Proposals to tax retiree savings to pay for aged-care services and remove tax concessions for balances over $5 million have been shot down by the Morrison government, with Superannuation Minister Jane Hume saying she did not plan to introduce more taxes.
Speaking at an Association of Superannuation Funds of Australia conference on Friday, Senator Hume rejected the two proposals put forward by ASFA and the Australian Council of Social Services.
“We have no intention of burdening Australians with a retiree tax,” she said.
In a pointed critique of opponents of the government’s suite of changes to the $2.9 trillion superannuation sector, Senator Hume also said the retirement income system was not perfect and should not be mythologised.
The government faces a two-front battle over super: the first, whether to increase the contribution rate; and the second over new “your future, your super” legislation containing sweeping industry reforms.
Industry Super Australia, the lobby group for the union-linked super sector, has been a vocal opponent of the reform package and proponent of proceeding with the increase SG rate from 9.5 per cent to 12 per cent.
“We’ve seen in numerous examples over recent years, too often, the super industry’s lobbyist leviathan has spoken with a megaphone on the floor of our Parliament in opposing efficiency reforms,” she said.
“Having seen behind the curtain, and worked in multiple sides of the industry, I’ve come into the Parliament as a strong supporter of compulsory super, but someone not blind to its faults.”
Also at the conference, prudential regulator chairwoman Helen Rowell called for fund trustees to make the hard but necessary decisions about mergers and acquisitions and call out poorly performing players.
Ms Rowell said it was the Australian Prudential and Regulation Authority’s position that fund trustees had a responsibility to look broadly at what was in the best interests of the sector as well as of members.
“You all know who the poorly governed, poorly performing funds are that are making poor decisions, and so what is it that the industry can do about that, for example, so that we don’t [have to]?” she said.
“But also just acknowledging the issue more publicly, and that it is needing to be tackled and helping us in our work in cleaning the industry up and getting improvements made.”
Released by the Treasurer in the midst of the pandemic, the report of the Retirement Income Review has received far less attention than it deserves. While the report covers a great deal of ground, it is disappointing and dangerous in important respects.
To begin with, its discussion of the tax burden on superannuation — which endorses Treasury’s claim that superannuation receives highly favourable tax treatment — is seriously misleading. As a moment’s reflection shows, the primary impact of taxes on savings is to alter how much consumption one must give up today so as to consume more tomorrow. The proper way to calculate the effective tax rate on savings is therefore to assess the impost savers face for deferring a dollar of consumption from the present into the future.
Examined in that perspective, the tax rates on compulsory superannuation are nowhere near as generous as the report suggests. Consider a person who earns $50,000 a year and is planning to retire in 20 years. As things stand, she will be required to put $4750 into superannuation this year, paying a 15 per cent contributions tax on that amount. If her fund earns 3.5 per cent a year — also taxed at 15 per cent — those savings will grow to $7300, spendable in 2041.
However, in the absence of taxes on contributions and on earnings, steady compounding would have increased today’s $4750 to about $9500. As a result, the actual tax rate, which reduces $9500 to $7300, is not the notional or statutory 15 per cent but, at 30 per cent, twice that.
Moreover, every dollar of superannuation reduces our saver’s entitlement to the Age Pension and to aged-care subsidies. And just as marginal effective tax rates on an additional dollar of income from working are properly calculated taking reductions in transfer payments into account, so must the reductions in eligibility be included in the effective tax rate on superannuation.
Factoring the means testing of those payments into the calculation pushes the effective tax rate on compulsory superannuation towards 40 per cent or more, which no one could sensibly describe as unduly low.
Unfortunately, none of this is reflected in the report. Instead, it simply assumes that superannuation savings should be taxed as if they were ordinary income and on that basis asserts that they benefit from a massive tax “concession”.
Perhaps because it doesn’t realise it, the report seems untroubled by the fact that were compulsory superannuation actually taxed on the basis of its chosen benchmark — a comprehensive income tax — our hypothetical saver would face a 93 per cent effective tax rate on her retirement income.
Given how distorting, unreasonable and politically unsustainable such a tax rate would be, its use as the standard for evaluating the current arrangements is indefensible.
The errors in the report’s tax analysis don’t end there — its discussion of dividend imputation is also deeply flawed.
What is significant, however, is the unstated inference its analysis leads to: that superannuation savings are so heavily subsidised as to really be the property of taxpayers as a whole, making it perfectly appropriate for the government, rather than savers themselves, to determine their use.
That matters because the report repeatedly claims that superannuants do not spend their savings “efficiently”. Precisely what it means by “efficient” is never explained; it can nonetheless be said with some confidence that it is using the word in a sense entirely unknown to economics.
Rather, the report treats “efficient” as a synonym for “what we, the reviewers, think ought to happen” — or to put it slightly differently, as what Kenneth Minogue, a fine scholar of government verbiage, called a “hurrah word”, with “inefficient” being the corresponding “boo/hiss word”.
In this case, the “hurrah” goes to savers who completely run down their savings; the “boo/hiss” to savers who leave bequests. It is, in the report’s strange reasoning, “efficient” for retirees to devote their savings to wine, gambling and song, but “inefficient” for them to leave an inheritance to their children and grandchildren, no matter how great their preference for the latter over the former may be.
That the contention is absurd on its face scarcely needs to be said; the only justification the report provides in its support is the claim that it is not the “purpose” of the system to allow savers to leave bequests — which is merely a convoluted way of saying that the report’s authors don’t believe they should.
