Category: Save Our Super Articles

The Tax Institute Submission | Proportional Indexation of the Personal Transfer Balance Cap

26 August 2020

Senator The Hon Jane Hume
The Assistant Minister for Superannuation, Financial Services and Financial Technology
The Treasury
Langton Cres
Parkes ACT 2600

CC: Robert Jeremenko, Retirement Income Policy Division, The Treasury

By email:

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Dear Assistant Minister

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.

Yours faithfully,

Peter Godber




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).

Proportional indexation

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).

 Personal TBC (Start)YearCap Space AccessedTotal UsedUnused Cap %8Personal TBC (End)Year
C$1,600,0002018$ 700,000$ 700,00057%$1,657,0002021

Members (A to D) Cap Space utilised in 2022 – 2025 (assuming further indexation in 2025).

 Personal TBC (Start)YearCap Space AccessedTotal UsedUnused Cap %Personal TBC (End)Personal TBC Year
B$1,638,0002022$ 500,000$1,500,0009%$1,647,0002025
C$1,657,0002022$ 900,000$1,600,0004%$1,661,0002025

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;
  • Government co-contributions;
  • 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.


1  Subsections 294-35(3) of the ITAA 1997.

Subsection 960-285(7) of the ITAA 1997.

3 Section 294-30 of the IT(TP) Act 1997

4  Subsections 294-35(3) of the ITAA 1997.

Subsection 960-285(7) of the ITAA 1997.

6 Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 [No. 81 of 2016].

7 Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 – Explanatory Memorandum.

8 Unused cap percentage effectively is rounded up to the nearest per cent as a result of subsection 294-40(2)(c) of the ITAA 1997.

9 Paragraph 3.373 of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 – Explanatory Memorandum.

10 Section 307-345 of the ITAA 1997.

11 Subsections 292-85(2), (3), (4) and (5) of the ITAA 1997.

12 Indexation of the General TBC will first occur (in the following income year) if and when the December quarter CPI figure reaches 116.9.

13 Lacey and Commissioner of Taxation (Taxation) [2019] AATA 4246.

14 Section 136-80 in Schedule 1 to the TAA 1953.

15 Subsection 307-80(4) of the ITAA 1997.

16 Subdivision 295-F of the ITAA 1997.

Click here for The Tax Institute’s original submission published 28 Aug 2020 by THE TAX INSTITUTE


Super increase in doubt as Scott Morrison fears hit to jobs

15 August 2020

Olivia Caisley – Reporter

Patrick Commins – Economics Reporter

Additional Reporting: Joe Kelly

Scott Morrison has given a strong signal he is no longer wedded to increasing the super guarantee to 12 per cent, acknowledging it could suppress wages and potentially cost jobs, as the government weighs up the findings of an independent review into retirement incomes

The Prime Minister on Friday noted the coronavirus pandemic was a “rather significant event” which had occurred since he pledged at the last election to continue with the scheduled increase in the super guarantee, due to reach 12 per cent by 2025.

On Friday, Reserve Bank governor Philip Lowe warned that ­increasing the super guarantee would “certainly have a negative effect on wages growth” and that, if it went ahead, he would “expect wages growth to be even lower than it otherwise would be”.

Dr Lowe argued there could be flow-on effects if the guarantee was increased, telling the standing committee on economics it might reduce take-home pay, cut spending and potentially cost jobs.

Mr Morrison later said he was “very aware” of the issues raised by Dr Lowe and argued they should be “considered in the balance of all the other things the government is doing”.

The warning from Dr Lowe came as an inquiry heard that nearly three million Australians had applied for early access to their superannuation, with $33.3bn already approved. Labor has accused the government of undermining the superannuation system through the early access program, with Anthony Albanese warning that too many young Australians had exhausted their super balances.

Dr Lowe also criticised the states for not carrying their “fair share” of the fiscal burden, saying they were preoccupied with their credit ratings rather than job creation. He repeated the RBA’s baseline forecasts for the unemployment rate to reach 10 per cent by the end of the year and expected the jobless gauge to “still be around 7 per cent in a few years’ time”.

“The challenge we face is to create jobs, and the state governments do control many of the levers here,” he said.

Mr Morrison seized on the call to say the federal government had done the “seriously heavy lifting” to navigate the pandemic and urged state and territory leaders to “provide further fiscal support”. He said the states had provided “about $45bn in both balance sheet and direct fiscal support” but the federal government had provided “about $316bn”.

Dr Lowe said that, with the cash rate at a record low of 0.25 per cent, further monetary policy easing was unlikely to gain any traction in stimulating ­demand. Instead, fiscal policy and structural reform would be the primary tools to carry the country through the crisis and lay the foundations for recovery.

He identified measures such as removing stamp duties — which he called a “tax on mobility” — and industrial relations reform, echoing calls from the Productivity Commission this week.

“There’s a process going on at the moment to try and make the enterprise bargaining system more flexible, so we can get back to a world where businesses and employees can get together and make their businesses work effectively, rather than be weighed down by process,” he said.

Dr Lowe warned Australians to be prepared for a “bumpy and uneven” recovery, and argued the second wave of coronavirus infections and new restrictions meant the bank was “not expecting a lift in economic growth until the ­December quarter”.

The early release of superannuation: the financial consequences

16 August 2020

Jim Bonham

Early release of superannuation

Limited early release of superannuation has been a part of the government’s support to people suffering financial stress caused by the COVID-19 pandemic.  This has been welcomed by some but strongly opposed by others because it is seen as a corruption of compulsory saving and disruptive to super funds. 

The financial implications

This paper takes a quantitative look at the financial implications of a $10k early release, for three hypothetical individuals Continue reading

Superannuation drawn into political crossfire in coronavirus crisis

The Australian

19 April 2020

John Durie

Scott Morrison may well get his wish if private equity, backed by industry superannuation fund money, does bid for Virgin Australia, but not the way the Prime Minister intended, which has once again politicised super.

