Category: Newspaper/Blog Articles/Hansard

Australian Financial Review

17 August 2016

by Sam Henderson

Many believe a $25,000 pre-tax contribution cap is too restrictive and does not adequately encourage Australians to save more in retirement

A reader in his 50s with $700,000 in super has a good chance of hitting $1.6 billion by retirement age, writes Sam Henderson who answers your questions on super.

Q: I am in my mid-fifties with a super balance of $700,000, largely achieved by making use of the pre-budget annual non-concessional cap over the last few years since the mortgage and private school fees have finally been put behind us. I had a perfectly sound plan in place to achieve a healthy super balance in line with Rice Warner’s lucky 40-year-olds over the next 10 years, using a combination of concessional and non-concessional contributions. But with the new flat $25,000 annual cap on concessional contributions, and having already used up the proposed retrospective $500,000 non-concessional cap, how can I possibly now achieve my pre-budget plan or even anything close to it? Some 40-year-olds may indeed be crying wolf, but I feel that we 50-somethings are being thrown to them! David

A: David, you are correct but only assuming you receive no return on your money, which is unlikely. I thought I’d run a quick rudimentary spreadsheet on the numbers and you would need to attain a return of 6.5 per cent compounded per annum to attain a little over $1.6 million in 10 years. According to SuperRatings, the average return over the past five years has been around 5.5 per cent for a super fund so assuming you received this return, it may be estimated that you could end of achieving a retirement lump sum of a little south of $1.5 million. Depending on your risk profile, experience, knowledge and preparedness to borrow money, gearing might magnify the returns (and potentially losses) to attain a figure well in excess of $1.6 million.

Incidentally, despite requiring a little faith in the future and an assumption that no further detrimental changes to super will affect you (lets hope not!), I don’t think you will be too far from the mark.

For the record, I do agree with you that the $25,000 is too restrictive and does not adequately encourage Australians to save more in retirement. It is proposed that superannuants will be able to use non-utilised years of the $25,000 (essentially saving it up and making a lump sum of up to $125,000 and still be able to claim a tax deduction). It’s further proposed that they will be able to contribute to super over the age of 65 without having to meet the work test until 75. This will help those people needing to pump up their super using lump sum contributions from the sale of assets or an inheritance.

All of this is increasingly important in a lower interest rate environment when $1.6 million may not create the income stream it did when interest rates were at 7 per cent. I should also note how highly problematic it is attempting to navigate the advice process in this environment after the government has made such impactful announcements without any of them having seen the light of parliament yet.

Q: I am another who will be caught out by the proposed changes to the transition to retirement pension rules. I do not classify myself as wealthy and I did not use the pensions to avoid tax. I believe that I have used them as intended and am now almost completely retired. I would like the option of doing interesting work if it came my way but it looks like that will be denied. I am also annoyed that the government has misrepresented the Productivity Commission which actually suggested that more information is needed to see who used TTR pensions and for what purpose before changes were made. The government is applying collective punishment to all who used the TTR pensions. I am now 68 and hence am well above my preservation age. I have a term allocated pension and an allocated pension in a self-managed super fund. Is it true that if I fully retire before the end of this financial year, the earnings for these pensions will continue to be tax-free? If so, I feel that it is ironic that the government will force a highly educated and experienced person (Ph.D.) from the work force but will draw no additional tax revenue. Michael

A: Thanks for your question, Michael. Your answer is far simpler than you may imagine. Attaining age 65 (three years ago) is a full condition of release so you should be receiving a full account-based pension not a transition to retirement (TTR) pension. TTRs are only for people from preservation age (age 56 at the moment) to age 64. This should have been changed by your administrator or accountant when you turned 65. You really have very little to worry about given the changes.

Essentially, you may continue to work or you may retire but either way, your pension will remain tax-free and you may also retain an accumulation account for as long as you like although it may be prudent to have as much as possible in a pension phase.

The only caveat is if you have greater than $1.6 million in your individual account, although I doubt you’d have a TAP if you are in this situation and the proposals are yet to pass parliament.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.