We are therefore left with a paradox. The reason repeatedly advanced for compulsory superannuation is that people of working age save much less for retirement than they ought to; now we are told that at retirement the bias is dramatically reversed — from then on, it seems, they save much more than would be desirable.
Quite how or why this miraculous transformation occurs is clearly a mystery that can be penetrated only by greater minds than ours; what is certain is that savers shouldn’t rest easy.
On the contrary, they should feel government coercion coming on: more specifically, a requirement to buy annuities or in other ways exhaust their savings, regardless of their preferences — or be driven to do so by some combination of higher taxes on any remaining savings and harsher means testing of social benefits.
Of course, it may be that the review is right: perhaps savers are utterly clueless, as one government report after the other appears to believe, and thus have to be forced to act “efficiently” by layer upon layer of regulation.
But if savers neither know what they want nor are capable of achieving it, what possible justification can there be for continuing to rely on a superannuation system based on individual decision-making — and every bit as important, in which individuals bear all the risks?
Why wouldn’t we simply shift over time to a government-run contributory pension scheme, possibly along Canadian or Scandinavian lines, that provides middle-income earners with an assured income in retirement — and does so fiscally prudently and at resource costs far lower than those of our current arrangements?
Or has it become the real goal of our superannuation system to force middle-income earners, who depend on that system most heavily, to subsidise an ever-expanding finance industry — including, should this review have its way, the suppliers of high-priced annuities?
These are serious issues; they merit serious analysis. If the government is genuinely interested in that analysis, the Retirement Income Review won’t help it.
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.
Many sectors of Australia’s retirees are now enjoying the prosperity that comes from higher sharemarkets and property markets.
But two groups are encountering new levels of tension. The first are those who own a dwelling but have most of their money in the bank. Their wealth is rising but they are becoming income-poor.
The second agitated group are holders of large superannuation balances who are suddenly being declared by young people as “spongers on the system” and “rent-seekers”.
I have encouraging news for both groups.
As people get older they often embrace more conservative investment policies and the bank deposit content of their portfolio rises. In previous years, bank deposits earned reasonable rates of interest, but today there is not much income difference between depositing your money in a bank and putting it under the bed. Banks are merely offering a safe place to store your money.
And so while the wealth of many Australians is rising with the value of their houses, their non-government pension income is falling. Their bank money hits their government pension entitlement and they have less income when their cost of living is rising faster than the CPI, given the high medical content.
There are a number of home loan products on the market, but one that is not often considered is the “Government Pension Loan Scheme”, which dates back to the Keating era but has fallen into disuse. Only about 3000 people took it up last year.
What the government is prepared to do is lend people starting in their 50s — but especially 70-year-olds and above — amounts of money that are not limited by your assets or income. The loans are secured on real estate, usually the family home. They are delivered fortnightly and the amount that is allowed is capped at 1.5 times the aged pension. The percentage of the value of a house that can be borrowed depends on people’s age. It gets very high in the nineties.
The loans are repaid when the family home is sold. While that does lessen later flexibility, many older people who are reluctant to borrow on their house are living in virtual poverty despite their wealth. A clear weakness in the loan scheme is the interest rate has not been adjusted to today’s world and is still 4.5 per cent, but my guess is that before the year is out it will be reduced.
A large number of people have seen a 10-20 per cent rise in the value of their dwelling in recent times. The government scheme supplements income but it does mean that there is less money for children to inherit. But I think it’s reasonable that some of the wealth that is being created in the housing boom is shifted into older people’s living standards.
Big super balances
The second group are in an entirely different situation.
Over a period of years there has been a switch in attitudes to the large amounts of superannuation held by older people. For a long time superannuation rules encouraged people to invest large sums in superannuation. This ALP and Coalition government policy deliberately created some very large superannuation balances, which are very difficult to achieve under today’s rules. The policy of maximising the amount of money people held in superannuation continued right through the Abbott/ Turnbull Coalition years.
Indeed, one of the most successful policies to retain the large superannuation sums was a Coalition government brainchild to freeze many superannuation plans issued prior to 2006-07, and allow the frozen money to be released via retaining large superannuation balances.
The Coalition’s policy was therefore to encourage people to use their personal money and leave large sums in super. That’s not today’s agenda, so one of the controversies in superannuation is how much people should withdraw in their 60s and 70s.
Current Superannuation Minister Jane Hume thinks that not enough money is being withdrawn and people’s living standards are suffering.
While this is might be true, many people are nervous about the amount of money they will need in their 80s given the rising costs of medicine, etc. And of course people in their 80s and 90s are required to take large sums out of superannuation. The level of under-withdrawal of superannuation money by people under 80 depends on what graph you look at. If all superannuation is counted, including zero balances, it is clear that people do withdraw their money. But if you take out the zero balances then there is a conservative rate of withdrawal in the 60s and 70s.
It’s important for the government to honour its election promises and not make major changes in this area — especially given its recent policies to actively incentivise the retention of large sums in superannuation.
But on an overall community basis, people have the fitness to spend money on travelling and other areas in their 60s and 70s, which they might not have in their 80s and beyond.
Australian super funds are on the track to end the year in positive territory, with returns buoyed by a 4.9 per cent sharemarket boost in November.
The dramatic turnaround in retirement savings follows rising optimism around the success of COVID-19 vaccine trials coupled with record rock bottom interest rates which has lifted the market from the March sharemarket collapse after COVID-19 hit the global economy.
Figures from super research group SuperRatings shows the median balanced fund – the most widely held investment option – has delivered a 2.3 per cent return since the start of 2020, despite the.
