Category: Newspaper/Blog Articles/Hansard

Super tax did not turn many rich Liberals against Turnbull

The Australian

9 December 2016

David Crowe

Malcolm Turnbull has good reason to be on permanent alert for a revolt from the Right. As the farce over climate change this week showed again, the conservative wing of the Liberal Party is quick to flex its muscle when its views are challenged.

But how powerful is that bulging bicep? On at least one issue this year, the threat from the Right looked far bigger than it really was.

The superannuation tax changes, made law last week after gaining royal assent, brought out all the Coalition’s internal anxieties. Critics of the changes warned of a voter backlash. Conservatives threatened to walk. “If the government’s superannuation policy does not change, I will be crossing the floor,” Liberal National Party MP George Christensen declared. He and others got their way: the bills were legislated only after Scott Morrison and Kelly O’Dwyer replaced the hated $500,000 lifetime cap.

The backlash was real. The political pain was severe. But the revolt should not be exaggerated. When the July 2 election results came in, the government found it had a problem with “battler” voters in marginal seats, most of them untouched by a tax increase on super accounts worth $1.6 million. The anger felt by the Liberal Party’s wealthier supporters did not turn into a powerful force at the ballot box.

Polling booth by polling booth, the government held the wealthier suburbs and lost ground in Middle Australia. This shows up in the results for Hughes, an electorate in southern Sydney that extends from the apartment blocks of Sutherland to the waterfront homes along the Georges River and the suburbs of Liverpool.

Liberal MP Craig Kelly held the seat against a 2.5 per cent swing, but the threat came from the Left, not the Right. At the Sutherland Uniting Church Hall, where 1865 formal votes were cast, the swing against Kelly was 6.8 per cent. The swing to Labor was 7 per cent.

The same thing happened in other parts of Sutherland, where Labor and the Greens gained ground. Another battler suburb, Kirrawee, where the median income was about $1400 a week in the 2011 census, also swung against Kelly. His primary vote was down 4.7 per cent and Labor candidate Diedree Steinwall was up 5.7 per cent.

Compare that with Illawong, a suburb that juts out into the Georges River. Here, where the median household income was about $2300 a week, the swing against Kelly was just 2.4 per cent. Labor lost votes. The big winner was the Christian Democratic Party, up 4 per cent.

There was a stronger swing against Kelly in Alfords Point, with a median income of about $2500. Voters here swung against Kelly by 4.7 per cent. The gains were split between the Greens, the Christian Democrats and the Animal Justice Party. That wasn’t a backlash from the Right. The wealthier part of the electorate gave the Liberals one of their best results. If fury over super was driving this shift it would hardly make sense to back the Greens.

The Christian Democratic Party was not running hard on super. While it argued for a “zero taxation” policy on super contributions and payouts, this commitment was on page 27 of a 48-page policy booklet.

The same trends were on display in the electorate next door, Cook, held by Morrison since 2007. The Treasurer suffered a swing against him of 2.7 per cent but the trend was greater in areas that probably had smaller super balances. In Cronulla South, for instance, he suffered a 3.3 per cent swing. Barely any of it went to Labor. The Greens gained 2.2 per cent, the Christian Democrats gained 2.6 per cent and an independent, John Brett, saw a similar swing. The big factor was the absence of the Palmer United Party, which won 3.6 per cent in the previous election. The median household income was about $1500 a week in Cronulla in the last census.

Compare that with Burraneer, a suburb of beautiful homes overlooking the Hacking River. Here, where the median household income was about $2400 a week, the voters at the Burraneer Bay Public School stuck with Morrison. The Christian Democrats gained about as much ground as the Palmer United Party lost. After preferences, the swing against Morrison was only 1.2 per cent.

The tax hike on super shifted some votes, of course. The Liberal Democratic Party turned it into an opportunity to woo Liberal members away from their party. The LDP’s NSW senator, David Leyonhjelm, kept his position in the upper house with the help of this one issue. Yet the party’s results were patchy in the lower house.

In the Victorian seat of Higgins, for instance, the LDP won only 1.2 per cent of the primary vote — or 1093 votes. This is O’Dwyer’s electorate and saw a furious local debate over the tax increase, although Victorian barrister Jack Hammond seemed to attract dozens of supporters rather than hundreds of them when his Save Our Super campaign held a town hall meeting.

The results in Higgins and elsewhere shoot down the theory that Liberals stayed loyal on their lower house ballot papers and took their revenge in the Senate. The LDP managed only 1.36 per cent of the Senate primary votes in Higgins, not much different to the house result and well behind Derryn Hinch and the Nick Xenophon Team. Hinch and the NXT both voted in favour of the super tax package.

Coalition MPs know the super debate made their election campaigns more difficult. They know the names of the volunteers who stayed at home this year out of frustration at the policy. Yet the issue was not the electoral poison some of the strongest critics claimed. Perhaps voters, even in wealthier parts of the country, understood that tax concessions had to change when the deficit was about $40 billion. Consider this when you are told conservatives are mobilising on an issue.

