide retirement incomes. But the system cannot solely be about maximising income in retirement. Were it to seek to do so, it would clearly come at considerable expense to individuals during their working lives.

The Review rightly outlined that the system should help people balance their lifetime income. This means balancing the trade-offs between income in someone’s working life and in retirement.

In this respect, the Review highlighted the trade-off between the superannuation guarantee and wages.

Drawing on overwhelming international and Australian evidence including independent analysis from the ANU, the Grattan Institute and the RBA, the review conclusively stated that a higher superannuation guarantee means lower wages for employees.

Specifically, the Review stated “the weight of evidence suggests the majority of increases in the superannuation guarantee come at the expense of growth in wages.”

No-one should be surprised by this or find it controversial. It was part of the original policy design of the superannuation system.

As I have said previously, this is not rocket science, anybody who denies that there is a trade-off is effectively a “flat-earther”.

The Review found that increases to the superannuation guarantee boost retirement income, but that this comes at the expense of working-life income.

For a median earner, increasing the superannuation guarantee could increase their retirement income by $33,000, but lower their working-life income by around $32,000.

Given the compulsory nature of superannuation, this is a trade-off that the system imposes, not one which individuals can choose for themselves.

Were it not for compulsion, it would be a matter for each individual to decide how much of today’s income they are prepared to save for their retirement.

It is simply not true, as some would have us believe, that there is virtually no limit to how high the superannuation guarantee can be increased in the name of delivering ever higher retirement incomes.

Indeed, for some, there isn’t a problem that cannot be solved through a higher rate of compulsory superannuation.

These myths do nothing to help Australians plan for retirement, to feel more confident or to be more secure in their retirement.

Indeed, as the Review noted, the people most affected by high default settings are not the most-well off: “People with lower incomes are particularly vulnerable when compulsory savings rates are set too high”, noting that it “could increase pressure on lower‑income earners during working life through lower incomes”.

This important observation sits alongside a key finding of the Review with respect to superannuation, which is that “If people efficiently use their assets, then with the SG rate remaining at 9.5 per cent, most could achieve adequate retirement incomes when combined with the Age Pension. They could achieve a better balance between their working life and retirement incomes.”

This is why, as the Prime Minister and I have said, we must rightly carefully consider the implications of the legislated increase to the superannuation guarantee before 1 July this year – even more so at a time when our economy is recovering from the largest economic shock since the Great Depression.

The Review also identified the trade-off between flexibility and compulsion.

The Review noted that our system has considerable flexibility if you want to save more for your retirement. But there is very limited flexibility if a person needs to save less to maintain their quality of life today.

The COVID-19 early release of superannuation scheme was an example of how greater flexibility can benefit those that need it.

Recognising the trade-offs, we gave Australians the choice of increased flexibility, allowing them to access their savings when they needed them most.

And the scheme improved their lives. The ABS Household Impact survey showed that for around 80 per cent of people, the main use of the funds was to pay for bills, mortgages or add to savings.

Early release of superannuation in many cases allowed people to stay in their homes, keep their kids in school and provide for their families during an exceptionally challenging period in their lives.

And, as the Review found, because of our robust multi-pillar system even a person who accessed the maximum $20,000 today will still have an adequate income in retirement.

While compulsion will remain an important part of our system, providing Australians with more flexibility should not be seen as an attempt to undermine the system overall. Far from it.

The earlier Australians interact with the system the more engaged they will be and the more ownership they will feel over their own savings.

More flexibility also means better accommodating the many different circumstances Australians finds themselves over the course of their lives – whether it be their working patterns, taking time off to raise children or deciding to make catch up contributions at a time that their financial circumstances allow.

This is why we have introduced several changes over recent years to provide greater flexibility and allow Australians to make the most of their circumstances and better balance their working life income and their retirement income.

These changes have included allowing Australians with balances under $500,000 to make ‘catch-up’ contributions, enabling the self-employed and others to claim tax deductions for their personal superannuation contributions, and allowing Australians aged 65 and 66 to make voluntary superannuation contributions without meeting the Work Test.

The Government will always be very sceptical of those who, in pursuit of their own self-interest, would seek to restrict the legitimate choices Australians should have about how they choose to save for their own retirement.

Better use of superannuation savings critical to higher retirement incomes

The Review made clear that how retirees use their superannuation savings in retirement has a significant impact on their retirement income and therefore their quality of life in retirement.

Overwhelmingly, retirees currently do not spend all their superannuation before they die. This is despite the fact that retirees today have not benefitted from a mature superannuation system their whole working life.

The Review shows that if nothing changes, by 2060, one in every three dollars paid out of superannuation will be part of a bequest. This raises the question as to whether the answer to lifting the retirement incomes of Australians is more superannuation savings or better guidance about how to maximise their superannuation savings during their retirement.

This question is all the more important given the trade-offs from higher contributions I have outlined above.

Drawing from the analysis in the Review, Treasury has estimated that at the current superannuation guarantee rate, using superannuation efficiently could increase the median person’s income in retirement by over $100,000 compared to how people typically draw down on their superannuation now.

To illustrate how significant this finding is, the Review also assessed the impact on retirement incomes of the superannuation guarantee rate increasing to 12 per cent, but the same median income earner only drawing down on their superannuation at the current typical rates. In this scenario, the person would only receive $7,000 in additional retirement income over their retirement despite having foregone more of their working life income.

It is clear that giving more confidence and guidance to retirees to assist them in drawing down on their superannuation savings more effectively is critically important.

This is perhaps the key challenge that the Review has highlighted and which we must collectively solve. There are few more effective ways to improve the quality of life for Australians in retirement than to help them make better financial decisions. This is an area that the Government will look to do more and I look forward to engaging with all of you on this critical task.

Continued superannuation reform key to higher retirement incomes

The efficiency of the superannuation system is vital to the retirement outcomes it delivers Australians. Under a compulsory system supported by important tax incentives, it is incumbent on the Government to ensure that members and taxpayers are getting value for money from the system.

The Government has successfully implemented major reforms to the system over recent years that will see substantial savings flow to Australians.

These reforms have included fee caps on low balance superannuation accounts, banning exit fees and requiring insurance to be offered on an opt-in basis in certain circumstances where it would otherwise result in an unwarranted erosion of member balances.

