The recent Retirement Income Review (RIR) implies policies that would reduce after-tax returns to super saving, encourage faster spending of life savings and of equity in the family home, and minimise bequests. Its approach would incline each generation towards consuming more fully its own lifetime savings.
This paper demonstrates the RIR relies on contested Treasury ‘tax expenditure’ estimates that use a hypothetical benchmark that is biased against all saving, but particularly against long-term saving.
The AP reports that the effective tax rate on superannuation earnings is already much higher than the statutory rate. It also presents credible alternative Treasury measures that use a neutral benchmark. These estimate ‘tax expenditures’ that are only one-fifth the size the RIR claims, essentially flat over time rather than rising strongly, and thus do not unduly favour self-funded retirees compared to Age Pensioners.
The RIR implies policies should encourage faster and more complete consumption of superannuation capital and housing equity in retirement to prevent some retirees’ wealth rising and ending in bequests. But with savers’ equity in their houses typically about double their savings in superannuation, no prudent acceleration of super spending is likely to overtake inflation of housing prices in an era of fiscal and monetary stimulus and asset price inflation.
The RIR proposes that a retirement income of 65-75% of the average of after-tax incomes in the last 10 years of work would be “adequate” for all, and estimates most (except some retiring as renters) are already saving more than enough for such a retirement. But it would be unwise and unnecessary for government to set its policies to constrain citizens’ choice of the self-funded living standards they want to work and save towards. Policies to crimp voluntary saving and accelerate retirement spending would create more uncertain retirements and a more fragile economy, more dependent on international lending and investment.
Many sectors of Australia’s retirees are now enjoying the prosperity that comes from higher sharemarkets and property markets.
But two groups are encountering new levels of tension. The first are those who own a dwelling but have most of their money in the bank. Their wealth is rising but they are becoming income-poor.
The second agitated group are holders of large superannuation balances who are suddenly being declared by young people as “spongers on the system” and “rent-seekers”.
I have encouraging news for both groups.
As people get older they often embrace more conservative investment policies and the bank deposit content of their portfolio rises. In previous years, bank deposits earned reasonable rates of interest, but today there is not much income difference between depositing your money in a bank and putting it under the bed. Banks are merely offering a safe place to store your money.
And so while the wealth of many Australians is rising with the value of their houses, their non-government pension income is falling. Their bank money hits their government pension entitlement and they have less income when their cost of living is rising faster than the CPI, given the high medical content.
There are a number of home loan products on the market, but one that is not often considered is the “Government Pension Loan Scheme”, which dates back to the Keating era but has fallen into disuse. Only about 3000 people took it up last year.
What the government is prepared to do is lend people starting in their 50s — but especially 70-year-olds and above — amounts of money that are not limited by your assets or income. The loans are secured on real estate, usually the family home. They are delivered fortnightly and the amount that is allowed is capped at 1.5 times the aged pension. The percentage of the value of a house that can be borrowed depends on people’s age. It gets very high in the nineties.
The loans are repaid when the family home is sold. While that does lessen later flexibility, many older people who are reluctant to borrow on their house are living in virtual poverty despite their wealth. A clear weakness in the loan scheme is the interest rate has not been adjusted to today’s world and is still 4.5 per cent, but my guess is that before the year is out it will be reduced.
A large number of people have seen a 10-20 per cent rise in the value of their dwelling in recent times. The government scheme supplements income but it does mean that there is less money for children to inherit. But I think it’s reasonable that some of the wealth that is being created in the housing boom is shifted into older people’s living standards.
Big super balances
The second group are in an entirely different situation.
Over a period of years there has been a switch in attitudes to the large amounts of superannuation held by older people. For a long time superannuation rules encouraged people to invest large sums in superannuation. This ALP and Coalition government policy deliberately created some very large superannuation balances, which are very difficult to achieve under today’s rules. The policy of maximising the amount of money people held in superannuation continued right through the Abbott/ Turnbull Coalition years.
Indeed, one of the most successful policies to retain the large superannuation sums was a Coalition government brainchild to freeze many superannuation plans issued prior to 2006-07, and allow the frozen money to be released via retaining large superannuation balances.
The Coalition’s policy was therefore to encourage people to use their personal money and leave large sums in super. That’s not today’s agenda, so one of the controversies in superannuation is how much people should withdraw in their 60s and 70s.