Financial planner Sam Henderson is CEO of accounting, advice and funds management firm Henderson Maxwell (www.hendersonmaxwell.com.au). To submit a question, please email: superquestions@fairfaxmedia.com.au. Published questions will win a free copy of Sam’s book The One Page Financial Plan (Wrightbooks, RRP $29.95) – remember to include your mailing address in your email.
AFR Magazine

AFR Contributor

The Australian
8 August, 2016
David Crowe Political correspondent Canberra @CroweDM

Scott Morrison has countered the idea of giving wealthier Australians any relief from a new $500,000 cap on some of their superannuation, saying the change should go ahead to ensure “intergenerational equity” for younger workers.

The Treasurer conceded the case for “technical” changes to the budget package but held out against calls to change the start date for the $500,000 cap on after-tax contributions, a measure that has ignited warnings about retrospective taxation because the threshold will apply from July 2007.

Mr Morrison said the policy was “sound” and Australians who had already benefited from tax breaks on super would have to accept tighter rules, along with younger workers who will never benefit from the previous more generous concessions.

“So I think there is a real intergenerational equity here and those who stand most to benefit from those changes have the biggest balances, the biggest incomes and have made the biggest tax-free contributions,” he told the Australian Agenda program on Sky News yesterday.

A backlash against the super tax increases caused turmoil within Liberal ranks during the election campaign, as members withdrew support at polling booths and some quit the party.

Malcolm Turnbull and his ministers are holding to the $6 billion tax increase, which adds $3bn to the budget bottom line after helping fund a rise in super for millions of workers on salaries of less than $37,000 a year through a super tax offset.

Labor has embraced the $3bn saving and the Greens back the reform to super tax concessions, suggesting Mr Turnbull and Mr Morrison will have the numbers to legislate the changes if they can address complaints in the Coalition partyroom.

The $500,000 cap raises $550 million over four years but would raise very little if the start date were shifted to this year.

Draft legislation is expected from Financial Services Minister Kelly O’Dwyer in weeks but the date is not expected to change.

Mr Morrison said those who had already made non-concessional contributions of $500,000 should accept the new cap. “They have an average balance of $2m in their super — $2m. And they have actually on average contributed $700,000,” he said.

Australian Financial Review

12 August 2016

Ben Potter

Derryn Hinch, the celebrity journalist turned senator-elect, says he has problems with the Turnbull government’s plan to wind back superannuation tax breaks for the rich.

Mr Hinch, who had a liver transplant five years ago, also said he wanted a compromise on the government’s construction industry watchdog, a ban on livestock exports and a million more organ donors.

Mr Hinch won a Victorian Senate seat in last month’s federal election, making him one of 12 crossbench senators the Turnbull government will have to court to pass bills spurned by Labor and the Greens.

He told AFR Weekend he got a lot of feedback on the super changes during the campaign “and if they say it didn’t affect their vote they are dreaming”.

The government wants to cap the super nest egg on which earnings for over 60s are tax free at $1.6 million, limit non-concessional contributions to $500,000 and cut the cap on annual concessional contributions for over 50s to $25,000 from $35,000.

The measures are aimed at reining in the budget deficit and defusing criticisms the super concessions favour the rich. But they were criticised for breaching a convention against retrospective legislation, and triggered a backlash among coalition supporters.
Fear of retrospectivity

“The thing that hurt them most was the fear of retrospectivity. I think that – rightly or wrongly – is what they fear the most,” Mr Hinch said. He said voters who did something five years ago in order to fund their retirement in 2025 didn’t like being told they had done the wrong thing.

Treasurer Scott Morrison this week offered exemptions for “life events” such inheritance and divorce payouts.

Katy Gallagher, shadow financial services minister, said Labor wanted to wind back costly super tax breaks for the rich and would work “constructively” with the government, but didn’t have any details.

On the Australian Building and Construction Commission, Mr Hinch said he didn’t want to “risk anything that will hurt workers but I also loathe corruption, so somewhere between those two we’ll work out where to go”.

The government wants to reinstate the ABCC to combat systemic corruption and illegal activity by construction unions and some employers uncovered by the trades union royal commission.

Mr Hinch wants to get a million more organ donors by changing the rules so that grieving family members can’t overrule a donor’s election. He said he expected live animal exports to be “the biggest battle” of the coming parliamentary term.