In the end, the super changes added a valuable $3bn to the budget bottom line while improving retirement balances for millions of workers on low incomes. They were prudent and fair. They were worth the backlash. Most important, the backlash was smaller than expected.

That may be worth remembering next time Turnbull is warned of a revolt from the Right.

Thursday, January 19, 2017

Politics based on shoddy advice and hearsay is bad politics

The Australian

22 November 2016

Judith Sloan

Did you know that someone has a $300 million superannuation fund?

I was told this amazing fact by a devoted but credulous Liberal political adviser trying to justify the punitive additional taxes being imposed on
ordinary current and retired superannuants by a Coalition government that should know better.
I’m not sure I believe the figure, but bear in mind that there will be several beneficiaries of the fund. In any case, when do you change the law on the
basis of one case?

But the point that I made to the adviser was that under the rules that have existed for many years, no one can come close to amassing that figure.

There are a few hundred funds above $5m and a handful above $10m.

Good luck to them, I say. There is a lot of hard work, investment, risktaking, providing employment underpinning accounts of that size.

And let’s not forget that taxes have been paid at both the contributions and earnings stages.

In more recent years, anyone on $300,000 a year or more has been paying a 30 per cent contributions tax. Normally you might expect Liberal politicians
to congratulate these large account holders.

But these days, Scott Morrison and Revenue Minister — I prefer to call her regulation minister because that’s really her specialty — Kelly O’Dwyer are
just happy sounding like Richard Di Natale, Bernie Sanders or Jeremy Corbyn.

It was not always so. Gosh, it was only in February that the Treasurer told a self-managed superannuation conference “one of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase”.

“That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me. If they are going to change the
rules at the other end when you are going to be living off it, then it is understandable that they might get spooked out of that as an appropriate
channel for their investment.”

Quite. Morrison went on to state: “I fear the approach of taxing in that retirement phase penalises Australians who have put money into
superannuation under the current rules — under the deal they thought was there.”

And that would include the beneficiaries of the apocryphal $300m account.

By May, everything had changed. Those experts at the Grattan Institute who compare superannuants with pigs with snouts in the trough — one of its
reports even uses a photo of the pig statues in Rundle Mall, Adelaide, to emphasise the point — and eager activist bureaucrats were able to convince
the gormless Morrison to change his mind.

It would make the budget fair, so the advice went. The fatal flaw of the 2014 budget would be avoided, notwithstanding the fact this budget contained the
oh-so-fair temporary budget repair levy that added two percentage points to the highest income tax bracket.

The government could call the assault on superannuants a type of reform, knowing the left-wing press would ignore the broken promise — recall the
hard time Tony Abbott was given for his broken promises — and praise the government for its efforts, urging Morrison to go further.

The union-dominated industry super funds were on board, not surprisingly, as the changes damage their mortal enemy, the self-managed superannuation
funds. You might think that this would give Morrison and O’Dwyer pause for thought, even rethink the changes. But no.

In fact, the only part of the superannuation package that will be delayed this year relates to the statutory objective of superannuation.

The industry super funds don’t like the government’s first attempt; they want words that will justify an increase in the superannuation contribution
charge. There must be reference to a dignified and comfortable retirement.

Expect the government to cave.

But here’s the thing: how can the rest of the package proceed if the objective of superannuation has not been settled?

This is truly bizarre. Surely the merit of the changes must be measured against the objective. This is complete incompetence on the part of
Morrison, O’Dwyer and their advisers.

And what about the fact the explanatory memorandum for the government’s superannuation package presented to parliament on November 9, and
circulated by Morrison and O’Dwyer, references the Grattan Institute’s It’s Time to Target Super Tax Breaks report at page 274, paragraph 14.12. That
would be the report with the pigs with snouts in the trough on the cover.

Should we assume that Morrison and O’Dwyer are endorsing this depiction of superannuants?

When did it become acceptable for the government to take its advice from a big government-high tax advocate such as the Grattan Institute (funded by
the taxpayer, no less)? And how is it possibly acceptable for the wife of the Prime Minister to sit on the board of this institute if the government is
taking advice from it? This is just a blatant conflict of interest.

As for the rest of the process, it has been a complete joke and the government knows it. Interested parties have been given between five and
eight working days to make detailed submissions about the various tranches of the package.

A similarly short period was allowed for submissions to the Senate committee and this committee will report almost immediately after
submissions have been received.

It’s the classic case of the tail wagging the dog. Morrison, O’Dwyer and presumably Malcolm Turnbull are so desperate to have the bills passed this
year that they don’t care about the quality of the legislation or the abuse of the consultation process. The changes must begin from July 1 next year.
The drafting of the legislation is all over the shop, bringing in new accounting concepts never used previously in superannuation tax law and
the deadlines are unworkable. The compliance costs for superannuants are immense, even for those who won’t be caught in the first instance.