The Government has also legislated reforms to allow the ATO to proactively reunite lost and unclaimed super balances held by the ATO with an individual’s current active account. As of December 2020, the ATO has proactively consolidated $3.7 billion held in unintended multiple accounts on behalf of almost two million Australians.

As the Review highlights, adequate retirement outcomes are also a product of the returns Australians earn on their savings. Those returns are a function of the performance their superannuation fund delivers and the costs of delivering that performance.

That is why the Government is focussed on ensuring Australians’ hard earned superannuation savings are working harder for them. As many in this room will be aware, the Your Future, Your Super reforms announced in the Budget stand to boost the retirement savings of millions of Australians, with Treasury estimating a total benefit to members of $17.9 billion over 10 years.

Treasury estimates young workers entering the workforce could be up to $98,000 better off at retirement because of these reforms.

Eliminating expenditure that is not in the best financial interests of members, preventing the creation of unintended multiple accounts, driving down fees and holding funds to account for poor performance represents the only “free lunch” when it comes to increasing the retirement incomes of all Australians.

Closing remarks

To conclude, the comprehensive review of Australia’s retirement income system tells us that we have much to celebrate.

Our system produces adequate retirement incomes for the vast majority of Australians, and it does so in a way that is fiscally sustainable in the long term.

As our population ages, as we live longer and our retirement patterns change, I am confident that the pillars of the system will continue to provide effective support to Australian retirees.

But as the Review highlights, there is scope to improve the system and to continue to challenge ourselves with respect to the key trade-offs at the core of the system.

The work of the Review now provides the evidence base to have these discussions and to consider what more we need to do to improve the system and ultimately help more Australians more effectively balance their lifetime incomes.

Labor’s excess dividend imputation credits Media Release – 27 March 2018

BILL SHORTEN MP

LEADER OF THE OPPOSITION

CHRIS BOWEN MP

SHADOW TREASURER

JENNY MACKLIN MP

SHADOW MINISTER FOR FAMILIES AND SOCIAL SERVICES

LABOR’S PLAN TO CRACK DOWN ON TAX LOOPHOLES, PROTECT PENSIONERS, AND PAY FOR SCHOOLS AND HOSPITALS

Labor’s reforms to excess dividend imputation credits will crack down on an unsustainable tax loophole that gives tax refunds to people who don’t pay income tax, while protecting pensioners and paying for better schools and hospitals.

Today, Labor is introducing a new Pensioner Guarantee – protecting pensioners from changes to excess dividend imputation credits.

The Pensioner Guarantee will protect pensioners who may otherwise be affected by this important reform.

Labor is cracking down on this tax loophole because it will soon cost the budget $8 billion a year.

Much of this goes to high-wealth individuals, with 80 per cent of the benefit accruing to the wealthiest 20 per cent of retirees. The top one per cent of self-managed superannuation funds received an average cash refund of more than $80,000 in 2014-15.

Labor does not think it is fair to spend $8 billion a year on a tax loophole that mainly benefits millionaires who don’t pay income tax – not when school standards are falling and hospital waiting lists are growing longer.

$8 billion a year is more than we spend on public hospitals or child care. It’s three times what we spend on the Australian Federal Police.

Labor will close this tax loophole to help pay for better schools, better hospitals and tax relief for working Australians – but we’ll protect pensioners with our Pensioner Guarantee.

We believe in a fair go for pensioners. We know they are struggling with the cost of living, especially with out of control power prices and Turnbull’s cuts to Medicare.

That’s why Labor is making sure pensioners will still be able to access cash refunds from excess dividend imputation credits.

The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

This means that every pensioner will still be able to benefit from cash refunds.

Labor has always protected pensioners – and we always will.

In contrast, the Liberals have cut the pension, increased the cost of living, and are trying to force Australians to work until they are 70.

Turnbull has:

  • cut the pension for 277,000 retirees;
  • kicked another 92,300 retirees off the pension altogether;
  • cut pension concessions that help pensioners with costs including rates and registration; and
  • is trying to cut the $365-a-year energy supplement for 400,000 pensioners.

 

Turnbull’s cuts will see more than $7 billion taken out of the pockets of Australia’s pensioners.

Turnbull has been the worst prime minister for Australia’s pensioners in living memory.

Labor’s policy is fair and responsible because it cracks down on an unaffordable tax loophole while protecting pensioners and paying for better schools and hospitals.

Mr Turnbull and his Liberals are protecting tax loopholes for millionaires, giving a $65 billion tax handout to multinationals, increases taxes for seven million working Australians, and cutting funding to local schools and hospitals. They are totally out of touch.

Labor’s policy will improve the budget position by $10.7 billion over the election forward estimates and $55.7 billion over the medium term.  This is a reduction of $700 million over the election forward estimates compared to the original announcement, and $3.3 billion over the medium term.

Part of this saving will be used to fund Labor’s Australian Investment Guarantee – delivering tax relief for businesses investing in Australia and in Australian jobs.

Labor’s policy has been fully costed by the independent Parliamentary Budget Office. The Parliamentary Budget Office’s costings are based on the current budget baseline, which includes the effect of the $1.6 million balance transfer cap.

More information on Labor’s policy can be found here.

TUESDAY, 27 MARCH 2018

Authorised by Noah Carroll ALP Canberra

Labor’s excess dividend imputation credits policy – “Pensioner Guarantee” – 27 March 2018

BILL SHORTEN MP – LEADER OF THE OPPOSITION

CHRIS BOWEN MP – SHADOW TREASURER

JENNY MACKLIN MP – SHADOW MINISTER FOR FAMILIES AND SOCIAL SERVICES

27 March 2018

Labor is cracking down on a loophole that gives tax refunds to people who have a lot of wealth but don’t pay any income tax.

This loophole will soon cost $8 billion a year- more than we spend on public schools, or child care. It’s three times what we spend on the Australian Federal Police.

Most of these funds go straight into the pockets of a few very wealthy people who are already very com fortable. In fact, 80 per cent of the benefit accrues to the wealthiest 20 per cent of retirees.

Labor believes that scarce taxpayer dollars can be better spent on improving schools and cutting hospital waiting lists – so that’s what we are doing.

Labor will close the loophole so that people who don’t pay income tax don’t get a tax refund – and spend the money on schools and hospitals instead.

Labor will introduce a new Pensioner Guarantee- protecting pensioners from Labor’s changes to excess dividend imputation credits.