The livestock industry and nationals leader Barnaby Joyce – a staunch supporter of live exports – says monitoring of offshore slaughter has improved since the former Labor government slapped a shortlived ban on the trade in 2012. But Mr Hinch said “if you don’t know the Vietnamese are beating the shit out of cattle with a sledgehammer you can’t police it”.

The Centre For Independent Studies

Robert Carling – Spectator Flat White

Scott Morrison is reportedly open to the idea of exemptions to his proposed $500,000 lifetime cap on after-tax superannuation contributions for defined ‘lifetime events’ such as inheritance, divorce or even a lottery win.

Though the details are yet to be unveiled, the broad contours are sufficient to place this notion squarely in the category of regulatory abominations. As I reached for one word to capture what is wrong with the policy, ‘capricious’ sprang to mind, and my dictionary definition (‘inconsistent; guided by whim’) confirmed its fitness for purpose.

The $500,000 limit is bad policy, but granting exemptions for ‘lifetime events’ is a very bad way to fix it. When governments look around for narrowly defined groups to receive special dispensations from a general rule, we can be sure the principle of equality before the law has gone out the window. Why is an individual who has inherited or won a large sum more deserving than one who has simply accumulated it through saving and investing?

At a more practical level, any attempt to draw legislative boundaries around selected ‘lifetime events’ is bound to leave cracks to be exploited by those not intended to benefit, and will invite claimants who see their particular circumstances as being worthy of new exemptions.

If the $500,000 limit stands, it should apply to everyone, without exception. But better still rethink it to address legitimate concerns that have been raised. For a start, the amount is too low. It is a draconian reduction from the current limit of $540,000 over three years to $500,000 over a lifetime. The current limit may be too generous, but the proposed limit is too low to give people the opportunity to accumulate a balance that will give them a good retirement income — particularly those who for one reason or another do not have the opportunity to maximise pre-tax contributions throughout their lifetime.

It is not as if the government would be blowing up its budget by allowing a more generous after-tax contributions limit. The only concession is that the income from the contributions is taxed at ‘only’ 15%. Big deal! All household saving would ideally receive such treatment in recognition of the severe anti-saving distortion imposed by taxation at full marginal rates.

Then there is the alleged ‘retrospective’ dimension. Counting after-tax contributions back to 1 July 2007 against the new cap is not retrospective taxation. Nobody will pay more tax now on contributions made in the past. And the government is not requiring anyone who exceeded the new cap up to May 2 2016 (budget night) to remove the excess from his or her super funds.

But the new cap is retrospective in the sense that people were managing their affairs in the years from 1 July 2007 to 2 May 2016 according to regulations they had every reason to believe applied to them, but which are now to be retrospectively re-written. Had they known from 1 July 2007 that a lifetime cap of $500,000 applied, they may have organised their finances differently.

The obvious remedy is to apply any new limit prospectively from the date of announcement, and if that allows someone who already has a lot in super to put in another $500,000 or whatever the new after-tax limit might be, then so be it. Get over it, Scott. And spare us the appeals to fiscal rectitude. The budget deficit is not an excuse for poor policy. In any case, a new and retrospectively applied cap on after-tax contributions does two-fifths of very little to rectify it.

Robert Carling is a Senior Fellow at the Centre for Independent Studies

Australian Financial Review

9 August 2016

Jennifer Hewett

Scott Morrison refuses to concede that the decision to backdate the lifetime limit on non-concessional superannuation contributions to 2007 is anathema to Liberal philosophy.

Scott Morrison doesn’t do reverse easily, if ever. The Treasurer’s approach to politics may not be the same as Paul Keating’s famous description of his own style – “downhill, one ski, no poles”. But when Morrison’s focused on his target, he doesn’t really contemplate changing course – or even creating an effective diversion.

Right now that target is achieving even the most modest claim to maintaining fiscal discipline any way he can, but most certainly including curbing superannuation tax concessions.

So despite the extreme level of agitation in his own party about his proposed superannuation changes – including rather pointed advice on super from other predecessors like Peter Costello – Morrison’s not sounding as if he has any intention of making substantive concessions to even the most passionate of criticisms.

Instead, he is holding firm to this view despite an increasingly heavy personal political cost to his own standing within the party and the very real potential that his judgment may be overturned by colleagues.