But this doesn’t seem to trouble O’Dwyer, who otherwise might be worried about imposing additional red tape on people who had followed the rules.

But this is the way that insiders think.

To assume this is the end of the road is naive. Labor never would have contemplated such radical changes to the taxation of superannuation.
But since the Coalition let the genie out of the bottle, Labor has raised the government two spades and will go further in due course.

The blame for this will be entirely attributable to Morrison and O’Dwyer, who think betraying their base is good politics. We will see.

By the way, sloppy and bad policy is never good politics.

Monday, February 13, 2017

Superannuation doubts drain $1.5bn from system

The Australian

23 November 2016

Michael Roddan – Reporter | Melbourne | @michaelroddan

Uncertainty surrounding the government’s superannuation reforms is continuing to dissuade savers from contributing to their retirement savings, at the same time as the $2 trillion industry is suffering signs of a generational shift where retiree drawdowns on their pensions are now out­weighing the amount of new ­contributions.

Data from the Australian Prudential Regulation Authority ­yesterday showed total contributions into the super system dropped 1.5 per cent over the year to September, a $1.5 billion drop year-on-year.

A near 5 per cent drop during the three months to September added to the 11.3 per cent contributions fall suffered by the sector in the June quarter, as the proposed super shake-up met with a “triple-whammy” of market-moving votes — Brexit, the Australian election and US election — to frighten savers on to the sidelines.

The fall comes as the government’s super reforms are set for debate in the Senate, where Labor has flagged its intention to seek amendments to the bill, after the package passed the House of Representatives last night.

Opposition treasury spokesman Chris Bowen said the reform package was “better than nothing” and said Labor would support its passage through the Senate if its amendments were not successful. “What we will do … is make sensible suggestions about how it can be improved,” Mr Bowen told parliament.

The reforms, unveiled at the May budget and which were the source of heated debate during the federal election, will limit non-concessional super contributions to $100,000 a year and introduce a $1.6 million cap on tax-free pension accounts.

While there was an absolute increase of 7.4 per cent in super ­assets to $2.1 trillion over the year, the APRA figures also revealed a dramatic slide in net contribution flows, which slumped nearly 20 per cent.

The wealth management industry is set for a rough ride over the coming decade as fund inflows wane, with super managers staring at a generational shift where baby-boomers start to draw down on savings. Supported by compulsory contributions from employers, the funds management industry has recorded enormous growth over the past 20 years, but shifting demographics will soon start to threaten the rivers of gold.

Jeremy Cooper, architect of a recent government review into the super sector, said the industry was expecting to move into the net drawdown phase in the 2030s, but those estimates would have to be revised if the 18.7 per cent slide in net contributions this year established a trend.

“More people were taking money out of the system than they were the previous year, by quite a bit,” Mr Cooper told The Australian.

“It may be explicable by some one-off thing, but it’s still quite a big jump.

“The proportion of people entering retirement is steadily increasing, but you wouldn’t have expected it to jump that big.”

About 700 Australians retire every day and the retiring population will grow at an average rate of 2.5 per cent for the next 10 years.

Chris Kelaher, chief executive of wealth management group IOOF, which has more than $100bn in funds under management, said the proposition that super contributions were going to taper off into nothing was “just a bit naive”.

“Obviously there’s a point in time in the future where the net flows into the system may vary negatively,” Mr Kelaher said. But he said greater longevity and longer pension phases would help support demand for wealth management.

Mr Kelaher said this year’s dip in personal flows was due to the US and Australian elections and the Brexit vote, but he argued that after the government’s reforms were passed people would ramp up contributions.

“You’ve had a triple whammy this year,” he said.

“You put those … things together and then you’ve had very soggy markets in January and everyone’s sitting on the sidelines and figuring it out.”

Association of Superannuation Funds of Australia chief executive Martin Fahy said the tax changes to superannuation would make the system more equitable and sustainable, and he called on the Senate to pass the reform package. “This legislation should be passed without undue delay to provide the certainty people need to make voluntary contributions to their superannuation,” Mr Fahy said.

The APRA data also showed more people were moving away from large funds and into self-managed super funds, where assets had grown 8 per cent over the year to $636bn.

Elsewhere, research from Morningstar showed the majority of super funds recorded losses in October, with a median return of negative 0.7 per cent. Industry funds were the top performers over the past 12 months, with Cbus returning 6.6 per cent.

Wednesday, February 22, 2017

Keeping the politics out of super

The Australian Financial Review

25 November 2016

This week’s super changes have removed a Costello-era savings incentive that in tougher times had morphed into unaffordable middle class welfare. The budgetary result of the changes is a saving of $2.8 billion over four years, one of the larger wins in an unspectacular pre-election 2016 budget. But it is also part of a transforming moment for super itself.