History of imputation policy

The dividend imputation system was introduced by the Hawke-Keating Government to ensure that the profits of companies operating in Australia are only taxed once for Australian investors. Under this system, imputation credits were attached to dividends, equal to the value of any company tax paid on the company’s profits. These credits could then be used to reduce an individual’s tax liabilities. If someone didn’t have a tax liability, or if the tax liability was smaller than the imputation credits, the imputation credits went unused. No cash refunds were paid.

The Howard Government changed the dividend imputation laws to allow individuals and superannuation funds to claim cash refunds for any excess imputation credits that were not used to offset tax liabilities. That is, people paying no tax received a tax refund. The original purpose of dividend imputation was to reduce tax paid, but due to Howard’s change, individuals – many wealthy individuals – are getting a cash bonus.

Australia is the only country with fully refundable imputation credits, and one of only a few OECD countries that has a dividend imputation system. Refundable tax credits are an anomaly in the Australian tax system, as most tax concessions in Australia are non-refundable tax offsets.

Who is benefiting from excess imputation loopholes? 

The vast majority of working Australians do not receive cash refunds for excess imputation credits.

Analysis from the PBO shows that 92 per cent of taxpayers in Australia did not receive any cash refunds for excess imputation credits in their 2014-15 tax return.

Recipients of cash refunds are typically wealthier retirees who aren’t paying income tax. These are people who typically own their own home and also have other tax-free superannuation assets, and don’t pay tax on their superannuation income.

Distributional analysis shows that:

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

 

Working Australians typically go to work and pay their PAVG taxes and if they own shares they use imputation credits to offset their personal income tax liabilities.  That is, they  use imputation credits to pay less tax, but don’t receive a cash refund.

The Government has run a dishonest scare campaign on the impact of this policy-using ‘taxable income’ data to indicate that Labor’s policy was targeting people on very low incomes.

The fact is, taxable income data excludes income from retirement phase superannuation and a lot of the income people receive in retirement is ‘tax free’ because it comes out of retirement phase super funds. As a result, some Australians have low taxable income but actually have a high disposable income or are relatively wealthy.

Example – low taxable income

A self-funded retiree couple has a $3.2 million super balance, plus their own home, and $200,000 in Australian shares held outside super. Even after drawing $130,000 a year in superannuation income, and $15,000 a year in dividend income, they would report a combined taxable income of $15,000, and pay no income tax at all. 1

Analysis of Labor’s original imputation reforms by Industry Super Australia shows that 80 per cent of the savings from Labor’s reforms comes from the wealthiest 20 per cent of retirees.

Low wealth households typically don’t benefit from the current taxation arrangements – they have little capacity to accumulate the wealth needed to do so. The recent ABS Household and Income Wealth report indicates that low wealth retiree households receive virtually all (96 per cent) of their income from government pensions and allowances.

Labor will always look after pensioners 

Labor announced its dividend imputation reform to end tax loopholes that benefit wealthy Australians, freeing up taxpayer funds to invest in our schools and hospitals.

Forgoing $8 billion in tax revenue annually isn’t sustainable, and it isn’t fair. Ending this loophole is the right policy for the future .

Labor wants to responsibly invest in better schools and hospitals, and be able to provide tax relief for working and middle class Australians. These are our priorities.

But we believe in a fair go for Australia – we know a lot of pensioners are struggling with the cost of living, especially with higher power prices and the Liberal Government’s cuts to Medicare.

We’ve always said we’d look after pensioners, and that is why Labor is introducing a new Pensioner Guarantee – protecting pensioners from changes to excess dividend imputation credits.

Labor is making reasonable changes to ensure pensioners will still be able to access cash refunds from excess dividend imputation credits.

The Pensioner Guarantee means Australian government pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019.

Under the Pensioner Guarantee:

  • Every recipient of an Australian Government pension or allowance with individual shareholdings will still be able to benefit from cash refunds. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness
  • Self-managed Superannuation Funds with at least one pensioner or allowance recipient

before 28 March 2018 will be exempt from the changes.

These changes mean that every pensioner will be able to benefit from cash refunds. That’s the fair thing to do. There’s no reason for Mr Turnbull to oppose this policy. Labor’s policy will also continue to exempt:

  • ATO endorsed income tax exempt charities; and
  • Not-for-profit institutions (e.g. universities) with deductible gift recipient (DGR)

The policy will commence on 1 July 2019.

Labor will always be better for pensioners 

Labor will always be better for pensioners. The Liberal Government hasn’t missed an opportunity to come after pensioner benefits.

Right now they have legislation in the Parliament to:

  • Raise the pension age to 70 – meaning Australia would have the oldest age of comparable countries. In the first four years alone around 375,000 Australians will have to wait longer before they can access the pension. This is a $3.6 billion hit to the retirement income of Australians.
  • Axe the Energy Supplement to 2 million Australians, including around 400,000 age pensioners – a cut of $14.10 per fortnight to single pensioners or $365 a year. Couple pensioners will be $21.20 a fortnight worse off or around $550 a year worse
  • Make pensioners born overseas wait longer to get the Age Pension by increasing the residency requirements from 10 to 15
  • Abolish the pension supplement from pensioners who go overseas for more than six weeks, which will rip around $120 million from the pockets of

The Liberal Government has a long track record of attacking pensioners:

  • In the 2014 Budget they tried to cut pension indexation – a cut that would have meant pensioners would be forced to live on $80 a week less within ten years. This unfair cut would have ripped $23 billion from the pockets of pensioners in
  • In the 2014 Budget they cut $1 billion from pensioner concessions – support designed to help pensioners with the cost of
  • In the 2014 Budget they axed the $900 seniors supplement to self-funded retirees receiving the Commonwealth Seniors Health
  • In the 2014 Budget the Liberals tried to reset deeming rates thresholds – a cut that would have seen 500,000 part -pensioners made worse off.
  • In 2015 the Liberals did a deal with the Greens to cut the pension to around 370,000 pensioners by as much as $12,000 a year by changing the pension assets
  • In the 2016 Budget the Liberals tried to cut the pension to around 190,000 pensioners as part of a plan to limit overseas travel for pensioners to six

Implementation 

Labor will consult with the Australian Taxation Office, Treasury and tax experts on the implementation of this policy. Labor has already announced it would provide substantial new resources to the ATO to ensure its policies are implemented effectively.

Fiscal impact 

Labor’s policy has been fully costed by the independent Parliamentary Budget Office.