Current Superannuation Minister Jane Hume thinks that not enough money is being withdrawn and people’s living standards are suffering.
While this is might be true, many people are nervous about the amount of money they will need in their 80s given the rising costs of medicine, etc. And of course people in their 80s and 90s are required to take large sums out of superannuation. The level of under-withdrawal of superannuation money by people under 80 depends on what graph you look at. If all superannuation is counted, including zero balances, it is clear that people do withdraw their money. But if you take out the zero balances then there is a conservative rate of withdrawal in the 60s and 70s.
It’s important for the government to honour its election promises and not make major changes in this area — especially given its recent policies to actively incentivise the retention of large sums in superannuation.
But on an overall community basis, people have the fitness to spend money on travelling and other areas in their 60s and 70s, which they might not have in their 80s and beyond.
On 22 January 2021, the Australian Financial Review featured a front-page article by John Kehoe and Michael Roddan headed “‘Ever more’ super gets hoarded: Hume”.1
In the same issue, Jane Hume (Minister for Superannuation, Financial Services, and the Digital Economy) provided an op-ed “Safety nets let frugal retirees spend savings without a super rise”.2
On 23 January 2021, Kehoe followed up with an article entitled “Push for seniors to dig deep into super nest egg” in which he wrote:
“Superannuation Minister Jane Hume kicked off a national debate about retirement incomes this week …
“She said people needed to be more confident to spend – not hoard – retirement savings to improve living standards throughout their lives …
“The government’s retirement income review led by former Treasury official Mike Callaghan identified that many retirees died with most of their wealth intact and did not run down their super or tap equity in their home, so they might be saving too much”.3
It is clearly an important national question. Wealth includes the home and other assets as well as super, but because the regulatory, financial, market, liquidity, and social issues in relation to housing differ so much from those applying to super, this article focusses only on super.
Is it true that retirees hoard their super? The answer is in three parts:
Yes, in nominal terms, in some cases,
No, in real terms (indexed to wages),
No, when considered as an average across all retirees.
The Minister’s view, as presented in the op-ed2 and reported in the articles mentioned1,3, is rather different, but it is strongly supported by the Retirement Income Review – Final Report (20 November 2020), chaired by Michael Callaghan4 (“RIR Report”).
A couple of quotes give the flavour of the RIR Report’s attitude (page numbers refer to the pdf version4):
page 23, “Most people die with the bulk of the wealth they had at retirement intact.”
page 56, “The evidence suggests that retirees tend to hold on to their assets … Alternatively they need not have saved as much …”
It seems the way is being paved towards downgrading the level of compulsion applying to super contributions for pre-retirees and tightening the requirements for withdrawal in retirement. Such changes may be damaging to retirees if they are not soundly based on facts and understanding.
The counter-arguments to the claim that super is being hoarded by retirees need to be fleshed out:
Superannuation kept in an allocated pension account, as is typical for retirees, is subject to minimum annual withdrawal limits. Those rates have been halved for 2019-21 because of Covid-19, but normally they are: 4% below age 65, 5% for ages 65-74, 6% for 75-79, 7% for 80-84, 9% for 85-89, 11% for 90-94 and 14% over 94.
Provided that investment returns can keep up with the minimum withdrawal rates from an allocated pension it is possible, with care, to leave the capital (in nominal dollars) untouched and take only the investment returns as income.
However, this becomes increasingly difficult beyond age 80 as the minimum withdrawal rates increase well beyond 7%, or at much younger ages if investment returns are low.
Hoarding of nominal superannuation capital throughout retirement is therefore possible, but only for those who die early or invest well.
Nominal dollars provide a poor base for comparison across long time periods. Real values, indexed to wages, relate much better to community living standards. If the super account maintains its nominal value for 15 years, it will have lost almost half its real value (assuming 4% p.a. long-term wages growth).
Successfully hoarding real capital between 65 and 74 years of age would require nominal investment returns, net of fees, consistently above 9%. This is possible during good times, but almost impossible in bad times, and it becomes far harder as the superannuant ages further.
There is a simple reason for that: the minimum drawdown rates are designed to prevent long-term hoarding, whilst enabling those who live a long life to continue to benefit from their savings.