The new measures limit to $25,000 the amount that can be paid at concessionary tax rates, lowers to $250,000 the income threshold at which a higher tax rate of 30 per cent (rather than 15 per cent) kicks in, and caps the size of a superannuation account at $1.6 million, or enough to pay for about four government age pensions.

That has reduced the attraction and scope of super as a serious tax shelter for the estates of the wealthy. And the new limits fit neatly with the Murray inquiry’s recommendation, taken up by government, to make retirement income the sole purpose of super, enshrined in law. The idea is reduce the leeway for tinkering with the system for political advantage – now a bad habit in Australian politics.

The latest changes have caused heartburn in the Liberal base. Malcolm Turnbull rightly observed last week that it is near impossible to guarantee that there will be no losers from any specific policy change designed to promote the overall good. He knows the political pain of that: this week’s super changes upset the Coalition’s heartland constituency of self-funded, self-reliant retirees and savers, people already hit with lower earnings in the post-crisis, low-yield world. Their anger over the disruption to their retirement savings plans, made in good faith within existing rules is understandable. That anger, funnelled through the Coalition backbench, forced Treasurer Scott Morrison to abandon the government’s plans to impose a $500,000 lifetime limit on post-tax or non-concessionary super contributions, backdated to contributions since 2007.

Critics stretched the definition to call that retrospective taxation. Yet governments often make decisions that render past investment decisions less fruitful, such as investing in limited taxi plate licences or in a factory that has been protected from competition. As the Henry tax review pointed out, there are good reasons to tax savings, or capital, relatively lightly and uniformly. Yet, faced with a chronic budget shortfall, governments do need to need to make hard decisions, including those that are going to upset their own base. And even with all of these changes, superannuation will still be highly concessionary: the amount of money that can attract the concessions will just be smaller.

There is still considerable work to do to overhaul the super system. Financial Services Minister Kelly O’Dwyer drew some giggles this week when she told an industry super conference that the government will once again push for union-dominated industry super funds to have a minimum one-third independent directors, the same as banks which have been in the headlines for the wrong reasons. The dominance of officials from the declining institution of the trade union movement is out of step for a retirement incomes system that has become more than just another workplace benefit. It is now a $2 trillion component of the financial system and its governance should reflect that. There is much talk about diversity in corporate governance, yet industry super funds maintain a rigid quota of representation from trade unions. And there are nasty black spots in union super too: such as the royal commission into trade unions uncovered with the repeat law-breaking Construction, Forestry, Mining and Energy Union’s influence over the Cbus superfund. Banking governance rules in banking surely would not allow such a law-breaking body, with clear links to organised crime, to have any links to a prudentially supervised financial institution trusted with billions of dollars of retirement savings. Regrettably, superannuation remains overly politicised. Both sides of politics should work to reduce this, not exploit it.

Monday, December 26, 2016

Save more, get less: how the new super system discriminates

The Australian Business Review

26 November 2016

Tony Negline Wealth Columnist

There are two harsh realities of the new superannuation laws — first, they discourage those on average wages from saving and second, the way it works they will discriminate against a layer of investors who have saved more than others.

It should never be this way — no doubt it was never the express intention of the new regime — but this is how it has come to pass.

Let me use some case studies I have used before, but now are more relevant than ever. At their worst they clearly reveal the new discrimination now legally enshrined in the system

We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income. All income is paid to you tax-free.

For the sake of simplicity, we will assume that this super pension started after December 2014, which means the account balance is deemed under Centrelink’s income test. Apart from your home and your super, you own $50,000 of personal use assets including your car. You have no other assets.

All of our examples will consider the assets test thresholds that will apply from January next year.

Case study 1
You have $1.6 million in super assets. In this case you will receive no age pension and therefore your income is $80,000 per annum.

Case study 2
You have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382 including the pension and energy supplements. Total income is therefore $44,382.

Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.

Case study 4
What about $700,000 of super assets? You will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.

Case study 5
Finally, what about those without $1 million in super assets? You receive no age pension and need to live off all their super pension of $50,000.

What does all this mean? You can have less assets but more income each year.

To spell it out, you can have $500,000 in super and you will be better off in terms of annual pension payments — super and government pension combined — than a couple with $700,000.

What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.

Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75% more income.

The government says it changed the super system to make it fairer and more equitable. These are the reasons for the $1.6 million pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above do these arguments really hold?

For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.

After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?

Anyone earning $50,000 each year, which increases at 2 per cent each year while their super grows by 5 per cent after all taxes, fees and charges, and receives compulsory superannuation, will have $400,000 in super assets after 31 years of work.

At that point if they were to retire they would receive 100 per cent of their pre-retirement income.

Clearly there is a distinct disincentive for people in this situation to work for longer or to try and earn a higher salary.