New data suggests funds may be on track to close the year as much as 3 per cent up on where they started, despite the first months of the pandemic sending balance fund down as much as 10 per cent.
The eighth consecutive month of positive returns meant the median balanced option was “on track to finish the year in positive territory”, SuperRatings said.
Super funds have bounced back strongly, booming 7.5 per cent since July, reversing falls through February and March as the pandemic rocked markets.
According to SuperRatings figures equities-exposed median growth options delivered an estimated 6.2 per cent return in November and 2.4 per cent over the calendar year.
The median capital stable option, which includes defensive assets such as bonds and cash, returned only 2 per cent in November and 1.7 per cent for the year.
Chant West, a consultancy which also tracks super funds, said current trends looked set to deliver a 3 per cent market return by year’s end, in what could prove an “excellent outcome” for fund members after the “disruption and economic damage caused by COVID-19”.
Chant West investment manager Mano Mohankumar said the recent recovery in funds had been “surprisingly sharp” after the shuddering halt of lockdowns imposed in the first half of the year.
“If we look back to the end of March, the world was in chaos. We were facing a frightening health crisis which saw most countries introduce some form of lockdown. Whole industries ground to a halt, countless jobs were lost and the global economy was heading rapidly into recession,” Mr Mohankumar said.
The market has seen a wild year since the coronavirus pandemic struck in January.
After rising to a record high of 7197.2 points by late February as investors initially switched out of Chinese assets when the pandemic took hold in the city of Wuhan, Australia’s S&P/ASX 200 share index dived almost 40 per cent to a 7.5-year low of 4402.5 points in just four weeks as the pandemic went global and the world faced unprecedented shutdowns of economic activity.
SuperRatings noted that capital stable options – which skew to bonds and cash – proved far more defensive for investors seeking to weather the pandemic, only falling 1.6 per cent by July.
Compared to that median balanced options were down 5.1 per cent in July.
But the fastest-ever bear markets in US and Australian shares were followed by the fastest ever bull markets, with Australia’s S&P/ASX 200 index bouncing more than 50 per cent as governments and central banks responded with unprecedented fiscal and monetary policy stimulus.
Australia’s federal government moved quickly to introduce a highly-effective income support scheme in the form of its JobKeeper program, later extended from September to March.
The turnaround in the markets marks a break with past trends, with markets tumbling 36 per cent in the wake of the 2008 global financial crisis, followed by a further 12.7 per cent crash in 2009.
The fiscal stimulus in the October federal budget shored up consumer and business confidence in the face of a damaging second-wave of coronavirus and strict lockdowns in Victoria which were subsequently lifted along with many state border closures.
The Reserve Bank started quantitative easing in November with a bigger-than-expected $100bn commonwealth and federal government bond buying program while also cutting interest rate targets including the overnight cash rate and the three-year bond rate target to just 0.1 per cent, providing a major leg of support to asset prices including shares and property.
The development of highly effective COVID vaccines proved much faster than expected with UK and US vaccinations starting in November and Australia giving emergency use authorisation for the AstraZeneca-Oxford vaccine from January.
A narrower-than-expected US presidential election win for Joe Biden helped fuel a surge in the US share market by lessening the chance of tax hikes while potentially still allowing greater US fiscal stimulus, and the US Federal Reserve has retained a bias to do more asset buying if needed.
Damian Graham, the chief investment officer of the $130bn Aware Super, said government support and the interest rate environment would go to driving market movements in 2021.
“When there’s such limited return in defensive assets it’s pushing people into growth assets,” he said.
“We think the market is reasonably priced but an expensive market is not the only requirement to see a correction.”
SuperRatings executive director Kirby Rappell said November had delivered a “watershed” month.
“Given the world is battling a pandemic that has resulted in large sections of the economy being placed in lockdown, the results are remarkable,” he said.
“This is the year super proved its worth once again and reminded us why it is so critical to our economic success.”
Mr Rappell said Australia’s success in containing the pandemic had put the economy in an “enviable position”, but significant risks still haunted the broader market.
“The pandemic is not yet defeated and there are geopolitical issues weighing on the outlook.
“Members should be optimistic but prepare themselves for potential surprises as we head into 2021,” he said.
The Chant West analysis found that despite the wild swings that had hit the market in recent decades super fund holders invested in median growth funds remained well ahead.
It noted that since the introduction of compulsory super in 1992 the median growth fund had delivered a 5.7 per cent real annual return, well above the 3.5 per cent target.
Mr Mohankumar said 2020 demonstrated the need for super fund members to maintain a long-term focus.
“Those who panicked and switched to cash or a more conservative option back in March would not only have crystallised losses, but as markets rebounded so sharply they would have missed out on some or all of the rebound,” he said.
The federal government’s push for more mergers in the superannuation industry and weeding out underperforming funds takes another step forward this week, with the release of the second annual “heat map” on performance by the Australian Prudential Regulation Authority.
Friday’s announcement will focus on the $750bn MySuper sector with the release of the latest heat maps, which will assess more than 80 MySuper funds by their investment performance, fees and “sustainability” for the financial year to the end of June.
This week will be the second year in which APRA has released the so-called heat maps (which colour-code funds in terms of how good or bad they have ranked) in the three areas.
More specifically, the maps will cover a fund’s investment performance over three and five years, administration and total fees and a fund’s sustainability, including net cashflow.
There is also speculation that APRA might include other measures of investment performance, possibly to support the proposed eight-year performance metric to be used in the upcoming Your Future, Your Super comparison tool announced in the October budget.