It’s true the draft legislation is now likely to grant certain exemptions from the proposed $500,000 lifetime cap on non-concessional super contributions in case of special events like compensation payouts or divorce settlements.
Concept of fairness

But Morrison is still not conceding the key and savage complaint of the party membership and many of his own colleagues, including some very senior ones.

This is that the decision to backdate the lifetime limit on non-concessional superannuation contributions to 2007 is anathema to Liberal philosophy or to any concept of fairness because it is retrospective.

Nor is he in any way inclined to lift the proposed new limit of $1.6 million as the maximum amount that can be allowed to remain in the untaxed pension phase of super. In his view, that limit doesn’t mean that people aren’t still receiving a tax benefit for savings above that amount. They are just no longer getting it tax free.

He is also convinced the budget cannot afford to alter the large announced reductions in the annual limits of super contributions taxed at a 15 per cent concessional rate.

These are now supposed to fall to a maximum of $25,000 a year from the old rates of $30,000 a year and $35,000 for those over 50.

Instead, he keeps insisting that he cannot consistently argue the need for cuts to family tax benefit supplements while simultaneously rejecting any diminution of already generous tax benefits to those who tend to be much wealthier.

He is deaf to the argument that these are the same people who will be entirely or largely self funding their own retirement rather than relying on access to the aged pension.

The Department of Treasury, which has always greatly disliked super concessions, has never accepted this argument either. That’s despite the obvious difficulties in making realistic estimates of how much such reductions in super concessions will eventually add to the taxpayer cost of funding the pension.
Low-risk investments

Now Treasury finally has a Treasurer, and a Liberal one at that, who seems to agree with this logic.

Nor does Morrison accept the position that in an era of abnormally low returns indefinitely, an amount of $1 million or even $1.6 million no longer generates much annual income from the low-risk investments favoured in retirement.

Instead, he maintains he’s telling people who earn a lot less than those able to put $500,000 after tax into super that their family tax supplement has to go in order to pay for child care changes.

“How can I look them in the eye and at the same time say ‘Oh no, I am going to protect this interest over here who are sitting on half a million bucks that they want to load in and stuff in so they can pay less tax on it,” he declared on radio this week.

That’s hardly going to win him votes among existing or aspiring self-funded retirees or the more traditional Liberal voters.

Ironically his biggest supporters of superannuation changes are more to be found within the Labor Party and the industry super funds, especially as he is using half of the supposed $6 billion in super savings over four years to bolster the super accounts of low-income earners.

His own colleagues are far less persuaded about the whole thing but they are most particularly aggrieved on the issue of retrospectivity and the 2007 start date.
Locking in benefits

They were as astounded as the industry was when Morrison unveiled his budget on May 3 and want this measure, at the very least, to only start from that date. Many of them know to their campaign fundraising cost that it harmed their ability to raise money or other support from their usually faithful “base” of strong Coalition backers.

Yet for Morrison, the typical “grandfathering” adopted to assuage those most affected only translates into locking in benefits for those who have already enjoyed advantages.

Given such a depth of feeling and the narrow margin of Coalition numbers, this strict view is going to prove another key test of Morrison’s ability to hold the line. Not to mention his own prospects in the party.

Morrison’s previous popularity with the conservative wing of the Liberals has never really recovered from his role in the demise of Tony Abbott last year. That overwhelmed his earlier hero status as the Immigration minister who finally stopped the boats as promised. As Social Services Minister, he did negotiate through the Senate some significant changes to pension eligibility without attracting much obvious public ire.

As Treasurer, he’s regarded as a big improvement on Joe Hockey. But the doubts remain and the pressure on him can only intensify in an era with no spare money and no spare numbers. Especially on super.

Australian Financial  Review

10 August 2016

Sally Patten

Sharemarket volatility has hit self-managed superannuation fund trustees’ confidence in their ability to select investments.

Self-managed super schemes anticipate they will invest less in blue chip shares and high yielding shares over the next 12 months, but expect to tip more of their savings into professionally managed funds, a survey by research company Investment Trends and fund manager Vanguard found.

The change in investment intentions is linked to self-managed fund members’ pessimistic outlook for equity returns over the next year. The study found that trustees had reduced their return expectations for the local market to 2.8 per cent in March from 6.6 per cent a year ago.