For the super sector, that is the problem of being the creation of politicians that has meant being subject to their often hypocritical whims to suit the purpose of the day. A few weeks ago the government thought it was clever opening the way for people to withdraw money early from their superannuation.

Josh Frydenberg noted “it’s your money” so you can get ­access to it if you are caught in a ­financial mess because of the government-imposed shutdown.

When the industry funds said they could face losses of up to $50bn in cash withdrawals, the Minister for Superannuation, Jane Hume, saw it as another leg in the push to consolidate superannuation funds.

Hume argued that some funds like Hostplus and REST were too reliant on the hospitality and retail sectors and, like others, had a concentrated pool from which to raise funds because industry fund contributions were often tied to industry industrial relations awards.

Diversification, she said, should be the rule in membership and investment strategy.

Then Morrison came up with the bright idea that specialist industry superannuation funds had plenty of cash so someone like the TWU, with a heavy dose of Virgin Australia workers, should be diverting funds into the airline.

The three pronouncements from the relevant ministers underlines the political bias against industry funds, breathtaking hypocrisy and, more importantly, a dangerous ignorance about how funds manage their money.

By law, managers must invest for the long term to boost member returns and this fiduciary duty would by definition prevent a fund making a national interest investment because that would suit the prime minister of the day.

When the government opened the door to early withdrawal of funds last month it not only risked members losing up to $84,0000 in lifetime savings but risked the funds losing the ability to invest to support corporate Australia.

Somehow all of this was forgotten by Morrison.

That said, it would not surprise if an industry fund like AustralianSuper provided capital to support a private equity bid for Virgin.

AustralianSuper has a stated policy of owning bigger stakes in fewer companies, which is why it backed BGH’s successful bid for Navitas and unsuccessful bid for Healthscope.

AustralianSuper investment chief Mark Delaney is keen to use the fund’s equity investments to support Australian companies with long-term capital.

This would be most company boards’ dream come true.

It would help if Canberra maintained a more consistent approach to superannuation even amid these extraordinary times.

Why SMSFs need government help too

Australian Financial Review

13 April 2020

Elio D’Amato

There has been an unprecedented spending initiative by the government to prop up the economy and its citizens through a virtual shutdown for the next six to 12 months. But although self-managed superannuation funds (SMSFs) will probably be hit hard through this crisis, we’re not hearing much about help for them.

An SMSF retiree’s asset balance is vital because it is from this that future income is generated to help fund living costs and expenses. Periods such as this can cause great anxiety while doing irreparable damage to future income streams as asset values plummet, particularly if there is a prolonged period of volatility.

Compounding the stress is that many retirees were lured to the sharemarket because there was nowhere else to generate a reliable income stream. But in the recent wave of dividend deferrals and cancellations, dividend-income expectations are being cut significantly.

The Australian Prudential Regulation Authority (APRA) delivered a regulatory mandate to cut dividends as it cautioned banks and insurance companies on paying out too much in dividends. This relief lever was seized quickly by the Bank of Queensland at the time of its half-year result.

Unlike share prices that are subject to sentiment, dividends paid by a company tend to reflect the economic reality a business faces. With declines in profitability and free cash flow expected for the coming six to 12 months, the income reality from the sharemarket for retirees on a risk-adjusted basis is bleak.

The outlook for other asset classes in which SMSFs traditionally invest doesn’t look much better. The property market is at risk of seeing its income dry up, leaving many retirees in the lurch. With the rising call for government-mandated rent deferrals, the SMSF property investor who previously received 4 per cent rental returns is likely to be affected significantly.

Further, investors in property trusts, exchange-traded funds (ETFs) and listed and unlisted funds could face a freeze on their distributions should conditions and asset values deteriorate further.

And let’s not forget those who sought the safety of cash and term deposits in the recent turmoil – $1 million held in cash-like products returns an absolute maximum $15,000 a year, well below the regular JobSeeker payment. With interest rates to remain lower for much longer, there is little in the way of hope.

Huge fall in earnings

Should economic and investment conditions worsen, an SMSF retiree could potentially see earnings fall by well over 60 per cent. For SMSFs on the margin, this could fall well below the age pension and JobSeeker payment level.

According to the SMSF Association, there are 560,000 SMSFs comprised of 1.1 million members. The Australian Taxation Office (ATO), in its last published SMSF quarterly statistical report for the three months ended September 30, showed that 37.1 per cent of all SMSF members were of retirement age, which equates to more than 400,000 individuals.

The federal government’s decision to reduce the minimum SMSF pension withdrawal requirement by 50 per cent is important – particularly as this amount is calculated based on the asset value at the start of the financial year.

But another part of the government’s support package was to drop the deeming rate used in the income test to determine qualification for financial support such as the age pension. Without going into the technicalities, the decrease in deeming rate means a reduction in accessible income that would result in those who receive a part pension being able to receive more and, in theory, potentially help some SMSF members on the margin to be eligible for at least a part pension.

The statistics, however, show that for SMSFs, this will probably not be the case. In the ATO report, while there is no breakdown as to whether the SMSFs are in accumulation or pension phase, the median average balance of all SMSFs per member was $408,237. The reality is that older SMSF members tend to have larger balances and therefore would most likely be disqualified from receiving the age pension as they fail the assets test.

Before this correction, an SMSF retiree couple with $1.2 million between them, who owned their own home and earned an income of 5 per cent on a balanced portfolio of assets, would derive in total $60,000 income for the year ($2307 a fortnight). A 60 per cent drop in future income results in $923 a fortnight, which is more than $370, or 30 per cent, less than the age pension.

Of course, where asset values do fall below the upper asset threshold ($869,500 in the case of a married couple who own their own home), they will qualify for a part pension under the current rules. But it is important to note that asset values in property and unlisted trusts often lag, with revaluations conducted sparingly.

Although the income hit of suspended distributions will probably be felt early, any asset revalue relief from non-shares assets may be some time in coming – supporting the idea of immediate income support in the near term.