Rice Warner superannuation specialist Steve Freeborn says the new heat map details will reflect funds’ investment performance that includes the first months of COVID-19, when markets suffered a sharp downturn before recovering.
They could also provide insight into whether funds have been able to reduce their fees in the year since the last heat maps.
Rice Warner has observed that a number of funds that were highlighted as having relatively high fees in last year’s heat map have undertaken reviews of fees.
But as they have only implemented them after June 30, changes will not be reflected in the latest heat map results.
A number of other larger funds, Freeborn notes, have continued to promote the benefits of their scale and cut their fees, particularly their MySuper investment fees.
In theory, heat maps are supposed to provide guidance to super fund trustees on how their funds are performing relative to other funds in the market.
Together with member outcome statements that need to be produced by super funds, they are supposed to provide the basis for conversations between APRA and the funds over their relative performance.
But critics argue that the maps provide no accountability for risk.
A fund could achieve good returns in one year, with some risky investments in a rising sharemarket, while other investors may decide to opt for lower performance but ones that make safer investment bets.
Higher returns can be correlated with higher risk (think bitcoin), which is not something that all super fund members wish to bear.
The now annual APRA heat maps are just the start of the super fund battle ground between the industry and regulators of the $2.9 trillion super sector.
The first few months of next year will see if the federal government decides to move to overturn legislation that would result in the compulsory superannuation guarantee levy rising from 9.5 per cent to 10 per cent in July.
The Morrison government has paved the way for an argument against it, on the grounds that it could cost workers wage rises that are better off in their own hands than locked up in super savings.
But there is also a realisation that despite the relief-driven optimism of the closing months of 2020 as Australian borders open up, 2021 is not going to see wage increases for many workers.
The argument now gaining ground, particularly with the union movement, is that it’s better to see a 0.5 per cent guaranteed increase in super contributions than no wage increase at all next year.
While the super levy has stayed steady at 9.5 per cent for the past few years, it has not been accompanied by rising wages.
The Morrison government is not an enthusiast for compulsory super, but the fact that the increase is already legislated could make it hard to stop the rise to 10 per cent in July.
But it could well move later to overturn the subsequent stepped rises to 12 per cent by 2025.
The May budget is also shaping up as another test of the Morrison government’s views on super.
After a drain of almost $40bn in early access to super allowed because of COVID-19, there is a concern that the budget could allow early access to super for deposits for first-home buyers.
But such a move would not do much for housing affordability and risks undermining the concept of super as a compulsory savings system that needs to be preserved until retirement.
Next year will also see more detail on the federal government’s push for more aggressive comparisons of super fund performance.
The government announced a package of changes to super in the October budget designed to improve the efficiency of the sector and provide consumers with more transparency to be able to compare fund performance.
Under the changes outlined in the budget, super funds will need to compare their investment performances against certain announced benchmarks, depending on which sector they invest in. The comparisons will need to be made over an eight-year period.
Funds that underperform their constructed benchmark by more than 50 basis points will need to write to members and tell them of their “underperformance”.
If they underperform for two years in a row they can be blocked by APRA from accepting new members into their default MySuper product.
While the move is aimed at discouraging underperforming super funds, the details have prompted criticism from fund managers, who argue that they will encourage super fund trustees to take safe bets and follow an index rather than take risks with a goal of achieving better performance over the longer term.
The new legislation to bring in these comparisons is still in the consultation phase, but is set to come into force from July 1.
The early access to super and some falls in financial markets have seen the first annual fall in super fund assets this year, after decades of continuous growth.
The latest figures released by APRA show super fund assets of $2.9 trillion at the end of the September 2020 quarter, a 1.6 per cent fall over the year.
The figures show it was the low-budget MySuper sector that has been most affected by early-access withdrawals.
Total assets in MySuper products totalled $754bn at the end of the September 2020 quarter — a 3.3 per cent fall in total assets in this sector over the prior year.
The MySuper heat maps will reflect a volatile investment markets in the six months to the end of June.
The latest APRA figures show super fund investment earnings were positive in the September 2020 quarter, at 1.9 per cent on average for funds, following a 6 per cent increase in the June quarter.
This has helped the recovery from the negative 10.3 per cent average return in the March quarter.
Just how each MySuper fund has performed amid this volatility will be under the spotlight this week, setting the scene for ongoing debates between government, regulators and the industry.
Superannuation tax concessions are about to expand as an unlikely economic rebound is set to trigger an increase in the amounts that can be held in tax-protected super funds.
Investors should soon be able to have $100,000 more in tax free retirement funds – and contribute a combined $12,500 more into their super annually during working years – as long awaited “indexation” kicks into action over the coming months.
The Australian Taxation Office has issued a public update alerting the finance industry to changing consumer prices which are expected to trigger an expansion of the all-important transfer balance cap – the amount that can be transferred to fund a tax free pension.
In the note the ATO has pointed out that if the Consumer Price Index for the December quarter is 116.9 or higher, “the indexation of the general transfer balance cap will occur on 1 July 2021”. With CPI rebounding in recent months, economists expect CPI will rise beyond this number. At Deloitte Australia, the forecast for the December quarter CPI is 117.
Existing superannuation concessions have been criticised in the wider debate over retirement incomes. The recent Retirement Income Review suggested superannuation concessions were costing the tax system close to $42bn annually. Nonetheless, the expanded limits will be widely welcomed by investors.
Just now the total amount that can be transferred on retirement to super underpinning a tax-free retirement is $1.6 million per individual. That number is set to rise to $1.7m for those who “start their first retirement phase income stream on or after indexation”.