Of course you can always argue the person with higher savings in the system is better off — we don’t know how future pension incomes will work and they have the option to spending their capital if they want … but that’s not the point. The point is the system has built-in discrimination.

Tony Negline is author of The Essential SMSF Guide 2016-17 published by Thomson Reuters.

Sunday, June 18, 2017

SMSF reaction to super law: disappointed and betrayed

Australian Financial Review

25 November 2016

John Wasiliev

Disappointment and a sense of being betrayed are the major reactions of self-managed superannuation fund (SMSF) trustees who find themselves unable to save for the retirement they planned for as a result of the significant changes to super that will apply from next July.

Anyone with super of more than $1.6 million in either savings or a pension account or with aspirations to accumulate such amounts are in this boat.

For trustee Libby Boshell and her husband, who have already accumulated more than $1.6 million after decades of saving, what to do now leaves them with feelings of despair and being targeted for the errors of past governments.

While accountants, financial planners and superannuation experts scramble to come to terms with the reforms and devise ideas and strategies to deal with them, trustees like the Boshells feel disillusioned.

In their own words, they have “carefully followed all the rules, done our homework, and sought to understand the value of long-term savings”.  The changes have left them distrustful about both super and the political system, in particular the Turnbull Coalition government’s approach to it.

With intentions to continue working beyond age 65 and keep saving through super, the Boshells now regard themselves as being “locked out” of making super contributions from July.

While they recognise they can make last-minute contributions under the current rules this financial year, they are frustrated because non-concessional contributions won’t be available to them and super accumulated beyond the pension limit will be taxable when they start pensions.

But their future super involvement is not as radical as SMSF trustees Tom and Cathy*, who say they have exit strategies planned that involve selling investments in their pensions before July while they are still exempt from tax.

They describe reports of trustees selling property in their super ahead of the reforms as being the reverse of the efforts trustees made in 2007 when the Howard government allowed a last-minute $1 million contribution entitlement before introducing its major super reforms.

They also plan to withdraw lump sums from their super while this is still possible because their view is that future super reforms could close off lump sums in favour of purchasing annuities.

They describe the new super rules as a “dog’s breakfast”. For them a key issue is not being able to trust politicians, especially with the prospect of a future Labor government proposing further contribution and tax restrictions.

Also less than complimentary about the new super rules is SMSF trustee Diane*, who describes the new legislation as  “extremely complex and unwieldy”  and which limits the scope for today’s workers to save for a comfortable retirement in an increasingly costly world, especially with regard to healthcare.

Her view on the government is the Liberals have abandoned their support base and as a result have lost many older Australians as voters for the foreseeable future. The older generation, she says, have long memories and have been betrayed.

Super advisers say the changes that will come into effect from next July are the most significant since the Howard reforms a decade ago.

SMSF specialist Meg Heffron of Heffron SMSF Solutions describes them as changes that are likely to completely re-shape super strategies for the next decade for those able to commit more than average levels of contributions to super.

She is surprised how quickly the reforms were approved by Parliament, and the limited time allowed to adapt to the changes to people who will be most affected – those with super accounts of more than $1.6 million.

Especially affected, says Heffron, will be those who have a combination of SMSFs and defined benefit pensions, many of them public servants, where the treatment is “really weird”. Also subjected to strange treatment are pensions often run from SMSFs known as market-linked or term allocated pensions where some unusual income treatment will take a lot of sorting out.

*Anonymity requested

Monday, February 13, 2017

Super tax deal favours wealthy estate-building

The Australian

26 November 2016

Terry McCrann Business Columnist Melbourne

The great irony — and, presumably, greatest unintended consequence — of the government’s move to reduce the tax benefits of superannuation for higher-income and wealthy people, is to guarantee that over the longer term, precisely only those people will use super to fund their own and their children’s and indeed grandchildren’s retirement.

Everyone else will take the tax benefits from super over their working lives to build a nest egg, but in retirement they will reduce their superannuation balances to get partial or full access to the Age Pension.

Because, quite simply, it will be the rational thing for the wealthy and the less wealthy alike to do.

Truly, a government led by a man who sees himself as the very embodiment of the 21st century will have succeeded in not simply wasting tens of billions of dollars of taxpayer money every year, forever — or until the next change in the supposedly now “set in concrete” rules for super — but also in taking Australia back to a 1950s future when super was limited to a privileged white-collar elite.

This irresistible outcome turns on the government’s hard cap of $1.6 million (indexed for inflation) for an individual super balance, and the way it intersects with the two major other tax-advantaged investments, the family home and negatively geared investment property (and indeed, negatively geared investments generally), and the welfare system.

First off, it becomes almost impossible for anyone in future to actually reach that $1.6m through pre-tax contributions (whether mandatory, related to salary and wage income, or voluntary) under the new annual limit of $25,000. Of which, of course, only between $17,500 and $21,250 would make it into super after contributions tax, depending on your income, and apart from very low-income earners who would never trouble the limit anyway.