Labor’s policy will improve the budget position by $10.7 billion over the election forward estimates and $55.7 billion over the medium term. This is a $700 million decrease in revenue from the previously announced policy over the forward estimates, and $3.3 billion over the medium term.

2018-19 2019-20 2020-21 2021-22 Total
Total financial impact (UCB) -2 -1 5,200 5,500 10,697

______________________________________________________________

1 Grattan Institute, https://grattan.edu.a u/news/the-reaI-story-of-labors-dividend-imputation-reforms/

Superannuation excerpt from the Australian Conservatives’ Policies

 Our Policies
Introduction

Our policies are framed by our principles and developed in consultation with Australian Conservatives members.

We will update policies as they are developed and announced, and our latest policy-based initiatives can be seen in our News section.

 

Lower, simpler, fairer taxes and deregulation

We will restore confidence and certainty in the superannuation system to ensure those who have worked hard to achieve financial self-sufficiency will not be disadvantaged by government decisions.

Source (click on link): https://www.conservatives.org.au/our_policies

Super changes tipped to enter lower house next week

STAFF REPORTER
Tuesday, 01 November 2016

With Parliament expected to consider superannuation reforms as early as next week, one trustee lobby group has
urged the government to slow down the pace of its reforms and take time to carefully consider the legislation.
SMSF Owners’ Alliance (SMSFOA) executive director Duncan Fairweather says the draft legislation should be
referred to parliamentary committees for review.

Mr Fairweather said submissions should be taken from Australians whose retirement savings will be affected,
the associations that represent them and superannuation experts.
“The government’s consultation on the draft legislation released so far has been hasty with just a few working
days allowed for comments on three tranches of complex new law,” he said.

Mr Fairweather added that the legislation introduces a new definition for superannuation, new structural
concepts, new rules on contributions and new tax applications.

“They are the most significant changes to superannuation in a decade since the reforms Peter Costello made in
2006,” he said.

“They will have an impact not just on the 4 per cent the government says will be directly affected now, but on
many more who are in mid-career and aiming for a financially independent retirement.”

Mr Fairweather said the Senate especially needs to consider whether it is prepared to pass tax law with
retrospective effective when it has been reluctant to do so in the past.

“The changes take many pages of legislation to explain. There is a risk of unintended consequences if the
legislation is rushed,” he warned.

As well as giving Parliament the opportunity to give proper consideration to the new superannuation laws, the
government should consider extending the start date of the legislation.

“Superannuation fund trustees, including the trustees for half a million self-managed funds, face important
decisions. Their financial advisers, accountants, lawyers and auditors will have to quickly get across the detail of
the legislation. That’s not to mention the task of modifying systems that faces the major funds and the ATO,”

Mr Fairweather said.
We appreciate there will be a revenue cost if the start date is pushed back. However, it is important to make
sure the new law will be workable and that Australians are given reasonable time to understand what the law
means to them.

The $1.6 million transfer balance cap explained

By William Fettes (wfettes@dbalawyers.com.au), Lawyer, DBA Lawyers, Bryce Figot (bfigot@dbalawyers.com.au), Director, DBA Lawyers and Daniel Butler, Director, DBA Lawyers (dbutler@dbalawyers.com.au)

Introduction

The Department of Treasury on 27 September 2016 released the second tranche of exposure draft legislation and explanatory material in relation to the Federal Government’s proposed superannuation reforms.

These materials provide long-awaited detail on the workings of the $1.6 million transfer balance cap measure. This article explains some key take-away points about this measure.

The transfer balance cap and transfer balance account

Broadly, the $1.6 million balance cap measure is a limit imposed on the total amount that a member can transfer into a tax-free pension phase account from 1 July 2017.

The general transfer balance cap is $1.6 million for the 2017-18 financial year subject to indexation (see below for further information on the indexation rules).

An individual’s personal transfer balance cap is linked to the general transfer balance cap. All fund members who are in receipt of a pension on 1 July 2017 will have a personal balance cap of $1.6 million established at that time. Otherwise, a fund member’s personal balance cap comes into existence when they first become entitled to a pension. An individual’s personal transfer balance cap is equal to the general balance cap for the relevant financial year in which their personal balance cap commenced.

Usage of personal cap space will be determined by the total value of superannuation assets supporting existing pension liabilities for a member on 1 July 2017, as well as the capital value of any pensions commenced or received by a member from 1 July 2017 onwards.

A member’s available cap capacity over time is subject to a system of debits and credits recorded in a ‘transfer balance account’, which is a kind of ledger whereby amounts transferred into pension phase are credited to the account and amounts commuted or rolled-over are debited from the account.

Earnings and capital growth on assets supporting pension liabilities are ignored when applying the personal transfer balance cap. Thus, a member’s personal balance cap may grow beyond the $1.6 million cap due to earnings and growth without resulting in an excess. As such, a taxpayer who allocates growth or higher yielding assets to their balance cap will generally be better off if their pension assets appreciate in value. However, note the limitations with regards to the segregation method discussed below.

Any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their accumulation account in the superannuation system. Thus, members with superannuation account balances greater than $1.6 million can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.

What counts as a credit?

The following items count as a credit towards an individual’s transfer balance account and thereby their personal transfer balance cap:

  • the value of all assets supporting pension liabilities in respect of a member on 30 June 2017;
  • the capital value of new pensions commenced from 1 July 2017;
  • the capital value of reversionary pensions at the time the individual becomes entitled to them (subject to modified balance cap rules for reversionary pensions to children); and
  • notional earnings that accrue on excess transfer balance amounts.

As can be seen from the above list, death benefit pensions count towards to the recipient’s personal transfer balance cap.

The inclusion of death benefit pensions as part of the reversionary beneficiary’s transfer balance cap is in accordance with DBA Lawyers’ prediction in our 1 August 2016 newsfeed article. This aspect will have a significant impact on the succession plans of all fund members who collectively with their spouse have more than $1.6 million in superannuation.

Fortunately, there is an important concession. An excess will only occur as a result of a death benefit pension six months from the date that the reversionary beneficiary becomes entitled to receive the pension. This means there is a grace period for reversionary beneficiaries to commute their pension interest(s) to stay within their personal transfer balance cap without triggering any excess. The exposure draft explanatory memorandum (‘EM’) explains the six month period as follows:

This gives the new beneficiary sufficient time to adjust their affairs following the death of a relative before any consequences – for example, a breach of their transfer balance cap – arise.