SMSF retirees who fail the assets test will have no option but to dip into their savings, rendering the government drop in the minimum pension withdrawal level totally useless. This drawdown will result in a lower asset base for future income generation, making it more difficult for them to be self-sustaining and increasing the future burden on government.

Short-term assistance

For the same duration that JobSeeker, JobKeeper and other spending initiatives are implemented, a possible aid package to SMSF retirees might include the assets test being waived and a regular ongoing payment equal to a minimum of 50 per cent of the current full age pension.

Although this in a few cases may still fall short of past income levels, it would provide urgent short-term income relief. It would reduce the need for excess drawdowns on assets when prices are challenged and/or liquidity dries up.

Further, for those who under normal circumstances pass the assets test, but receive a part pension due to other income generation, for the same period they could automatically be eligible for the full pension to compensate for loss of income.

The main intention would be to deliver some basic support to the large number of forgotten SMSF members whose income even when investments were stable was inadequate.

David Murray says super is busted

Australian Financial Review

2 April 2020

Tony Boyd

Five years after he handed the federal government the final report of the Financial System Inquiry David Murray is convinced the country’s superannuation system is broken.

Murray, who was chief executive of the Commonwealth Bank of Australia for 13 years and is now chairman of wealth manager AMP, says it is actually misleading to call it a retirement income system.

“Ours is not a superannuation system, it’s a tax advantaged savings system,” he says.

Murray says the fact that thousands of Australians have, in recent weeks, rushed to switch out of balanced funds into cash after the stockmarket had fallen by about 38 per cent was an indication the system was not fit for purpose.

He says Australia should mandate the payment of a pension to super fund members upon retirement. This would make the job of super fund trustees easier because they could match long term assets with long term liabilities.

Murray says the final report of the FSI delivered to the federal government in November 2014 recognised the impossibility of politicians agreeing to Australia introducing mandated pension payments upon retirement.

As a simpler and more politically acceptable option, the FSI recommended the introduction of Comprehensive Income Products for Retirement (CIPRs).

Annuity-style pension products

“We made recommendations about an annuity style product called CIPRs, which would try and encourage people through self-selection to focus more on annuity style pension products in retirement,” he says.

“The issues that we discussed around the CIPRs started with the discussion about what does a really good system look like. And apart from having a retirement income objective for the system, a really good system would only pay pensions in the form of annuities. That is a pension should provide a pension.

“That would create a much more predictable environment for trustees to manage risk and asset allocation.

“The reason we didn’t recommend that pensions be mandated was that we’re in a country that if it had been promoted it would have been easily politically defeated. So, we fell back on the simpler recommendation.”

Of course, the federal government has dragged the chain on implementing a comprehensive tax efficient framework for CIPRs. It is not the only area where the FSI recommendations have been half heartedly implemented or ignored.

Murray is disappointed that legislation defining the single objective of super as being for retirement income has not passed through parliament. He thinks independent trustee directors should be on industry fund super boards. But the government has given up on this fight after repeatedly failing to get such measures through the Senate.

The single most important recommendation of the FSI was in relation to the need for the big four banks to be “unquestionably strong”. This was implemented by the Australian Prudential Regulation Authority.

As a result of this measure the big four reduced their leverage and implemented common equity tier 1 capital which Commonwealth Bank of Australia CEO Matt Comyn this week said was the strongest in the world.

Murray says “unquestionably strong” has “worked nicely” but he is concerned that the super system, which should be a force for stability in times of crisis, is in need of emergency liquidity from the Reserve Bank of Australia.

Funds don’t need RBA support

The switching out of growth assets into cash over the past two weeks combined with the federal government’s decision to allow emergency access to $20,000 in super savings has prompted several leading industry super funds to request RBA support.

Superannuation minister Jane Hume has rejected the idea and suggested any fund unable to pay its members must have poor governance of its investment strategy.

Murray, too, is damning in his commentary of any fund that is need of liquidity. He says the root of the problem is funds advertising on the basis of having a higher rate of return

“The discussion about switching does show the flaw in this system where you can keep changing your allocations and it shows some of the systemic risks that arise,” he says.

“I think the more serious issue is that where superannuation is advertised and sold on the basis only of rate of return, then trustees will make assumptions and seek out the highest rate of return in their asset allocations with some risk to stability as they go forward.

“By assuming that default funds will flow in no matter what, that the inflows will keep rising and that therefore funds can take more risks with the illiquid assets means these funds are establishing a higher risk system for their members. And this is what has shown up recently to the point where the funds want liquidity support.

“Now, whether that is simply because the government has allowed some early withdrawals or not, only each fund knows, but on the amounts that the government has mentioned, it seems to me to be not quite credible that a well-managed fund should need support for those amounts of withdrawals.

“If we have funds that have taken aggressive asset allocation positions, have sold those on the basis of rate of return for their default fund and attracted money from other funds as a result, then the funds that have taken a more cautious approach are penalised and their own members could well be penalised.

Take cue from Singapore

“Now, we can’t solve that now because the role of the government and the Reserve Bank is to manage the crisis we’ve got. But it does demonstrate that this system we have is not right. And I think we have to face into some more sensible arrangements for the future than we have today.”

Murray warns against the RBA stepping in to provide liquidity to super funds because of the moral hazard. But he says if emergency support is required then we could copy Singapore’s Temasek-style sovereign wealth fund.

He says this fund could acquire assets from a fund needing liquidity but in doing so the fund would have to accept a price in alignment with the prices prevailing in the sharemarket.

The government owned entity could purchase assets from the super fund in return for liquidity and this would allow the fund to restore its asset allocation back to the level which prevailed before the COVID-19 sell-off.

Murray says this would be fair to all members of a fund because the illiquid assets would have to be sold at a discount to face value. The alternative is inequity for members in the fund not switching to cash because they would be stuck with overvalued assets.