It gets worse when you add the reality that most people don’t — and never will — start contributing anything close to the maximum early in their working lives. How many people kick off their working lives earning the $277,000 required to get a $25,000 employer contribution?

Add the 21st century reality of fragmented and interrupted lifetime working patterns and that $1.6m cap becomes an entirely hypothetical fantasy for almost everyone. But that’s so far as pre-tax contributions are concerned.

The way you top up your super balance today and the way you would even more need to top up the balance in the future is through big after-tax contributions approaching retirement.

The most obvious way is to sell the family home and put — under the rules now abolished — up to $540,000 per person, $1.08m per couple — into super. It is this which the government has now quite precisely targeted to stop, by reducing the maximum to $300,000/$600,000.

The initial budgetary proposal to have a lifetime limit for after-tax contributions rather than an annual maximum made more sense; the problem was that the $500,000 chosen was just too low.

It is also why the government’s decision to allow one last go at putting in up to $540,000/$1.08m is so egregiously stupid and favours the wealthy. I’ll come to that in a moment.

First, we need to consider the impact of the $1.6m hard cap, which actually isn’t.

You will be allowed to go above the $1.6m (remember, indexed) if over your life you can get there through pre-tax contributions and the earnings they generate. What you won’t be allowed to do is go above it by putting in after-tax contributions.

So if you were at, say, $1.5m approaching retirement, you could not put in the up to $300,000 in after-tax contributions when you sold your family home, only $100,000. So a rational person wouldn’t sell that capital tax-free asset. But there’s nothing to stop you front end loading your after-tax contributions and then letting after-tax contributions take you through and well above the $1.6m.

To take an extreme example: start at the age of 20 putting in the $100,000 after-tax a year, every year. Indeed, there’s nothing to stop you starting at the age of one and getting to the $1.6m supposed limit while still at school.

So the future trick will be to get to the $1.6m hard cap at an age somewhere in your 30s or in your mid-teens; then you let after-tax contributions of $25,000 a year and the earnings on the total take you as high as it can.

Such a person could easily get to $4m by retirement. Yes, at that point only the earnings on the $1.6m (indexed) would be tax-free. But earnings on the other few million would be taxed only at 15 per cent. Better than being taxed at 47 per cent (or who knows what) in your hands as personal income.

Now I wonder who on earth could start putting in $100,000 a year, every year, from the age of, say, 20; or even more, from the age of one?

I’ve got a sneaking suspicion it would be someone who has wealthy parents. Or indeed wealthy grandparents.

Treasurer Scott Morrison said it was outrageous for super to be used as an exercise in estate planning. What’s he’s done is to make it an even more exclusive version of estate planning: for those who can transfer $100,000 per child — or grandchild, or indeed, in their generosity, members of their wider family — every year. Rather than leave bequests in their will.

This also applies to those who can take advantage of the last chance to pump in up to $540,000 before July 1. I know of at least one person who has done it for each of his children.

So in short, only rich people will be able to build balances significantly greater than $1.6m under Morrison’s new super system. Everyone else will struggle to get to that figure; and having failed to get there, it would make sense to adjust their balance down to ensure they got some access to the pension and, if it’s still around, the critically important health card.

They would have pocketed all the tax benefits along the way, which were designed to be repaid by having them off the pension in retirement, and yet gone straight on to the pension.

Further, Morrison has specifically ruled out the option of people cashing in the $1m or $2m modest family homes — and who knows what that figure will be in 2030 and 2040 — and putting that money into super to stay off the pension.

The bottom line is to create whole new genres of estate planning for rich and everyone else alike. Wealthy people will do it in part through their children’s super, verily down to how many generations are extant, while not only reaping the tax benefits along the way but maximising them in their and their children’s retirement.

Everyone else will do it either through the family home or even more than now negatively geared property and other investments, while also taking the tax benefits on offer with super along the way. And then in retirement, take the super money and spend or bequest it or whatever, to also get the pension.

It really is hard to think of a more asinine policy initiative in recent decades. It completely undermines the super system to generate minimal sustained savings, while supercharging investment in tax-advantaged family homes and negatively geared assets.

There’s one final point: I would suggest with absolute certainty that Treasury wouldn’t have a clue how seriously this will impact negatively, on both sides of future budgets.

Monday, December 26, 2016

Thank you Treasurer for the super reforms

The Australian Financial Review

27 November 2016

Sally Patten

On behalf of the financial planning and accounting communities, your correspondent would like to take this opportunity to thank Treasurer Scott Morrison for the most significant superannuation reform package in nearly a decade.

Changes to the retirement savings rules, especially complicated, tectonic plate-shifting ones such as those which will be introduced on July 1 next year, help to justify the existence of a variety of occupations, including government relations and policy experts, lawyers, super fund administrators and a good number of staff at the Tax Office (not to mention financial journalists).