It is easy to trot out simple examples to show that capital can or cannot be preserved in various scenarios. From a policy point of view, however, what matters is the true average behaviour of all retirees.
In support of the claim that retirees do not consume their capital, the RIR Report4 cites a paper by Polidano et al 5, and re-plots Fig 2 of that paper as Fig 5A-12 on page 434 (pdf version). That graph shows average superannuation account values at a point in time, as a function of age, thus neatly dodging the inflation issue.
At first sight, that graph seems to confirm the hoarding thesis – although some drop-off in account value can be seen for ages in the late 70s.
On page 434 (pdf version), the RIR Report4 states: “Superannuation assets have tended to grow in retirement (Chart 5A-12), instead of declining as would be expected if assets were funding retirement”.
Polidano et al 5similarly state that they find “little evidence that people, on average, run-down superannuation balances after reaching the preservation age (Figure 2).”
Both comments support the hoarding hypothesis, but closer inspection reveals that the graph pertains only to the average of non-zero-balance accounts. In other words, those accounts which have been totally withdrawn have been excluded.
This is an example of “survival bias”. A similar situation can arise when back-testing share investment criteria against past data, if consideration is limited to companies that are still in business. Ignoring those that have failed can be an expensive mistake.
In the present case, the survival bias may or may not matter, depending on one’s purpose; but when the purpose is to establish that retirees hoard their super, it matters a great deal.
Fortunately, Table 1 of Polidano et al5 provides valuable additional data: average account balances are listed there both for accounts with non-zero balances, and for all accounts – segregated further by gender. That allows the survival bias effect to be both quantified and eliminated. It is substantial: roughly 80% of males are shown as having exhausted their accounts by age 80.
To make the impact of the account survival bias easier to see, Fig A below plots the Alife data from Table 1 in Polidano et al 5, for all accounts and for non-zero-balance accounts.
A discussion about how fast, if at all, people consume their superannuation in retirement must include all accounts to be meaningful.
As shown in the two solid all-accounts curves in Fig A – blue for males and orange for females – there is a strong and steady fall-off in the average all-accounts value throughout retirement, at least to the early 80s, by which time most or all of the average balance has gone.
The notion that retirees, averaged across the population, hoard their super is thus contradicted by the facts.
That is an important conclusion when considering superannuation policy.
A final version of that paper, in which some errors are corrected, has been published in The Australian Economic Review, September 2020, vol 53, No 3, pp 429-449.
* Jim BonhamPhD, BSc, Dip Corp Mgt, FRACI is a retired scientist and manager with a professional background which was initially in academic physical chemistry, and subsequently in applied research and development in the paper industry. He has been running an SMSF since 2003 and has a keen interest in the retirement income system.
Proportional Indexation of the Personal Transfer Balance Cap
The Tax Institute requests the Government to consider the reforms outlined below in relation to Division 294 of the Income Tax Assessment Act 1997 (ITAA 1997) – that is, the transfer balance cap (TBC) provisions.
Division 294 was included as a part of the 2016-17 Federal Budget Superannuation Reforms and introduced a cap on the amount of superannuation benefits an individual could transfer into pension (tax-free retirement) phase. The General TBC was initially set at $1.6 million1 upon commencement from 1 July 2017. The law includes the indexation, in increments of $100,0002, of the TBC in line with movements in the CPI.
Section 294-40 of the ITAA 1997 provides for individuals that have not reached their TBC to access proportional indexation of the TBC in accordance with their unused cap percentage.
The Tax Institute considers that this provision is overly complex and needs to be reformed. In the context of the TBC provisions, The Tax Institute submits that simpler rules would:
Assist members and their advisers to better understand and manage the TBC; and
Reduce the cost for both industry participants and the ATO in relation to administering these provisions.
The Institute submits that the removal of proportional indexation will achieve both of these objectives. Accordingly, the Institute’s submission is as follows:
Abolish proportional indexation of the Personal TBC and adopt standardised indexation in line with movements in the General TBC for individuals that have not maximised their Personal TBC prior to the indexation; or
If proportional indexation is retained:
it should be limited, or its application better targeted to individuals that are within close proximity of the General TBC; and
a permanent relief mechanism should be introduced to allow the Commissioner to disregard inadvertent and small breaches of the Personal TBC and not penalise individuals in cases where the excess transfer balance amount is removed within a specified period of time. There is a precedent that was included in the enabling legislation whereby TBC breaches of less than $100,000 were able to be rectified within 6 months (of the commencement of the legislation) and the breaches would not give rise to the application of notional earnings or an excess transfer balance tax liability3. We suggest adopting this transitional rule permanently (with some modification if required).