Murray says that by matching the price of assets to the general movement in equities in the market plus a further discount for illiquidity would mean the government entity buying the assets would pay fair value.

The assets could be sold later and the taxpayer would make a profit. The concept of a Temasek style sovereign wealth fund would suit the times given the need for the government to bail out Virgin Australia.

Temasek, which owns 55 per cent of Singapore Airlines (which in turn owns 23 per cent of Virgin), last week underwrote a $S5.3 billion ($6.1 billion) equity raising by Singapore Airlines. The airline also raised $S9.7 billion through the issue of 10-year bonds.

Murray says he is inclined to think the banking system is fine given it has no systemic prudential issues.

“On the other hand, there are some fundamental issues in superannuation that we can get through with some support if it can be designed the right way and we don’t create this moral hazard for the future,” he says.

“But then we have to open up the way this damn thing works and fix it.”

Industry funds’ pathetic plea shows the jig is up

The Australian

31 March 2020

Janet Albrechtsen

Many people are recycling ­Warren Buffett’s famous quote that it’s only when the tide goes out that we discover who has been swimming naked. And for good reason: one Australian industry is looking pretty ugly right now, its mismanagement and hubris expose­d by this current crisis. The naked swimmers are the trustees of the biggest industry superannuation funds and their directors.

This sector rode so high and mighty in the good times that it demanded that the corporate sector­, especially the banks, take money from their owners and give it to causes deemed worthy by these industry super funds.

In the midst of this crisis, while the banks are honourably bailing out their customers, these sanctimonious industry super funds demand­ that ordinary Aust­ralians rescue them and their members from the consequences of the sector’s arrogance.

The biggest question is how this group has been protected from scrutiny and sensible regul­ation for so long, and what can be done to end its immunity from the kind of critical examination the rest of the financial sector has alwa­ys faced.

Consider the causes of the arroganc­e and power of large industry­ super funds. They have been coddled by an industrial relation­s club that mandates that it be showered with never-ending torrents of new money. Of the 530 super funds listed in modern­ industrial awards, 96.6 per cent are industry super funds. That’s some gravy train.

With that guaranteed inflow of cash, it’s hardly surprising that industr­y super funds have grown fat and lazy about risk. They made two critical assumptions. First, that these vast inflows would alway­s exceed the outflows they had to pay pensioners and superannuants. And second, they could keep less of their assets in cash or liquid assets to meet redemp­tions.

In fact, they doubled down on this bet by plunging members’ money into illiquid assets — they filled their portfolios with infrastructure, real estate, private equity­ and other forms of long-term assets that can’t be easily and quickly sold to meet redemptions.

These assets can’t be easily valued­ either — experts will tell you that the valuation of illiquid assets is essentially guesswork. If you don’t have a deep and liquid market into which to sell an asset, you really have no idea what that asset would fetch if and when the time came to sell.

The fact the valuation of illiquid assets is open to huge ­variation was a terrific advantage in so many ways for industry ­insiders during the good times.

Industry super funds could use boomtime assumptions to prod­uce inflated valuations to prop up their performance relative to retai­l funds that don’t have the same guaranteed gravy train of inflows to invest in unlisted long-term asset classes.

That gives the industry funds one heck of a competitive edge and those inflated performance figures make for handsome ­bonuse­s for employees of industry funds and asset managers such as IFM.

This apparent outperformance by industry super funds seems to have anaesthetised the Australian Prudential Regulation Authority and many others. They have been able to resist sensible regulation by pointing to their “healthy” performance, and they have received exemptions from the kind of stock-standard rules that govern other trustees of public money.

The upshot is that many industry super funds have ridiculously large boards stuffed full of union or industry association nominees who obligingly pass their directors’ fees back to their nominating union (where, lo and behold, it might find its way to the ALP) or industry association.

But now the music has stopped. What these big industry funds have sold to members as “balanced” funds doesn’t look so balanced any more.

The current crisis has exposed illiquidity issues. Many of their members have lost their jobs or lost hours of work, drying up the guaranteed flow of new super­annuation contributions.

And the Morrison government has announced an emergency and temporary exemption allowing members in financial trouble to withdraw up to $10,000 a year from superannuation for each of the next two years.

The liquidity problem facing industry super funds has been compounded by the fact many members have been switching from what the industry funds call “balanced” options into cash options, requiring funds to liquid­ate long-term assets in the “balanced­” options.

This new environment has forced industry funds to slash questionable valuations of illiquid assets in their “balanced” funds to avoid redeeming member­s or members who switch out of balanced funds into cash options getting a windfall at the expense of members who remain in the “balanced” funds.

So the jig is up. When comparisons between industry super funds and retail funds are adjusted for risk — as they should be — industry super funds don’t look so healthy after all.

Now that the tide has gone out, we can see two issues with greater clarity. First, trustees of industry super funds haven’t done a stellar job of managing risk through the full economic cycle, through good times and bad.

There was too much compla­c­ency from more than two decades of uninterrupted economic growth. And maybe some naivety too: Australian industry funds are relatively new, emerging only in the 1980s after the introduction of compulsory superannuation payments.

Second, APRA stands condemned for letting industry super funds get away with second-rate governance and poor management of risk through the full econo­mic cycle.

Consider the hypocrisy of these super funds now wanting a bailout to deal with a liquidity problem of their own making during­ the boom times. For years, noisy industry funds have sanctimoniously demanded that company boards give up some profit to benefit society.

Now their mismanagement has exposed risks that their members­ may not have been told about. And the same industry funds want the Reserve Bank of Australia (aka the taxpayer) to bail out their members to protect their boards from claims of mismanagement. The industry funds no doubt will point to the help the government is giving the banks as a preceden­t for a bailout.

However, they should remember that the quid pro quo for banks getting government help is the banks meeting a stringent set of capital and liquidity rules, not to mention governance requirements such as a majority of independent directors. Do these funds want a similar regime instead of the namby-pamby one that applies­ now?