Typically, a surviving spouse suffers years of grieving following the loss of a spouse but only has a six month period to make a decision on a reversionary pension if that results in an excess of their personal transfer balance cap.

What counts as a debit?

A member’s transfer balance account is debited when they commute (partially or fully) the capital of a pension. When a commutation occurs, the debit entry to the transfer balance account is equal to the amount commuted. Accordingly, it is possible for an individual’s transfer balance account to have a negative balance if their debits exceed their credits. For example, a full commutation of a pension where the assets supporting that pension have grown from $1.6 million to $1.7 million will result in a transfer balance account of negative $100,000.

Ordinary pension payments do not count as debit entries for the purposes of the transfer balance account. Proposed legislative amendments will ensure that partial commutations do not count towards prescribed minimum pension payments. This proposal may also impact a member with an account-based pension electing to convert an amount to a lump sum for claiming their low rate cap.

In addition to the above recognised debits, relief will be available in relation to certain events where an individual loses some or all of the value of assets that are held in pension phase. The proposed relief concerns family law payment splits, fraud and void transactions under the Bankruptcy Act 1966 (Cth). In these circumstances, an individual will be able to apply to the ATO for relief so that their transfer balance account can be debited to restore their personal transfer balance cap, eg, if a member is defrauded of their super savings and the perpetrator is convicted, then a debit (or restoration) can be made to their transfer balance account.

At this stage, there is no relief proposed in relation to a major economic downturn eroding the value of fund assets held in pension phase. Therefore, if another global financial crisis were to occur, any adverse economic effects on the assets supporting pensions could substantially impair a member’s personal transfer balance cap.

Excess personal transfer balance cap

Individuals who exceed their personal transfer balance cap will have their superannuation income streams commuted (in full or in part) back into accumulation phase and notional earnings (see below) on the excess will be subject to an excess transfer balance tax.

Notional earnings accrue on excess transfer balances based on the general interest charge. Notional earnings accrue daily until the breach is rectified and are generally credited towards an individual’s transfer balance account (subject to a transfer balance determination being made by the Commissioner).

The draft EM provides the following example of an excess transfer balance (refer to example 1.14):

On 1 July 2017, Rebecca commences a superannuation income stream of $1 million from the superannuation fund her employer contributed to (Master Superannuation Fund). On 1 October 2017, Rebecca also commences a $1 million superannuation income stream in her SMSF, Bec’s Super Fund.

On 1 July 2017, Rebecca’s transfer balance account is $1 million. On 1 October 2017, Rebecca’s transfer balance is credited with a further $1 million bringing her transfer balance account to $2 million. This means that Rebecca has an excess transfer balance of $400,000.

On 15 October 2017, the Commissioner issues an excess transfer balance determination to Rebecca setting out a crystallised reduction amount of $401,414 (excess of $400,000 plus 14 days of notional earnings). Included with the determination is a default commutation authority which lets Rebecca know that if she does not make an election within 60 days of the determination date the Commissioner will issue a commutation authority to Bec’s Super Fund requiring the trustee to commute her $1 million superannuation income stream by $401,414.

As can be seen from the above example, there is some flexibility built into the system for proactive rectification where an excess transfer balance occurs.

An excess transfer balance tax is payable on the accrued notional earnings of the excess amount to neutralise any benefit received from having excess capital in the tax-free retirement phase. The excess transfer balance tax is assessed for the financial year in which a member breaches their transfer balance cap. The excess transfer balance tax is 15% on notional earnings for the first breach and 30% for second and subsequent breaches.

Indexation of the balance cap

The transfer balance cap is indexed in increments of $100,000 on an annual basis in line with the Consumer Price Index.

A person’s eligibility to receive indexation increases in relation to their personal transfer balance cap is subject to a proportioning formula based on the highest balance of the member’s transfer balance account compared to the member’s personal balance cap.

The proportioning formula as applied to an example increase of $100,000 is as follows:

(Personal transfer balance cap – highest transfer balance) x $100,000
Personal transfer balance cap

 

An example of how the proportioning formula applies in practice is set out below.

Example

John commences a pension with an account balance of $800,000 in FY2017-18. At that time, he has used 50% of his $1.6 million personal transfer balance cap.

If the general transfer balance cap is indexed to $1.7 million in 2019-20, John’s personal transfer balance cap is increased by $50,000 because he is only eligible to take 50% of the $100,000 increase. Accordingly, John can now commence a pension with capital of $850,000 without breaching his personal transfer balance cap.

The above answer does not change if John partially commutes his pension prior to the indexation increase, as the formula is based on John’s highest transfer balance (ie, $800,000).

A member who has exhausted or exceeded their personal transfer balance cap will not be eligible for any cap indexation.

CGT relief

The draft legislation also provides CGT relief which broadly enables the cost base of assets reallocated from pension to accumulation phase to be refreshed to comply with the transfer balance cap or the new transition to retirement income stream arrangements. The draft EM states:

Complying superannuation funds will now be able to reset the cost base of assets that are reallocated from the retirement phase to the accumulation phase prior to 1 July 2017.

Where these assets are already partially supporting accounts in the accumulation phase, tax will be paid on this proportion of the capital gain made to 1 July 2017. This tax may be deferred until the asset is sold, for up to 10 years.

Segregated assets

Broadly, an SMSF trustee can elect to obtain CGT relief to reset the cost base of a segregated asset to its market value provided the asset ceases to be a segregated asset prior to 1 July 2017. The market value is determined ‘just before’ the time the asset ceased being a segregated current pension asset.

Typically, an asset would cease to be segregated by being transferred from pension to accumulation phase. However, it appears that an asset could also cease being segregated by being treated as an unsegregated asset (with an associated actuarial report).

It is important to note, however, that the segregation method will not be available to SMSFs and small APRA funds, with at least one member in pension mode who has a total superannuation fund balance of over $1.6 million (in all funds). This limits planning opportunities that may otherwise be available to SMSFs under the segregation method.