But the biggest beneficiaries will surely be financial advisers and accountants, who will spend the next seven months demonstrating their expertise by explaining the changes to their clients and ensuring that they remain on the right side of the law.

For what it is worth, this reporter’s advice to readers who think they might be caught by any of the reforms, which include placing a $1.6 million ceiling on the amount of money that can be held in a tax-free pension, lowering the annual pre-tax contributions limit to $25,000 and reducing the non-concessional contributions caps to $100,000 a year, would be to not wait until June next year to start getting your super affairs in order.

But by the same token, there is probably little point in contacting your adviser just yet, as the chances are they are a long way from getting their heads around the package and all its implications.

The fear is that not every professional adviser will have a sound understanding of the rules in time to help their clients.

As one industry insider conceded last week: “Clearly [mistakes] can happen with complex rules. There is going to be the odd false start.”

The reform package may help to make the super system more equitable and sustainable, but simple it ain’t.

In skiing terms, savers who have more than $1.6 million in super can consider themselves to be the top of a black run, with the highest degree of difficulty.

Let’s look at just one example: the segregation of assets between a tax-free pension account and an accumulation account, which will house any excess amounts over $1.6 million.

It is probably worth retirees at least thinking about which assets should be held in the pension account, given there is no ceiling on how far the value can rise due to market gains, and which assets should be held in an accumulation account.

So far so good. There are various theories on the best split of assets.

Then we get to the issue of tax. If the superannuant is in a self-managed super fund, they will not be able to segregate their assets for tax purposes. An actuary will work out the tax on a proportionate basis across the two accounts.

However, if the superannuant holds their assets on a large platform, such as in a retail fund, they will be able to segregate their assets for tax purposes as well as asset allocation purposes, and so might like to think about which of their accounts should hold fully franked shares.

If they were held in an accumulation account, they could be used to reduce the tax bill.

Would it be worth switching from a self-managed super fund onto a platform in order to maximise the tax benefits?

Curiously, while self-managed super funds are at a disadvantage in the example above, members of such funds appear to have one big advantage over members of garden variety pooled super funds.

A self-managed fund with more than $1.6 million of assets is able to re-set the cost base of the investments to any date between November 9 and June 30, so that assets that are placed into an accumulation account are able to lock in the tax-free capital gains that have been accrued thus far.

But accountants fear that the majority of pooled super funds will not be able to do the same for their members, lumping them with bigger capital gains tax bills.

It’s a brave new world out there.

Monday, December 26, 2016

Super reform: Kelly O’Dwyer should hang her head in shame

The Australian

9 November 2016

Judith Sloan | Contributing Economics Editor | Melbourne

The government knows its superannuation legislation is deeply flawed. Its efforts to contain the consultation process — allowing a week for parties to comment on hundreds of pages of new law — haven’t prevented those who actually understand these things to declare much of it is unworkable.

Where tax legislation language is appropriate, the new laws use inappropriate accounting concepts. The rules contain unrealistic start points and maximise the compliance costs associated with the transfer balance cap of $1.6 million.

For those with several superannuation accounts, including one providing a defined-benefit income stream, expect to be unfairly treated. By using the one multiplicand (16) of annual pension income irrespective of age to calculate the implied transfer balance amount, anyone over the age of 70 is essentially done in the eye.

But it is good for the public servants who have given the government such dodgy advice, who will retire on unimaginably generous money courtesy of a recent salary increase and the benefit from the new rule.

But here’s the thing: the government doesn’t care. In particular, the responsible minister, Kelly O’Dwyer, doesn’t care. All she wants is the legislation to be rammed through parliament and she will do almost anything to achieve this dubious objective. The fact that, in due course, there will be many more older people on the Age Pension doesn’t worry her. She will be gone by then.

The fact there will be even higher taxes imposed on superannuation in due course because the Liberals were more than happy to impose additional taxation on current and retired superannuants to the tune of $6 billion over three years won’t bother her either.

She doesn’t care about the extraordinarily high compliance costs or the fact the changes benefit the industry (read union) super funds at the expense of self-managed superannuation funds. She’s from the Graham Richardson school of politics — whatever it takes.

And then we have the Labor Party wheeling and dealing, even though the super policy it took to the election was a Harry met Sally policy: we’ll have what they are having and book the same savings.

Now it turns out that this was actually a bit of a porkie and Labor wants to impose some further changes that will raise an extra $1.4bn over the forward estimates.

Labor Treasury spokesman Chris Bowen wants the annual non-concessional contributions cap to be $75,000 rather than $100,000 and the 30 per cent contributions cap to kick in at an adjusted salary of $200,000 a year rather than $250,000.

And Kelly can say good night to her carry-forward arrangements in relation to unused concessional contributions as well as eliminating the work test for older people. These were really the only sweeteners in the Liberals’ super package announced at budget time, apart from the pointless low-income superannuation tax offset.