To date, and to its credit, the Morrison government has resisted their calls. Scott Morrison and Josh Frydenberg should stand even stronger, demanding APRA lift its game. How did the industry fund sector escape scrutiny of its dirty little secrets for so long?

Part of the reason is sheer thuggery. Industry Super ­Aust­ralia, the representative body for industry super funds, tried to silenc­e Andrew Bragg a few years ago when he was at the Business Council of Australia for exposing the unholy links between unions and industry fund. Bragg, now a senator, is leading the push to reform­ industry super.

The voting power, and buying power, of huge industry funds is another part of the answer. Their special pleading and scare tactics to ensure they can keep feasting on members’ funds by having the super guarantee charge contribution increased from 9.5 per cent to 12 per cent is the rest of the answer.

The pathetic plea for a taxpayer­-funded bailout from mismanaged industry super funds is compelling evidence that ­workers should be allowed to keep more, not less, of their hard-earned money rather than be forced to shovel more into industry funds and their mates.

Coronavirus: Perks and loopholes can’t endure as we run up debt

The Australian

30 March 2020

Adam Creighton

The young and poor have little say in society but they are incurring the bulk of the costs from the shutdown.

Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant. Unlike the Spanish flu 90 years ago, it seems coronavirus is of little threat to the vast majority.

The $320bn the government and Reserve Bank have allocated so far to staunch the self-imposed economic carnage will have to be paid for. The plunge in tax revenues could well be as significant as the increase in outlays, leaving a gap that will test governments’ ability to borrow. There’s already $400 trillion of debt sloshing around the world.

And the bill will come long after those whom the younger generations have tried to protect have died. It’s reasonable to give some thought now to how the costs will be shared.

Policies that were thought fair and reasonable only months ago will start to look unfair, even absurd. The government will face stark choices about how to allocate the burden. Will it crush the productive sector of the economy with even more income tax?

Everyone will suffer in degrees during this crisis, but it’s only fair that those who are being saved, ­especially if they are financially equipped, pay a disproportionate burden of the cost.

(It’s true retirees have seen huge falls in their superannuation balances, but once a vaccine is found in a year or two, their accounts are likely to roar back to life.)

The Commonwealth Seniors Health Card, which is a benefit for retirees who are too well-off to quality for the Age Pension, should be immediately dumped.

How can we have people ­queuing up for soup in Sydney’s Martin Place (as was the case on Sunday night), while taxpayers fork out hundreds of millions of dollars a year to ensure cheap medicines and transport for those who can easily afford them anyway?

Scrapping the seniors and pensions tax offset, which provides a tax-free threshold of about $33,000 for over-65s and about $58,000 for couples, is also a no-brainer. Naturally, these two changes will cause some discomfort for those affected, but nothing compared with the chaos ­recently foisted on millions.

It’s obvious the superannuation guarantee should be suspended for the rest of the year, as I’ve argued repeatedly. The government is forgoing almost $20bn a year in tax by keeping it when it needs the revenue urgently.

Coronavirus: Economic bailouts

CountryBailout amountAdditions
USA$A3.2 trillion+ $A810bn for layoffs
Germany$A1.3 trillion+ $A89bn for layoffs
UK$A627bn+ 80% of salaries up to $2390/month for layoffs
Japan$A437bn+ cash payments and travel subsidies for layoffs
Australia$320bn+ workers and sole traders can access $10,000 tax free from superannuation, + $1500 per fortnight for workers
Canada$A121bn+ $2000/month for 4 months for layoffs
South Korea$A66bn
Norway$A15.2bn+ 100% of salary for 20 days / 80% if self-employed for layoffs
New Zealand$A11.5bn+ wages covered for people who need to self-isolate

As of March 31, 2020

Rather than taxing younger generations or workers to oblivion, it’s best to ­curtail generous arrangements, at least temporarily. These tax increase would have relatively little or no impact on disposable incomes; indeed, in the case of suspending the super guarantee, take-home pay would increase for millions of workers.

Other options might include a significant inheritance tax imposed, say, for the next 20 years to help defray the gargantuan tax burden that has just been put on everyone who is not going to die in that period.

Tax-free earnings on superannuation in the retirement phase should cease, at least temporarily. Currently, the earnings of superannuation funds for retirees face zero taxation.

Everyone else pays 15 per cent tax. It should be the same for everyone (as the Henry tax review recommended, by the way). Fifteen per cent is still a lot more generous than marginal income tax rates.

Cancelling the refundability of franking credits — for everyone, not just self-funded retirees — is another option.

To be sure, this would cause real pain, given some retirees quite reasonably have structured their affairs around them. But this is a crisis.

There are some economic bright sides for younger people. If a house price crash eventuates, those with jobs and to obtain credit will be more easily able to afford a home.

Whether house prices fall for long remains to be seen, though. In times of uncertainty, gold and property tend to be relatively attractive assets and immune from inflation.

And significant inflation may well be on the horizon. The borrowing lobby in society is much more politically powerful than the lending lobby. That is, the constituency that benefits from inflation (anyone with debt) is greater than those who wouldn’t.

What’s more, a niche group of economists reckons the central bank can give us all money directly — say, $10,000 each straight into our bank accounts — without undermining the economic system.

It’s known as Modern Monetary Theory and, understandably, it is becoming popular.

“There’s no such thing as a free lunch” was branded into me through years of economics study. It’s hard to imagine that we can just make new money out of thin air without serious long-term costs to the economic system, or certainly respect for it.

Why would anyone bother working or saving?

The fiscal situation is looking so dire a future government might well give MMT a try. It’s so ­seductive. They should be wary, though. A great inflation has unpredictable consequences, which history suggests can be terrible.

Nevertheless, if inflation does break out, the burden of the economic shutdown would play out very differently. It would remove the government and private debt burden, obviating the need for the various tax increases suggested above. Anyone with significant cash or deposit holdings would be wiped out.

For now, however, this is all academic.