Unsegregated or proportionate assets

Broadly, where an asset is supporting a pension liability using the unsegregated or proportionate method, an SMSF trustee can elect to obtain CGT relief to reset the cost base of an asset to its market value on 1 July 2017 subject to the following requirements:

  • the fund must calculate a notional gain on the proportion of the asset that is effectively attributable to the accumulation phase as at 30 June 2017;
  • if not deferred, the fund must add this notional gain to its net capital gain (or loss) for FY2017 which effectively crystallises the tax liability that would have arisen if that asset had been sold in FY2017;
  • however, an SMSF trustee can elect to defer the notional gain for up to 10 years (ie, up to 1 July 2027) unless a realisation event occurs earlier than 1 July 2027; and
  • if a realisation event does not occur by 1 July 2027, the cost base of the relevant asset will revert to its original cost base.

If the relevant asset is sold before 1 July 2027, the deferred notional gain is added to any further net capital gain (or adjusted against any net capital loss) made on a realisation event such as the ultimate sale of that asset. This further notional gain is calculated based on the higher cost base determined as at 30 June 2017 (being the market value of that asset at 30 June 2017 with any further adjustments to that asset’s cost base since 30 June 2017).

Thus, an SMSF trustee may elect to reset the cost base of an asset. This election may be applied on an asset by asset basis as some may prefer not to reset the cost base of all eligible assets to market value, eg, a particular asset’s market value may be lower than its cost base and a cost base reset in that context could result in a greater future capital gain. Further, this election can be made in the SMSF’s FY2017 annual return and does not need to be made prior to 1 July 2017 (as is the case for a CGT reset for a segregated asset as discussed above).

The net capital gain attributable to the accumulation interest that is not exempt under the exempt current pension income provisions is taxed at 15% subject to the 1/3 CGT discount available for assets held for more than 12 months. Refer to examples 1.45, 1.46 and 1.47 in the draft EM.

Although the prospect of resetting the cost base of current pension assets may be attractive in the lead up to 1 July 2017, paragraph 1.226 of the draft EM reminds SMSF trustees not to overlook the general anti-avoidance provisions in part IVA of the Income Tax Assessment Act 1936 (Cth). This paragraph of the EM states:

The CGT relief arrangements are only intended to support movements of assets and balances necessary to support the transfer balance cap and changes to the TRIS. It would be otherwise inappropriate for a fund to wash assets to obtain CGT relief or to use the relief to reduce the income tax payable on existing assets supporting the accumulation phase. Schemes designed to maximise an entity’s CGT relief or to minimise the CGT gains of existing assets in accumulation phase may be subject to the general anti-avoidance rules in Part IVA …

Naturally, the impact of the CGT reset provisions will need to be carefully considered as there are numerous strategies that will unfold under the draft proposals.

Conclusions

The proposed $1.6 million transfer balance cap measure involves substantial changes to Australia’s superannuation system, especially the tracking of each member’s personal balance cap. The balance cap proposal will reduce the tax effectiveness of pensions due to the new cap and have a major impact on succession planning strategies giving rise to substantially more tax payable overall in respect of death.

In particular, many couples will not like the fact that their deceased spouse’s reversionary pension gets ‘retested’ to a surviving spouse where the surviving spouse is subject to only their own $1.6 million personal balance cap. The Government has seen that raising extra tax revenue is preferred rather than allowing a deceased spouse’s pension that would have already been tested within their personal transfer balance cap to revert to a surviving spouse. We see this as a major issue that is likely to arise in submissions.

Note that the above commentary is a general summary only based on exposure draft legislation and explanatory material that is subject to change. For full details, see https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2

Related articles

http://www.dbalawyers.com.au/pensions/automatically-reversionary-pensions-super-reform/

http://www.dbalawyers.com.au/announcements/proposed-superannuation-reforms-july-2016/

http://www.dbalawyers.com.au/announcements/1-6m-balance-cap-examined-tax-death-benefits/

*           *           *

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

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

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

DBA LAWYERS

4 October 2016

Institute of Public Affairs’ submission to Treasury – lodged 16 September 2016

From the desk of Brett Hogan, Director of Researchipalogo

16th September 2016

Manager
Superannuation Tax Reform
Retirement Income Policy Division
The Treasury
Langton Crescent
PARKES ACT 2600

SUBMISSION ON EXPOSURE DRAFT OF SUPERANNUATION LEGISLATION

Dear Sir / Madam.
On behalf of the Institute of Public Affairs, please find enclosed this submission on the
Exposure Draft of the Australian Government’s:

  • Superannuation (Objective) Bill 2016;
  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016; and
  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016.

Given the limited time available for consultation, this submission will take the form of a letter
and concentrate on the proposed new objective of the superannuation system.

1. Introduction and Budgetary Context
Superannuation lies at the heart of important national policy questions about taxes, spending,
personal responsibility and the role of government.

Almost a quarter of a century after the introduction of compulsory superannuation, four out
of five Australians do not have enough savings to fully fund their retirement.

Yet rather than identify new ways to encourage all Australians to put more money into their
retirement accounts, the bipartisan approach of national policy makers is to treat the $2
trillion worth of private superannuation funds as just another source of taxation revenue.

The Institute of Public Affairs considers that for all the talk of ‘fairness’ and desire to rein in
so-called ‘tax concessions,’ it is out-of-control government spending and the desire to
increase taxation revenue that is driving these changes.

Australian Government spending has increased 1 from $271 billion per year in 2007-08 or
23.1% of Gross Domestic Product (GDP), to $445 billion in 2016-17 or 25.8% of GDP.


1 Australian Government, Budget Paper No.1:Budget Strategy and Outlook 2016-17, p 10-5

In 2019-20, spending is expected to pass $500 billion for the first time. So while it took 107
years for federal government spending to reach $271 billion it will take only another twelve
years to reach $500 billion and according to trend a total of only fourteen years to double it to
$542 billion.

Additionally, sometime shortly after 30 June 2017, Australian Government Gross Debt is
expected to pass $500 billion for the first time. Gross debt on 30 June 2007 was only $53.2
billion. 2

The Government should not seek to resolve these imbalances by raising taxes to ‘chase
spending,’ as former Treasurer Peter Costello was recently quoted as saying. 3

2. Recent Proposed Changes
On Budget Night, 3 May 2016, the Australian Government announced a swathe of new
changes to the taxation and regulatory treatment of superannuation, designed to raise $2.9
billion net over four years.