Separately, industry professionals have noted that contribution caps – the amount that can be contributed to super on a pre and post-tax basis – will also receive an indexation-based increase thanks to rising average weekly wages.
At present, the amount that an individual can contribute to super is limited to $25,000 on a pre-tax (concessional) basis and $100,000 on a post tax (non concessional) basis. These amounts are set to rise to $27,500 and $110,000 at the same time next July.
An absurd twist
The changes will also unleash confusion by creating new tiers within superannuation where different people at different ages have different caps on how much they can have funding tax free super.
In a twist that only the absurdly complex super system could come up with, industry professionals have been baffled as to why super caps are indexed in relation to different economic numbers: The CPI and Average Weekly Ordinary Time Earnings (AWOTE). Indexing allows the government to change ‘caps’ as inflation moves higher.
Peter Burgess, deputy CEO and director of policy and education at the Self Managed Super Funds Association, believes that on the basis of the most recent figures it is looking like both caps will go up. “When the government created the system many in the industry said it is going to be very confusing when indexation kicks in. Now, it’s fast approaching,” he says.
In July 2017 the Transfer Balance Cap was introduced as a way to tax the wealthiest users of the super system. Once a person has more than $1.6m in super, the earnings on the amount in excess of $1.6m are eligible for tax: Amounts in excess of $1.6m in the super system are generally taxed at the 15 per cent “accumulation” rate.
The higher Transfer Balance Cap of $1.7m will largely apply to new retirees transferring funds to start a pension.
“We thought the changes might happen in 2020 but COVID-19 put a brake on it. Now investors are surprised at the rebound in the economy and I expect many will be surprised to see the caps lifting as well, “ says Lyn Formica, head of SMSF technical at Heffron.
Proportional Indexation of the Personal Transfer Balance Cap
The Tax Institute requests the Government to consider the reforms outlined below in relation to Division 294 of the Income Tax Assessment Act 1997 (ITAA 1997) – that is, the transfer balance cap (TBC) provisions.
Division 294 was included as a part of the 2016-17 Federal Budget Superannuation Reforms and introduced a cap on the amount of superannuation benefits an individual could transfer into pension (tax-free retirement) phase. The General TBC was initially set at $1.6 million1 upon commencement from 1 July 2017. The law includes the indexation, in increments of $100,0002, of the TBC in line with movements in the CPI.
Section 294-40 of the ITAA 1997 provides for individuals that have not reached their TBC to access proportional indexation of the TBC in accordance with their unused cap percentage.
The Tax Institute considers that this provision is overly complex and needs to be reformed. In the context of the TBC provisions, The Tax Institute submits that simpler rules would:
Assist members and their advisers to better understand and manage the TBC; and
Reduce the cost for both industry participants and the ATO in relation to administering these provisions.
The Institute submits that the removal of proportional indexation will achieve both of these objectives. Accordingly, the Institute’s submission is as follows:
Abolish proportional indexation of the Personal TBC and adopt standardised indexation in line with movements in the General TBC for individuals that have not maximised their Personal TBC prior to the indexation; or
If proportional indexation is retained:
it should be limited, or its application better targeted to individuals that are within close proximity of the General TBC; and
a permanent relief mechanism should be introduced to allow the Commissioner to disregard inadvertent and small breaches of the Personal TBC and not penalise individuals in cases where the excess transfer balance amount is removed within a specified period of time. There is a precedent that was included in the enabling legislation whereby TBC breaches of less than $100,000 were able to be rectified within 6 months (of the commencement of the legislation) and the breaches would not give rise to the application of notional earnings or an excess transfer balance tax liability3. We suggest adopting this transitional rule permanently (with some modification if required).
The requested reforms have been developed by The Tax Institute’s National Superannuation Technical Committee and are detailed in Annexure A for your consideration.
* * * * *
If you would like to discuss, please contact either me or Tax Counsel, Angie Ananda, on 02 8223 0050.
Part of the 2016-17 Federal Budget superannuation reforms introduced (from 1 July 2017) a lifetime cap on the amount of accumulated superannuation an individual could transfer into pension (tax-free retirement) phase. The General Transfer Balance Cap (TBC) was initially set at $1.6 million4.
Apart from some specific circumstances prescribed in the law, amounts in excess of the TBC must be withdrawn out of pension phase. The excess amounts could remain either in the accumulation phase with associated earnings taxed at 15 per cent or completely transferred out of the superannuation system. Notably, the General TBC would be indexed and allowed to grow in line with the CPI, in increments of $100,0005.
In addition, a Personal TBC was introduced within the enabling legislation6 which is generally equal to the General TBC applicable at the time when an individual makes their first transfer of capital to a retirement phase income stream.
The ATO administers individual compliance with the TBC via a Transfer Balance Account (TBA).
Section 294-40 of the ITAA 1997 provides for proportional indexation of the TBC to allow individuals to benefit from increases in the General TBC where they have not fully expired their entitlement to their Personal TBC.
The structure of proportional indexation, over time, results in individuals having a Personal TBC that differs from the General TBC relative to the time they commence a retirement phase income stream.
Complexity is further added as an individual can only obtain a proportion of each General TBC indexation increase (that is, $100,000), based on their Unused Cap Percentage (UCP).
The UCP applies only if the individual has not fully utilised their Personal TBC and is determined by identifying the individual’s highest TBA balance at the end of a day, at an earlier point in time, and comparing it to their Personal TBC on that day. The UPC is expressed as a percentage and applied against the indexation available for the General TBC. This process is required at each indexation point until such time as the individual utilises 100% of their Cap Space.