As in an ordinary war, the young are doing the heavy lifting and face a massive tax burden. It could be a bit less burdensome if reasonable, temporary tax increases were imposed for the over-65s to help defray the costs.

It’s important to keep perspective. Roughly 165,000 people die in Australia each year; about 3000 from influenza.

Meanwhile, the economy is being destroyed — real and permanent damage — for uncertain benefit.

If we totally shut down the economy, as many are advocating, when does it reopen? And if it reopens and the virus emerges again, is it shut down once more?

It’s patently not possible to keep turning an economy on and off every few months without ­destroying civilisation.

Consequences of increasing the superannuation guarantee rate

12 March 2020

Jim Bonham

1       Introduction

Between now and 2025 the compulsory “superannuation guarantee” (SG) contribution to superannuation is legislated to increase in steps from 9.5% of gross income to 12%.

This move is being opposed by some people, particularly the Grattan Institute (see, amplified by op-eds in the press.

Unfortunately, formal “think tank” and academic reports tend to be inaccessible to the average reader. Calculations may be opaque; and journalists often manage to make the impending increase look quite complicated and confusing.

It does not have to be so.  This short note explores the immediate consequences of the legislated increase in the SG rate from 9.5% to 12% and introduces an alternative proposal to increase the SG rate to 10%, or even leave it unchanged, and drop the contribution tax entirely.

Click here to download PDF version

2       The issues

The table below lists what I perceive to be the main points of concern, and a brief comment on each.  This is provided for context, not as a detailed commentary on any specific position.

Perceived problem Comment
(a)Retirees already have enough money so there is no need to beef up super. Depending on investment returns, current SG contributions will only provide an initial retirement income of 14% to 25%, or so, of final employment income (depending on investment choices).
(b)Increasing the SG rate will depress incomes. The government has reportedly asked ANU to advise specifically on this issue.  Gross incomes will fall by 2.23% (given assumptions detailed in the text), but there is an alternative.
(c)Increasing retirees’ assets will disproportionately reduce their age pension entitlement This reflects a problem with the structure of the age pension, not super.  In any event it will take a decade or so to become significant, leaving plenty of time to fix the structural issue.
(d)The budget can’t afford the cost The cost to the government of the planned increases, per employee, is equivalent to about 0.5% of their gross income – the equivalent of a modest tax cut.

Each of these issues is discussed in more detail below.  The intention is not to provide detailed rebuttals of any specific point of view, but rather to add context to the upcoming increase, and to suggest an alternative approach.

3       How much does the SG provide?

It can be a daunting task to work out how much superannuation one will have in retirement, what its real value will be and how that might relate to one’s income needs.

Fortunately, help is available from on-line calculators such as the excellent one provided by ASIC   ( which also provides detailed actuarially determined estimates of long term investment returns, fees and earnings for several common investment styles, as well as estimates of inflation and wages growth (as reflected in rising living standards).

A common measure, used by the OECD for example, for assessing retirement funding systems is the replacement ratio, which is the initial income in retirement divided by the final employment income.  (Obviously, this only makes sense for someone who remains in steady employment up to retirement and doesn’t apply to those with a more fractured employment history). 

It is generally accepted that a replacement ratio of 70% represents good practice and, in the absence of better information, it seems to “feel” about right.

Fig 1 shows the replacement ratio expected just from current SG contributions and their compounded investment returns, assuming

  • SG rate is 9.5%, taxed at 15%
  • Wages growth is 3.2%
  • Length of employment is 45 years
  • On retirement, superannuation is converted to an allocated pension from which 5% per annum is drawn as income in the early years.
  • Complications such as contribution caps are ignored.

The simple conclusion from Fig 1 is that, however the superannuation account is invested, the SG contributions alone will not provide anything like a 70% replacement ratio. 

Most people will need to supplement their SG contributions substantially with further voluntary superannuation contributions, the age pension, or other investments outside superannuation, in order to live at a level anything like what they were used to.

There is thus a lot of scope to increase the SG contributions, which goes a long way toward refuting Issue 2(a). 

4       How will the SG rate increase affect pre-retirement incomes?

To keep things simple, we’ll exclude from consideration those who are on a very low income, those who are subject to Division 293 tax (incomes over $250,000) and those who are already at or near the concessional contribution cap. We’ll also assume that all income derives from employment.  Finally, in the interests of simplicity, we’ll assume that the increase takes place in one step rather than being staged over several years.

It is highly likely that employer bargaining power is such that increasing the SG contribution rate will not affect total income packages (i.e. gross income plus SG contributions).  The calculations below assume that this is so – it is a key assumption of this paper.

Note, however, that in real life salary negotiations are not necessarily cut and dried.  So, a push to restore a previous total package value might not be immediate but be buried in subsequent increments, or it might manifest as additional pressure in future negotiations.

To be able to work this through mathematically, however, we make the simplifying assumption that incomes will adjust immediately.

It’s also important to keep in mind that while a mathematical model produces precise, neat and tidy results, these are only as good as the initial assumptions – the real world is much messier.  The important function of an analysis such as this one is not so much to produce precise predictions, but rather to lay bare the way in which key variables (in this instance: income, income tax, SG rate and contribution tax) all interact.  Better understanding should lead to better decision making.

With these cautions in mind, let’s move on.  Some straightforward arithmetic, illustrated in Table 1, shows that the immediate consequences of increasing the SG rate will be as follows:

  • SG contributions will rise by 23.5%
  • Gross incomes will fall by 2.23%
  • Net SG contributions will rise by 23.5%, corresponding to 1.90% of initial gross income
  • Government income tax receipts will fall by an amount which depends on income.

Table 1 shows how the numbers work out for an initial gross income of $100,000:

Table 1

  • The top line reflects the assumption of no change in the total income package
  • so, there must be a drop in gross income (2nd line)
  • and therefore, the government’s income tax receipts will fall (3rd line)
  • as will the individual’s net income (4th line).
  • The SG contribution goes up by 23.5% (5th line).
  • The government claws back an extra 23.5% contributions tax (6th line)
  • leaving a net contribution which is also 23.5% higher than before (7th line).