While most of these changes are not the subject of this consultation, the Institute of Public
Affairs would like to formally put on the public record its opposition to:

  • reducing the threshold for the 30% contributions tax from $300,000 per year to
    $250,000 per year;
  • reducing the pre-tax contributions limits from $30,000 and $35,000 to $25,000 per
    year;
  • limiting the amount of money that can be transferred into a retirement account to $1.6
    million; and
  • introducing a new $500,000 lifetime post-tax contributions limit backdated to 2007
    (subsequently replaced on 15 September 2016 with a $100,000 per year limit).

Restrictions on the amount of money that can be transferred into, or remain within, retirement
accounts, undermine the ability of the system to provide comfortable retirement incomes.

3. Primary Objective of Superannuation
In his Budget Speech on 3 May, the Treasurer said that “becoming financially independent in
retirement, free of welfare support, is one of life’s great challenges and achievements.” 4

The Institute of Public Affairs wholeheartedly agrees.

However, notwithstanding this philosophically sound statement, the Treasurer that evening
issued a joint Media Release with then Assistant Treasurer Kelly O’Dwyer to announce that


2 Ibid. p 10-13 3 The Australian, “Peter Costello’s Blast: Liberal Party Lacks Clear Vision,” 10 September 2016,
http://www.theaustralian.com.au/news/nation/peter-costellos-blast-liberal-party-lacks-clear-vision/newsstory/3e8974f875d3f85873eb2fb8d73a5c5d, Viewed 16 September 2016
4 Hon. Scott Morrison MP, 2016 Budget Speech, http://www.budget.gov.au/2016-17/content/speech/html/speech.htm,
Viewed 16 September 2016

the Government would “enshrine in law that the objective for superannuation is to provide
income in retirement to substitute or supplement the Age Pension.” 5

Tellingly, this Release also noted that the proposed objective “has been an important anchor
for the development of the superannuation changes included in the Budget.”

According to sections 4 and 5 of the Exposure Draft 6 of the Superannuation (Objective) Bill
2016, in fact the Government is proposing that this is now to be the ‘primary objective’ of the
superannuation system.

Section 6 states that any subsequent legislation relating to superannuation that is introduced
to Parliament must include “an assessment of whether the Bill is compatible with the primary
objective of the superannuation system.”

Contained within the Exposure Draft Explanatory Materials 7 for the two Draft Bills is a set
of five proposed so-called ‘subsidiary objectives,’ which are worth highlighting:

  • facilitate consumption smoothing over the course of an individual’s life;
  • manage risks in retirement;
  • be invested in the best interests of superannuation fund members;
  • alleviate fiscal pressures on government from the retirement system; and
  • be simple, efficient and provide safeguards.

While the Government appears to have adopted the primary and subsidiary objectives from
the Final Report of the 2014 Financial System Inquiry (FSI),8 it is noteworthy that the FSI
actually made six subsidiary objective recommendations, with the Government choosing to
leave out that the system:

  • be fully funded from savings.

In referring to this objective in its Final Report, the FSI said that:

“A fully funded system, as opposed to an unfunded system, is important for sustainability and
stability. The system is designed to be predominantly funded by savings from working life
income and investment earnings, where superannuation fund members in general have claims
on all assets in the fund.”

Concepts such as facilitating consumption smoothing, investing in the best interests of
members and managing risks in retirement, let alone that the system be fully funded from
savings, actually make a lot more sense than the proposed primary objective ‘to substitute or
supplement the Age Pension.’


5 Hon. Scott Morrison MP & Hon. Kelly O’Dwyer MP Joint Media Release, “A More Sustainable Superannuation System,”
3 May 2016, http://sjm.ministers.treasury.gov.au/media-release/053-2016/, Viewed 16 September 2016
6 Superannuation (Objective) Bill 2016 Exposure Draft, https://consult.treasury.gov.au/retirement-income-policydivision/superannuation-reform-package/supporting_documents/Exposure_Draft_Superannuation_Objective_Bill.pdf,
Viewed 16 September 2016
7 Exposure Draft Explanatory Materials, https://consult.treasury.gov.au/retirement-income-policy-division/superannuationreform-package/supporting_documents/Exposure_draft_Explanatory_Memorandum_Superannuation_Tranche_1.pdf, Viewed 16 September 2016
8 Commonwealth of Australia, Financial System Inquiry Final Report, November 2014,
http://fsi.gov.au/files/2014/12/FSI_Final_Report_Consolidated20141210.pdf, Viewed 16 September 2016

Yet it is the proposed primary objective that will be reference point for the superannuation
system, and against which all subsequent proposals for change will be judged.

It is of the gravest concern that maximising personal income in retirement is not deemed to be
the primary, or even a subsidiary, objective of the system.

The OECD has found 9 that the net pension replacement rate for average income earners in
Australia is only 58 per cent (53.4 per cent for women) when the generally accepted benchmark is 70 or 80 per cent.

Australia’s 2014 National Commission of Audit reported that 10 the proportion of retirees on
a full or part pension was expected to remain at around 80 per cent over the next three
decades.

According to the Government’s own Budget Papers, 11 the cost of ‘Income Support for
Seniors’ was $43.2 billion in 2015-16 and is projected to reach $51.8 billion just four years
later.

Superannuation initiatives that are implemented under the auspices of the proposed primary
objective are unlikely to help middle-income earners to significantly boost their income in
retirement or to allow large numbers of Australians to move off the full or part Age Pension.

Instead of proposing that the goal of the superannuation system is merely to take the place of
or top up the Age Pension, the aim should be to maximise the retirement incomes of all
Australians, and reduce dependence on welfare payments.

To this end, the Institute of Public Affairs would like to offer an alternative Primary
Objective for the superannuation system:

“The objective of the superannuation system is to ensure that as many Australians as
possible take personal responsibility for funding their own retirement. The Age Pension
provides a safety net for those who are unable to provide for themselves in retirement.”

The Institute of Public Affairs is happy to support the adoption of all six of the FSI’s
subsidiary objectives, if the primary objective is so amended.

Given that a bad objective is worse than no objective at all, the second-best option would be
to make no change.


9 Organisation for Economic Co-operation and Development, Pensions at a Glance 2015, http://www.oecd.org/publications/oecd-pensions-at-a-glance-19991363.htm, Viewed 16 September 2016
10 Australian Government, National Commission of Audit 2014, Chapter 7.1: Age Pension, http://www.ncoa.gov.au/report/phase-one/part-b/7-1-age-pension.html, Viewed 16 September 2016
11 Australian Government, Budget Paper No.1:Budget Strategy and Outlook 2016-17, p 5-26

4. Timing of this Consultation
It is disappointing that the Government has allowed only nine days between the release of the
draft legislation (Wednesday 7 September) and the close of submissions (Friday 16
September).