“It is becoming harder for trustees to select investments because of the volatility. They feel they can’t do it as well because of the uncertainty. They feel less confident about doing it themselves,” said Recep III Peker, head of research for wealth management at Investment Trends.

The increased self-doubt is perhaps not a surprise, given that 28 per cent of self-managed funds said that more than half of their portfolios were invested in financial shares, which have performed poorly thanks to rising capital requirements and sluggish economic growth.

In the biggest change in investment intentions since the global financial crisis, 55 per cent of do-it-yourself scheme trustees said they intended to invest in blue chips over the next 12 months, down from 65 per cent who had that intention a year ago. The proportion of fund members who expected to invest in high-yield shares and exchanged traded funds (ETFs) fell to 24 per cent and 18 per cent respectively, down from 32 per cent and 20 per cent.
More bearish

On the other hand, the proportion of funds expecting to invest more in managed funds, including those covering the domestic and offshore markets, rose to 17 per cent from about 14 per cent last time.

“Investors are a bit more bearish than they used to be but they are still thinking about the long term. They want to rely on professionals more. Anyone who gives advice to self-managed funds on the investment side has got a great opportunity right now to benefit from this market volatility,” said Mr Peker.

Mr Peker said it was the first time since 2008-09 that demand for ETFs had fallen, although he said the market remained healthy. Some 90,000 self-managed funds hold ETFs, up from 54,000 in 2014.

Investor nerves about the market were also apparent from the change in their asset allocations over the past year. The weighting of direct shares in self-managed portfolios slipped to 38 per cent in 2016, the lowest level for six years. Cash holdings sat at 25 per cent of the average portfolio, the highest level since 2013.

Self-managed fund trustees, according to the survey, were most worried about a slowdown in China and another global financial crisis. The two issues where concerns rose compared to a year ago were a China slowdown and a rise in Australian debt levels. Investment Trends and Vanguard found that the proportion of self-managed fund members who consider themselves to be ‘self directed’ fell to 42 per cent, down from 54 per cent last time. The proportion of trustees who use an adviser to validate their ideas increased to 48 per cent from 35 per cent.

The Age

8  August 2016

Peter Martin

Scott Morrison’s super warning

It would cost half-a-billion dollars to abandon superannuation changes announced in the budget – and the ratings agencies are unlikely to react well, warns Scott Morrison. Courtesy ABC News 24.

“One of them, if you get a pay-out as a result of an accident or something like that, then that is exempted from the $500,000 cap,” he said. “If you have entered into a contract before budget night to settle on a property asset out of your self-managed super fund and you are using after-tax contributions to settle that contract – well, that won’t be included.”

Other measures would be in the exposure draft of the legislation that would be released shortly.
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Labor says it will oppose the $500,000 lifetime cap if it is found to be retrospective. But its superannuation spokesman, Jim Chalmers, says he will consider supporting it if an independent review finds in its favour.

Mr Morrison said he would be most unlikely to lift the $500,000 limit.

“I don’t know too many people out there who are sitting there with a bag of $500,000, which they want to put in their superannuation fund,” he said. “They are on higher incomes, have higher balances, have already benefited significantly from the generous tax contribution and other concessions, and the argument they are making is: ‘I want to put more in so I don’t have to pay as much tax as someone else is on those earnings’.

“I am saying we should be getting rid of the Family Tax Benefit supplement payments every July, and that is to people who earn a lot less than those who are able to put half a million dollars after tax. How can I look them in the eye and at the same time say: ‘Oh no, I am going to protect this interest over here who is sitting on half a million bucks’.”
Treasurer Scott Morrison says he is prepared to write in exemptions in the superannuation proposals.

Mr Morrison spoke with Senate powerbroker Nick Xenophon and his team in in Adelaide last week and would be meeting with new senators Pauline Hanson and Derryn Hinch. He would impress on them that every savings measure the new Senate rejected would make it harder to retain Australia’s AAA credit rating and get the budget back in to surplus.

“The facts of the Senate are that if Labor and the Greens are blocking government legislation then it only takes the Xenophon Party or the One Nation Party to side with Labor and the Greens and it is blocked,” he said. “Senators will be in a position where they really do have a balance of power. They won’t have the option to say that this is their view and move on.”