In summary, the superannuation account of the individual currently earning $100,000 nets an extra $1,897 per year.  In the short term, this is a zero-sum game (the savings have to be paid for): $1,295 is provided by the individual (reduced net income offset by lower income tax) and $603 is provided by the government (reduced income tax receipts offset by higher contribution tax).

In other words, the individual saves more, and the government also contributes.

Although this is a zero-sum game in the short term, that is not the case in the long term.  Superannuation savings provide a massive investment resource for the nation, and a more financially secure retiree population will require less government support.  There is a large net benefit to the nation from supporting and incentivising long-term saving.

Although Table 1 is worked for $100,000 initial gross income, the same 2.23% fall in gross income and 23.5% increase in net SG contribution occurs for any other initial income. 

The boost to SG contributions then flows through to provide a valuable 23.5% increase in the value of SG contributions and their accumulated investment returns at any time through to retirement, and consequently the same percentage increase in both earnings and earnings tax.

A partial response to Issue 2(b), therefore, is: yes, the planned increase in SG rate will depress gross incomes by 2.23%. 

5       How is the cost shared between government and individual?

Before the increase, the net SG contribution is 8.075%, after allowing for the 15% contributions tax, so a 23.5% increase in that corresponds to 1.90% of the initial gross income.  That 1.90% must be paid for, and as we have seen the cost is shared between the individual and the government.

Fig 2 shows the split for a wide range of initial incomes, the structure in the graphs reflecting the complicated structure of income tax rates.

The cost to government averages about 0.5% of gross income (for incomes between $50,000 and $180,000) and that helps put Issue 2(d) in context: it is of similar magnitude to a modest income tax reduction.

The cost should not be onerous for the government and could be funded by cancelling or reducing less important programs, or by working with greater efficiency (meant literally, not as a euphemism for sacking people which only pushes costs back to individuals).

Incidentally, the cost to government is sometimes compared to the cost of fixing other significant problems, such as Newstart.  This is the wrong way to evaluate the priority of a project: it should be compared to the least important project, which can most easily be dropped, not to other important projects.

6       How quickly will the effects be felt?

The effects on net income and taxes discussed above will be immediate, but the impact on retirement income will take time to evolve – about a decade for effects to become noticeable and four decades for the complete benefit. 

Superannuation operates over the very long term, which means the sooner problems are fixed the better. The current financial climate does not justify delay.

Two issues which will eventually emerge but will be insignificant for the first couple of decades are:

  • Earnings taxes on superannuation investments will increase by 23.5%.
  • Age pension entitlements will decrease for people on low-to-moderate-incomes.

Both benefit the government.  However, the age pension needs significant modification to correct other fundamental problems:

In short, there is plenty of time and opportunity to make sure that Issue 2(c) will not become a problem.

7       An alternative proposal

The above calculations highlight something quite bizarre about concessional superannuation contributions: the superannuation guarantee compels people to save for their retirement, but the contributions tax immediately undermines that – now you see it, now you don’t!

The system would be much neater and easier to understand if the contributions tax were abolished.

That would also make voluntary concessional contributions (up to the cap) more attractive, thus encouraging more saving, but let’s look more closely at what it would mean for compulsory SG contributions.

As we have seen the upcoming increase in SG rate will increase compulsory net contributions to superannuation by 23.5%, given the assumption that gross incomes are unaffected, so let’s take that as an objective and see how it would be achieved without the contributions tax.

The answer is that the SG rate then only needs to be increased to 10%, rather than 12%.  Net contributions will increase by 23.3% which is almost identical to 23.5%, but the split in cost between the government and individual is changed significantly.

Table 2 shows the detailed figures for a gross income of $100,000:

Table 2

and Fig 3 shows the split in costs between government and individual for a range of gross incomes:

From the government’s point of view, this proposal is more expensive by about 1% of gross income than the increase currently legislated – it is still the equivalent of a modest tax cut across the board.  Staging this change over several years would further reduce the budgetary shock. 

From the individual’s point of view, the cost has reduced to about a quarter of a percent of gross income, which in normal times most people would not notice.

However, these are not normal times: the aftermath of this summer’s fires and the developing coronavirus scenario mean that many people are or will be under severe financial pressure.  The government is currently working to provide significant stimulus in response.  The government has also reportedly asked ANU to advise the government on whether the upcoming increase will affect incomes.

As shown above, they certainly will do so, and it is tempting to see this as a strong argument against making any increase at all.

However, it is easy in times of crisis to neglect long term issues, banking problems for future generations.

The government could find it attractive, therefore, to demonstrate a continued commitment to long term saving by dropping the contributions tax, while leaving the SG rate at 9.5% so there is no additional cost for individuals. 

If that approach is followed, the boost to net SG contributions will be 17.6% instead of 23.5% – a little less, but still a sizeable improvement for the long term. 

To see what that would mean, we return to Fig 1 and consider someone who chooses a “Balanced” investment option for their super.  Using ASIC’s figures, that would give a replacement ratio of 20% under the current rules for the assets derived from SG contributions. 

The initial retirement income would thus be 24.7% of final employment income under the current plan (23.5% improvement), or 23.5% of final employment income if the SG rate remains at 9.5% and the contributions tax is dropped (17.6% improvement).  Either way, it is a significant improvement, while still leaving a considerable gap to be filled by extra voluntary saving, or the age pension, depending on the retiree’s circumstances.

8       About the author

Jim Bonham (BSc (Sydney), PhD (Qld), Dip Corp Mgt, FRACI) is a retired scientist (physical chemistry). His career spanned 7 years as an academic followed by 25 years in the pulp and paper industry, where he managed scientific research and the development of new products and processes. He has been retired for 14 years and has run an SMSF for 17 years.  He will not be affected by any change to the superannuation guarantee.