We note that the formal consultation period on proposed changes to the Working Holiday
Maker Visa Scheme (also known as the Backpacker Tax) ran from mid-August to mid-
September, which would have assisted that review to receive over 1,700 submissions. 12

Considering the important retirement incomes, taxation, welfare and social policy issues that
are involved here, a longer period would have resulted in additional, and more detailed,
responses.

5. Segregating Consultation on the Objectives from Substantive Proposals
We also question segregating public consultation on the proposed new superannuation system
objective from the arguably more contentious tax increases and contributions limits.

While we understand that the discussions that had been taking place within the Liberal and
National Parties may have delayed formal public consultation on the substantive proposals,
given that the whole package was developed and initially announced at the same time, the
Government should have delayed consultation on the objective as well.

6. Future Changes
If the objective of the nation’s superannuation system is merely to provide income in
retirement to substitute or supplement the Age Pension, then the taxation and regulatory
proposals announced in the 2016 Budget and amended on 15 September are only the beginning.

Once the principle has been established that superannuation taxes can be increased to pay for
government spending, that all major parties have voted for it, and that it doesn’t even
contradict the objectives of the system, then there will be no stopping future governments.

Kind regards,
Brett Hogan
Director of Research


12 Australian Government, Department of Agriculture and Water Resources website, “Working Holiday Maker Visa Review,” http://www.agriculture.gov.au/ag-farm-food/working-holiday-maker-review/submissions, Viewed 16 September 2016

Treasurer sees sense on non-concessional super cap

logosoa15 September 2016

The Treasurer’s decision to scrap the $500,000 lifetime non-concessional cap is sensible.

In our view it was never necessary in the first place.

If an upper limit is set on tax-free superannuation accounts it shouldn’t matter how and when the limit is reached.

So the new, reduced non-concessional cap of $100,000 a year is also unnecessary. If an overall account balance cap is set then annual concessional contribution limits are not needed. Conversely, with contribution limits in place (the new cap on non-concessional contributions and the reduced concessional cap) there’s no need to have an overall $1.6 million retirement account balance cap at all. Having both contribution and balance caps adds unnecessary complexity to a system for which simplicity is one of the government’s stated objectives.

However, scrapping the retrospective lifetime $500,000 cap on non-concessional contributions will remove a headache for many people whose retirement savings plans were disrupted by the budget announcement. They will now be able to plan ahead with more confidence.

It is unfortunate that it comes at the cost of withdrawing the budget measures to harmonise contribution rules for people aged 65 to 74, including getting rid of the work test.

The Treasurer’s decision comes after widespread expressions of concern from self-managed fund members, many of whom have been in touch with Coalition members and senators, and representations from SMSF Owners and others.

The scrapping of a major plank of the superannuation changes announced in the May budget confirms our view that the changes were not well thought through at the time. They were driven by revenue needs rather than what is best for the superannuation system.

There are still many unanswered questions about how the $1.6 million cap will work in practice and it may be several weeks before the Government releases further draft legislation that will hopefully answer such questions.

If a cap on tax-free account balances is thought necessary at all, the limit should be doubled.

Research undertaken by Professor Ron Bewley, former head of the School of Economics at UNSW, concludes that an upper limit of $3.2m is necessary to provide an income sufficient to last throughout retirement.

See: https://www.smsfoa.org.au/images/expert_advice/160609_Dr_Ron_Bewley_So_how_much_should_the_superannuation_cap_be.pdf

Changes to superannuation have far-reaching and long lasting effects on people and should only be contemplated after extensive consultation. The truncation of the Tax White Paper process, the rushed consultation on the objective of superannuation, the unexpected budget changes and this latest announcement fell short of the principles of good policy making on superannuation which for most Australians is their most significant investment outside the family home and the key to a comfortable retirement.

SMSFOA Contact:
Duncan Fairweather
Executive Director
SMSF Owners’ Alliance
dfairweather@smsfoa.org.au
0412 256 200
www.smsfoa.org.au

Superannuation changes will condemn middle class to the pension

 ipalogoMedia Release

Simon Breheny and Brett Hogan

The Turnbull Government’s proposed superannuation changes will condemn middle-income Australians to the Age Pension, according to a research paper released today by free market think tank the Institute of Public Affairs.

The paper, Strangling the Goose with the Golden Egg – Why We Need to Cut Superannuation Taxes on Middle Australia, which was written by Rebecca Weisser in collaboration with Henry Ergas, highlights how the government’s desperation for new sources of revenue to fund its spending habits is undermining the integrity of Australia’s retirement incomes system.

“Currently, middle class Australians can only expect income in retirement equal to 58% of their pre-retirement earnings, compared to nearly 90% for low income earners,” said Mr Simon Breheny, Director of Policy at the Institute of Public Affairs.

“The poor have the pension, the rich have alternative investments and the middle class will miss out again. The objective of the superannuation system should be for people to maintain their living standards in retirement, not imply that they should be grateful to be tied to the Age Pension,” Mr Breheny said.

The paper’s recommendations include moving to abolish taxes on contributions and earnings and instead taxing end-benefits in retirement at an individual’s marginal income tax rate, prioritising the reduction of fees and charges, and facilitating the purchase of private, defined benefit pensions for those who wish to purchase them.

“The compulsory superannuation guarantee will not help, given that the proportion of retirees on a full or part pension will remain at around 80 per cent over the next three decades according to the recent National Commission of Audit,” said Brett Hogan, Director of Research at the Institute of Public Affairs.

“Instead of citing ‘fairness’ to criticise people who attempt to provide for themselves, policy makers should acknowledge that private funds put aside for retirement represent deferred consumption, so flat and low superannuation taxes on contributions and earnings for everyone is actually good public policy,” Mr Hogan said.

A copy of Strangling the Goose with the Golden Egg is available here.

For media and comment: Simon Breheny, Director of Policy, Institute of Public Affairs, on 0400 967 382, or at sbreheny@ipa.org.au, or Rebecca Weisser on 0438 645 562, or Henry Ergas on 0419 239 710.

For media coordination, please contact Evan Mulholland, IPA Media and Communications Manager, on 0405 140 780, or at emulholland@ipa.org.au

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