All the time, Liberal backbenchers stay mum, in part because most wouldn’t have a clue and in part because those who should object are more worried about their career prospects than prosecuting the case for lower taxes and small government.

The only ray of hope is that Malcolm Turnbull regards the changes demanded by Labor as a bridge too far (and Labor won’t budge) and that enough crossbenchers won’t co-operate.

Going back to the policy drawing board would be the best outcome at this stage.

Friday, January 4, 2019

Superannuation restructure tips to stay under $1.6m pension cap

Australian Financial Review

16 November 2016

by Sam HendersonMake the most of opportunities before June 30 to balance out super sums between partners, writes Sam Henderson who answers your questions on super.

Q: To comply with the proposed $1.6 million tax-free pension limit, our SMSF will require restructuring. What I am contemplating is withdrawing a significant amount as a pension from my member pension account and making a non-concessional contribution into my wife’s pension member account – which happens to be well below the $1.6 million limit. As the trustee, I need to choose the withdrawal type – ie, lump sum or pension. Both withdrawal types count towards the minimum withdrawal requirement of our pension and are not taxed in my personal tax return. Will such a withdrawal, dependent on whether it is nominated as a pension or a lump sum, compromise the grandfathered status of the pension account when considering eligibility of the Commonwealth Seniors Health Card? I retain a right to exclude the non-assessable pension under the grandfathered rules at January 1, 2015. Are there other ramifications dependent on the type of withdrawal that is made? What are the differences between a lump sum and a pension withdrawal? David

A: Put simply, a commutation means that your pension account will need to stop and restart, therefore affecting the grandfathered Commonwealth Seniors Card (or, more widely than your case, those on the grandfathered age pension deeming rates with lower balances). Since there are no upper limits (there is a minimum only) of pension payments, it’s best to make your withdrawal in the form of pension payment to ensure existing grandfathered scenarios remain unaffected.

As a general rule, I typically make lump sum withdrawals for clients as pension payments for the sake of simplicity and to maintain any grandfathered provisions.

With respect to making a non-concessional contribution in your wife’s name, you may be able to contribute up to $540,000 into her super fund by June 30 if she hasn’t triggered the bring-forward rule. If she’s over 65, though, she will be limited to $180,000 a year and only if she meets the work test of working 40 hours in 30 consecutive days in the financial year in which the contribution occurs. Next year, of course, all these amounts will be markedly reduced so the next half of this financial year will be a big one for super funds to maximise their opportunities.

Q: Sam, if I have more than $1.6 million in my self-managed superannuation fund (SMSF), can I still make non-concessional (after-tax) contributions in 2017-18? Peter

A: Peter, my understanding is that after July 1, 2017, if your balance exceeds $1.6 million then you will not be permitted to make further non-concessional contributions. People with less than $1.6 million in their fund will be able to make non-concessional contributions up to their $1.6 million cap of $100,000 per annum or up to $300,000 using the bring-forward rule. If you do make further non-concessional contributions, you will be issued with a direction from the ATO to remove the money from your superannuation fund.

For this reason, it may make sense to make arrangements to contribute up to $540,000 for each member in this financial year using the existing bring-forward rules to potentially max out a contribution between a couple of up to $1,080,000

Q: I am 67 and fully retired, therefore I cannot open a superannuation account as I would fail the work test. If my pension exceeds $1.6 million (say $2 million), where could I put the extra $400,000? Frank

A: Frank, the government plans to make this one easy for you by compelling you to comply with the apportionment rule. If you have an existing retirement pension (account-based pension), then you will not be given any other alternative other than using an apportionment process to calculate your $400,000 over and above the proposed $1.6 million cap.

That said, you will be able to cash the funds out of the superannuation environment and for some people, this may be a viable alternative. Just remember, though, outside of the super entity, you will need to pay the regular individual marginal tax rates and potentially capital gains tax. It’s the latter that concerns me.

I mentioned last week that I am curious as to how the government will be able to apply the rules to those with multiple superannuation funds and if the apportionment rule can practically be applied given potentially two different trustees (such as when a person has an SMSF and an industry fund). For example, if we rolled your $400,000 excess amount into an industry fund and invested it into direct shares with franking credits, we could potentially eliminate the income tax by segregating the accounts which won’t be possible if all the funds are in one account. So too, we may see an emergence for higher-net-worth clients having two SMSFs for this reason, ignoring any potential impact on the Commonwealth Senior Health Card or any other grandfathered provisions under Centrelink.

You see, you don’t need to meet a work test to do a rollover into another fund and you can do partial rollovers (potentially in-specie) depending on where you’re rolling your fund to or from although, as mentioned, you’d want to check the grandfathering if you have a health card. Advice is definitely recommended to those in this situation.

Tuesday, December 13, 2016

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