Save Our Super submission: Consumer Advocacy Body for Superannuation

Click here for the PDF document

13 January 2020

The Manager
Retirement Income Policy Division
Langton Cres
Parkes ACT 2600

Save Our Super submission:  Consumer Advocacy Body for Superannuation

Dear Sir/Madam

Save Our Super has recently prepared an extensive Submission to the Retirement Income Review dealing in part with the many ‘consumer’ issues triggered by the structure of retirement income policy and the frequent and complex legislative change to that policy.  

That Submission was lodged with the Review’s Treasury Secretariat on 10 January 2020 and a copy is attached to the e-mail forwarding this letter. It serves as an example of the analysis of super and retirement policy and of the advocacy that superannuation fund members, both savers and retirees, can contribute.  Its four authors’ backgrounds show the wide range of experience that can be useful in the consumer advocacy role. 

We note both the policy and the advocacy consultations are running simultaneously, exemplifying the pressures Government legislative activity places on meaningful consumer input.  Consumer representation is necessarily more reliant on volunteer and part-time contributions than the work of industry and union lobbyists and the juggernaut of government legislative and administrative initiatives.

Given the breadth, complexity and fundamentally important nature of the issues raised for the Retirement Income Review by its Consultation Paper, we have prioritised our submission to that Review over the issues raised by the idea of a Consumer Advocacy Body.  This letter serves as a brief submission and as a ‘place holder’ for Save Our Super’s interest in the consumer advocacy issues.

The idea of a consumer advocacy body is worthwhile in trying to improve member information, engagement and voice in superannuation and in the formation of better, more stable and more trustworthy retirement income policy.  It should help government to understand the perspectives of superannuation members.

Save Our Super was formed from our frustration at the evolution of superannuation and broader retirement income policies.  We contributed as best we could to the rushed and heavily constrained Government consultations on, and Parliamentary Committee inquiries into, the complex retirement income policy changes that took effect in 2017. One example of our inputs is .

For the consultations on the Consumer Advocacy Body for Superannuation, we limit our comments here to point 1 on the Consultation’s brief web page, :

Functions and outcomes: What core functions and outcomes do you consider could be delivered by the advocacy body? What additional functions and outcomes could also be considered? What functions would the advocacy body provide that are not currently available?”

Key roles

  • Consult with superannuation fund members on their concerns, including issues of legal and regulatory complexity, frequent legislative change and legislative risk which has become destructive of trust in superannuation and its rule-making.
  • Commission or perform research arising from consultations and reporting of member concerns.
  • Tap perspectives of all superannuation users, whether young, mid-career, or near-retirement savers, as well as of part- or fully self-funded retirees.
  • Publish reporting of savers’ concerns to Government, at least twice-yearly and in advance of annual budget cycles.
  • Contribute an impact statement – as envisaged in the lapsed Superannuation (Objectives) Bill – of the effects of changes to any legislation (not just super legislation) on retirement income (interpreted broadly to include the assets, net income and general well-being of retirees, now and in the future).

The advocacy body should:

  • take a long-term view, and could be made the authority to administer, review or critique the essential modelling referred to in Save Our Super’s submission to the Retirement Income Review. Ideally, the  Consumer Advocacy Body should have the freedom to commission Treasury to conduct such modelling, and/or to use any other capable body.
  • give appropriate representation and support to SMSFs, and be prepared to advocate for them against the interests of large APRA-regulated funds when necessary.  
  • advocate specifically for the very large number of people with quite small superannuation accounts, when their interests are different from those of people with relatively large balances.

The biggest risk to the advocacy body in our view is that it would over time be hijacked by special interest groups, or hobbled by its terms of reference.  Careful thought in its establishment, key staffing choices and strong political support would be helpful to protect against these risks. 

Membership issues

  • Membership of the Body should be part-time, funded essentially per diem and with cost reimbursement only for participation in the information gathering and consumer advocacy processes.  A small part-time secretariat could be provided from resources in, say, PM&C or Treasury. 
  • Membership opportunities should be advertised.
  • Membership of the Body should be strictly limited to individuals or entities that exist purely to advocate for the interests of superannuation fund members. (This would include any cooperative representation of Self-Managed Superannuation Funds.) We would counsel against allowing membership to industry entities which might purport  to advocate on behalf of their superannuation fund members, but might also inject perspectives that favour their own commercial interests.
  • Membership should include individuals with membership in (on the one hand) commercial or industry super funds and (on the other hand) Self-Managed Superannuation Funds.  We see no need to ensure equal representation of commercial and industry funds, though we would be wary if representation was only of those in industry funds or only commercial funds.
  • We offer no view at this stage on whether the Superannuation Consumers Centre would be a useful anchor for a new role, but we would suggest avoiding duplication.

Functions not currently available

The consultation asks what functions the Consumer Advocacy Body for Superannuation could perform that are not presently being performed.  SOS’s submission to the Retirement Income Review and earlier submissions on the changes to retirement income policy that took effect in 2017 shows the range of superannuation members’ advocacy concerns that are not at present being met.  

Prior attempts to establish consultation arrangements for superannuation members appear to us to have focussed mostly on the disengagement and limited financial literacy of some superannuation fund members.  Correctives to those concerns have heretofore looked to financial literacy education and better access to higher quality financial advice. Clearly such measures have their place.

But in the view of Save Our Super, these problems arise in larger part from the complexity and rapid change of superannuation and Age Pension laws, and in the nature of the Superannuation Guarantee Charge. Nothing predicts disengagement by customers and underperformance and overcharging by suppliers more assuredly than government compulsion to consume a product that would not otherwise be bought because it is too complex to understand, too often changed and widely distrusted.

There needs to be more consumer policy advocacy aimed at getting the policies right, simple, clear and stable, as was attempted in the 2006 – 2007 Simplified Super reforms.

Other issues

In the time available, we offer no views on questions 2,3 and 4, which are more for government administrators.

Yours faithfully

Jack Hammond, QC

Founder, Save Our Super

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