Once an individual has used their entire available Cap Space, their Personal TBC is not subject to further indexation, even if they later commute some or all of that pension to bring their TBA balance below their Personal TBC.
This is best illustrated with the following examples (adapted from the Explanatory Memorandum)7:
Example – simple
Danika first commenced an $800,000 retirement phase income stream on 18 November 2017. A Transfer Balance Account is created for her at this time. Her Personal TBC was $1.6m for 2017-18. As Danika had not made any other transfers to her retirement phase account, her highest TBA balance is $800,000. She has used 50% of her $1.6m Personal TBC.
Assuming the General TBC is indexed to $1.7m in 2020-21, Danika’s Personal TBC is increased proportionally to $1.65m. That is, Danika’s Personal TBC is only increased by the UCP of 50% of the $100,000 indexation increase to the General TBC. As such, Danika can now transfer a further $850,000 to commence a retirement phase income stream without breaching her Personal TBC. Notably, earnings on the original $800,000 were not taken into account in working out how much of the unused cap was available.
Example – complex
On 1 October 2017, Nina commenced a retirement phase income stream with a value of $1.2m. On 1 January 2018, Nina partially commuted $400,000 from this income stream to buy an investment property.
Nina’s TBA balance on 1 October 2017 was $1.2m and on 1 January 2018, it was $800,000 (after the $400,000 partial commutation).
In 2020-21, assume the General TBC is indexed to $1.7m. To work out the amount by which Nina’s Personal TBC is indexed, it is necessary to identify the day on which her TBA balance was at its highest. In this case, the highest balance was $1.2m on 1 October 2017. Nina’s Personal TBC on that date was $1.6m. Therefore, as she has used up 75% of her Personal TBC, Nina’s UCP on 1 October 2017 is 25%.
To work out how much her Personal TBC is to be indexed, Nina’s UCP is applied to the amount by which the General TBC has indexed (i.e. $100,000). Therefore, Nina’s Personal TBC in 2020-21 is $1.625m.
In 2022-23, assume the General TBC is indexed to $1.8m (i.e. by another $100,000). As Nina has not transferred any further amount into the retirement phase, her UCP remains at 25%. Her Personal TBC is now
$1.65m (i.e. 25% of the further indexation increase of $100,000). In this year, Nina decides to transfer the maximum amount she can into the retirement phase.
This will be her Personal TBC for the 2022-23 year ($1.65m) less her TBA balance of $800,000. This means Nina can transfer another $850,000 into the retirement phase without exceeding her Personal TBC.
Once Nina has used all of her available Cap Space, her Personal TBC will not be subject to further indexation. Notably, this is the case even if Nina later partially commutes some of her retirement phase income stream and makes her TBA balance fall below her Personal TBC.
Range of Potential Personal TBC
Members (A to D) Cap Space utilised in 2018 – 2021 (assuming indexation in 2021).
Cap Space Accessed
Unused Cap %8
Members (A to D) Cap Space utilised in 2022 – 2025 (assuming further indexation in 2025).
Cap Space Accessed
Unused Cap %
As illustrated above, the amount of proportional indexation largely depends on an individual’s UCP, each time there is indexation of the General TBC.
The result of this process is an individual’s Personal TBC is likely to be unique to themselves if they are in the category where they do not utilise their full TBC at the point of commencing a retirement phase income stream.
The burden is therefore likely to fall to individuals with smaller superannuation balances.
Current Issues and Challenges
Overly complex calculation and too widely targeted
The above examples demonstrate the complexity of the proportional indexation calculation which, over time, will require very effective record management systems to track and be effective in ensuring individuals are not subject to inadvertent breaches of their TBC.
According to the Explanatory Memorandum9 (EM) to the enabling legislation, the introduction of the TBC was to better target superannuation concessions thereby ensuring the system’s sustainability over time. The EM estimated the introduction of the TBC would affect less than one per cent of Australians with a superannuation interest. If this estimate is accurate, then arguably this particular calculation which is carried out on the full population (in retirement phase) represents a very inefficient and costly tax administration for what was meant to only have a one per cent application.
Design not hitting target
By its very nature, proportional indexation essentially rewards and benefits those who are able to defer the commencement of their retirement phase income stream to a later date. As a consequence, it may actually encourage those who are ready to retire (with amounts in excess of the General TBC) to defer and leave their superannuation balance in the accumulation phase until indexation does occur. Such behaviour would appear contrary to the intent and objective of proportional indexation.
Inconsistent treatment with other superannuation caps
The proportional indexation of the Personal TBC is unprecedented when compared with other indexation that takes place under the tax law. For instance, the Low Rate Cap Amount10 which represents a lifetime cap on the tax-free level of superannuation lump sums an individual can receive in their lifetime is indexed in line with AWOTE, in increments of $5,000. There is no proportional reduction based on how much of the previous Low Rate Cap Amount has remained unused.
Too many rates, caps and thresholds
It has taken industry participants and the ATO considerable time and effort to educate individuals on the concept of the TBA (including debits and credits) and the consequences of breaching their Personal TBC. At times, there has even been some confusion with the Total Superannuation Balance (TSB) which has also been pegged to the General TBC for the purposes of assessing eligibility to the following superannuation concessions:
Non-concessional contributions caps (NCC) and associated bring forward caps;
Tax offset for spouse contributions; and
Segregated method to determine their earnings tax exemption (SMSFs and small APRA funds only).
We submit that there was a logical nexus and a familiarity developed with the $1.6 million between the General TBC and the TSB (at least for the above mentioned superannuation concessions). However, as proportional indexation comes into effect with an individual potentially having a Personal TBC not equalling the General TBC, The Tax Institute is concerned that the Personal TBC will further exacerbate what is becoming a very complex suite of rates, caps and thresholds operating within the superannuation system.
A lack of consistency has been applied historically across the various caps and eligibility criterion for superannuation concessions. Some caps are indexed based on either CPI or AWOTE whereas others are referenced to a specific date and/or data set.
The non-concessional bring forward non-concessional contributions cap (that allows some individuals to use 3 years of the non-concessional contribution cap in a single year), provides an example of the anomalies apparent in the reference points for access to superannuation concessions.
The bring-forward non-concessional contributions cap is assessed based on an individual’s TSB, with thresholds referencing both the General TBC and the General NCC.
Source: Paragraph 5.47 of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 – Explanatory Memorandum.
Specifically, the references to $1.4 million, $1.5 million and $1.6 million reflect a calculation that takes a multiple of the NCC (originally set at $100,000) and subtracts it from the General TBC11.
Notably the table above gets very complicated and may produce anomalous eligibility thresholds given the indexation of the General TBC is based on CPI and the General NCC on AWOTE. This problem is further exacerbated if, in a given income year, the NCC is indexed but the General TBC is not (due to the higher $100,000 incremental hurdle).
Access difficulties to Personal TBC
Currently, financial planners and advisers have difficulties accessing clients’ TBA and TSB balances given the information is only accessible via the ATO and restricted to the individual and their tax agents.
Without this information, it is extremely difficult for advisers to provide appropriate financial advice which will not cause their clients to inadvertently breach their caps. Unfortunately, we foresee this problem only getting worse if and when proportional indexation comes into effect with an individual’s Personal TBC diverging from the General TBC12. This ultimately affects the quality of the advice provided and may lead to errors, giving rise to complaints and the need to remediate.
Reliance on ATO
Of particular concern is that the Personal TBC determination rests solely with the ATO, who in turn must rely on all Fund providers to report all relevant member’s transactions accurately and in a timely fashion. Any errors or omissions in the reporting may lead to subsequent re-reporting which may trigger a re-calculation of the Personal TBC. However, the individual and/or their financial adviser may have acted and relied upon the ATO’s calculation.
Notably in a recent AAT case13, a taxpayer submitted that they were led into error by misleading content on the ATO website when managing the excess over their Personal TBC. However, the Tribunal found in favour of the ATO and also confirmed that the Tribunal had no jurisdiction to address any application against the ATO even if its website could be said to be misleading This was the case, notwithstanding there was acknowledgement that the taxpayer had relied on the ATO information in good faith and made an honest mistake.
Furthermore, there appears to be no rights to object to any inadvertent breach of the individual’s Personal TBC in such a situation and is a real concern given the fact that the Commissioner does not explicitly have any discretionary powers to disregard an excess transfer balance (even if information obtained from the ATO contributed to the breach).
Culpability for errors or omissions unclear
As alluded to in the previous issue, it may also be unclear as to who is culpable for an inadvertent breach of the cap as a consequence of any error or omission in member reporting. With such a large superannuation system and the volume of transactions that occur, one can expect reporting errors
or omissions to arise from time to time that require re-reporting to the ATO. To the extent re-reporting causes a subsequent breach of the cap and/or denial of any related superannuation concessions, it is unclear who is culpable for that breach. This is particularly the case if the individual has multiple accounts with various Fund providers and there are errors or omissions experienced by more than one Fund provider.
Severe tax consequences for excess transfer balances not rectified
The breaching of the TBC may often lead to an individual disputing their excess transfer balance with the ATO and refusing to commute the excess. Individuals may give explicit instructions to their Fund not to process a commutation authority issued by the ATO. However, Trustees have no choice but to act and process a commutation authority that it receives14. Failure to do so within the prescribed 60 days will result in the income stream ceasing to be a retirement phase income stream15.
This in turn results in the income stream ceasing to qualify for the earnings tax exemption16 with the eligibility deemed to have been lost from the start of the income year in which the commutation authority was not complied with. Notably this tax outcome poses an administrative challenge particularly for large funds that operate retail Master Trusts and offer their members superannuation interests in unitised asset pools. Specifically, it becomes extremely difficult to even determine what portion of the income and gains from the unitised (pension) asset pools is attributable to that particular member. Furthermore, the Trustee would also need to assess the tax character of that income and gains, plus any applicable tax offsets in order to determine the effective earnings tax rate that ought to have been applied to the deemed assessable income.
More importantly, the Trustee’s compliance with a commutation authority may give rise to a complaint by the member for not complying with their explicit instruction or request not to process.
Outcomes and Conclusion
The current superannuation system is overly complex and costly to administer. There is merit in making it much simpler for all stakeholders.
The Tax Institute submits that simpler rules would assist in:
Members and their advisers better understanding and managing the TBC; and
Reducing the cost for both industry participants and the ATO to administer these rules.
The removal of proportional indexation specifically achieves both these objectives.
As with other existing superannuation caps, adopting the General TBC will ensure every individual has the same TBC regardless of when they entered the retirement phase. This will provide certainty to individuals and their advisers to better plan for their retirement, without having to rely on gaining access to ATO information.
The call for permanent relief for inadvertent and small breaches is aimed at red tape reduction and thereby increasing the overall efficiency of the superannuation system. At present, it can take up to 120 days before an excess transfer balance amount is withdrawn from retirement phase. Any such breaches tend to involve every party within the system and is therefore a very costly and time- consuming exercise. We submit this particular option strikes a good balance between maintaining the integrity and efficiency of the superannuation system. It should also obviate any breaches which may result from any misreporting and re-reporting of member transactions by Fund providers and reduce the number of disputes and complaints raised by the individual against the Trustee and/or the ATO.
Whilst the proportional indexation methodology is designed to target higher member balances, its universal application is more likely to impact superannuation funds with lower balance members. The Tax Institute considers it to be undesirable to significantly increase the complexity inherent in a system that has limited application against the object of the measure. There is still time to remove this provision from Division 294 before the first indexation event occurs and we urge the Government to carefully consider this submission.
The super system is at a crossroads with the combination of the $33bn early access drain, the withdrawal of banks from wealth management and the decline of other traditional retail players in super.
When the history books are written about superannuation in Australia, one question to be asked is whether 2020 will be a high-water mark for the sector.
Overall, total new contributions going into super will continue to increase with the compulsory super contribution scheme, but the combination of the early access to super scheme, questions over the move to a 12 per cent compulsory guarantee levy and new fears that the October budget could allow more access to super for housing add up to an inflection point for the industry.
As Industry Super Australia chief executive Bernie Dean says, the worry is that having seen the success of the early access to super scheme since April this year, the government may be tempted to open up super for all sorts of short-term stimulatory means — sugar hits that limit the amount of money the government has to pay out of its own budget.
As AMP struggles and the banks exit the wealth management business and the private wealth management sector is still coping with the fallout from the royal commission, the traditional private sector companies and lobby groups that have championed the case are distracted or battling to get cut-through against rising anti-super voices.
Having to have two former prime ministers in Paul Keating and Kevin Rudd argue the case to continue the move to 12 per cent was a sign of the limited voices arguing in favour of the compulsory super system, which has been the envy of the world.
Until recently it appeared to have bipartisan support, introduced by Labor and supported by Liberal governments, but now that seems to be eroding.
There was a time when the total super asset pool continued to set records, going through the $1 trillion and $2 trillion figures barriers, underwriting a massive funds management industry in Australia and retirement savings-oriented businesses.
By the end of last year, the total assets in super hit $2.951 trillion, up from $2.88 trillion in June last year.
But the pendulum has swung back this year. Total assets in super funds at June were down to $2.864 trillion despite the sharemarket holding up well in the face of the pandemic.
The latest figures from the Australian Prudential Regulation Authority show that total contribution flows into super funds rose from $114.7bn for the year to June 30 last year to $120.6bn for the year to June 30 this year.
But total benefit payments — including those paid as a result of the early super release scheme that started on April 20 — rose from $76.5bn last financial year to a record $100.4bn for the financial year just ended.
This meant net contributions flows were down by an unheard of 38 per cent from $38bn to $23.5bn.
Total benefits paid out in the June quarter this year of $37bn were almost double the $21.1bn paid out in the March quarter and the $20.5bn in the June quarter last year.
The June quarter payouts included $18.1bn from the early release scheme with 2.4 million Australians choosing to draw on their super for an average amount of $7503.
Australian Prudential Regulation Authority data shows total drawdowns under the early release scheme are now $33bn, with more than 3.2 million Australians choosing to put their hands in their own retirement savings for an average payment of $7678. This means another $15bn flowed out of the system in the two months from July 1 to September 6.
Rather than falling, the average amount accessed by those going to the well a second time (allowed from July 1 until the end of the year) rose to $8427 compared with $7402 for the first application. In short, the super drain has continued with people who do access their super wanting to take out more.
No one can blame people doing it tough from wanting to access their super to pay short-term bills.
But the whole point of our super system is one of compulsory savings to provide income for retirement. The danger is that the government’s early access scheme opens a Pandora’s box of new reasons to access super that could, over time, undermine the system.
There have always been those who have been critical of compulsory super, introduced almost 30 years ago, for ideological reasons. The system, after all, was based on forcing workers who might not save to put money aside for their retirement.
The Treasury also has been wary of the total tax forgone in the super system. But the tax breaks are part of the quid pro quo of forcing people to lock up a proportion of their funds.
With some tweaks to cut back on concessions to the wealthy the system appeared to be holding up well, generating a huge pool of national savings that was being used to help stabilise our financial system in times of crisis and invest in infrastructure and key assets such as electricity, ports and airports.
Now the concern is that the debate has reached a tipping point and super is regarded as a honey pot to be raided.
There is no magic pudding. The less put away for retirement, the worse off people — particularly lower-paid people — will be when they stop working. The value of compounding means that $20,000 taken out of super has a net cost of many times that at the end of a 30-year career.
Another factor is that the system has allowed the rise of a new section of the financial system — the $700bn industry super sector — while the retail super sector has been hit by the royal commission and other issues.
The Jetstar of the super sector, industry super funds have not had to deal with the legacy issues of the private sector super funds, having lower cost structures and a younger membership base as well as not having to pay out profits to shareholders. Their strong cashflows also have allowed them to deliver good returns as they could safely lock in their investments over a longer timeframe.
But there is no great love for the industry super fund sector in some conservative parts of politics despite the fact, by and large, they have delivered well for their millions of members.
The super system is at a crossroads with the combination of the $33bn early access drain, the withdrawal of banks from wealth management and the decline of other traditional retail players in super.