The requested reforms have been developed by The Tax Institute’s National Superannuation Technical Committee and are detailed in Annexure A for your consideration.
* * * * *
If you would like to discuss, please contact either me or Tax Counsel, Angie Ananda, on 02 8223 0050.
Part of the 2016-17 Federal Budget superannuation reforms introduced (from 1 July 2017) a lifetime cap on the amount of accumulated superannuation an individual could transfer into pension (tax-free retirement) phase. The General Transfer Balance Cap (TBC) was initially set at $1.6 million4.
Apart from some specific circumstances prescribed in the law, amounts in excess of the TBC must be withdrawn out of pension phase. The excess amounts could remain either in the accumulation phase with associated earnings taxed at 15 per cent or completely transferred out of the superannuation system. Notably, the General TBC would be indexed and allowed to grow in line with the CPI, in increments of $100,0005.
In addition, a Personal TBC was introduced within the enabling legislation6 which is generally equal to the General TBC applicable at the time when an individual makes their first transfer of capital to a retirement phase income stream.
The ATO administers individual compliance with the TBC via a Transfer Balance Account (TBA).
Section 294-40 of the ITAA 1997 provides for proportional indexation of the TBC to allow individuals to benefit from increases in the General TBC where they have not fully expired their entitlement to their Personal TBC.
The structure of proportional indexation, over time, results in individuals having a Personal TBC that differs from the General TBC relative to the time they commence a retirement phase income stream.
Complexity is further added as an individual can only obtain a proportion of each General TBC indexation increase (that is, $100,000), based on their Unused Cap Percentage (UCP).
The UCP applies only if the individual has not fully utilised their Personal TBC and is determined by identifying the individual’s highest TBA balance at the end of a day, at an earlier point in time, and comparing it to their Personal TBC on that day. The UPC is expressed as a percentage and applied against the indexation available for the General TBC. This process is required at each indexation point until such time as the individual utilises 100% of their Cap Space.
Once an individual has used their entire available Cap Space, their Personal TBC is not subject to further indexation, even if they later commute some or all of that pension to bring their TBA balance below their Personal TBC.
This is best illustrated with the following examples (adapted from the Explanatory Memorandum)7:
Example – simple
Danika first commenced an $800,000 retirement phase income stream on 18 November 2017. A Transfer Balance Account is created for her at this time. Her Personal TBC was $1.6m for 2017-18. As Danika had not made any other transfers to her retirement phase account, her highest TBA balance is $800,000. She has used 50% of her $1.6m Personal TBC.
Assuming the General TBC is indexed to $1.7m in 2020-21, Danika’s Personal TBC is increased proportionally to $1.65m. That is, Danika’s Personal TBC is only increased by the UCP of 50% of the $100,000 indexation increase to the General TBC. As such, Danika can now transfer a further $850,000 to commence a retirement phase income stream without breaching her Personal TBC. Notably, earnings on the original $800,000 were not taken into account in working out how much of the unused cap was available.
Example – complex
On 1 October 2017, Nina commenced a retirement phase income stream with a value of $1.2m. On 1 January 2018, Nina partially commuted $400,000 from this income stream to buy an investment property.
Nina’s TBA balance on 1 October 2017 was $1.2m and on 1 January 2018, it was $800,000 (after the $400,000 partial commutation).
In 2020-21, assume the General TBC is indexed to $1.7m. To work out the amount by which Nina’s Personal TBC is indexed, it is necessary to identify the day on which her TBA balance was at its highest. In this case, the highest balance was $1.2m on 1 October 2017. Nina’s Personal TBC on that date was $1.6m. Therefore, as she has used up 75% of her Personal TBC, Nina’s UCP on 1 October 2017 is 25%.
To work out how much her Personal TBC is to be indexed, Nina’s UCP is applied to the amount by which the General TBC has indexed (i.e. $100,000). Therefore, Nina’s Personal TBC in 2020-21 is $1.625m.
In 2022-23, assume the General TBC is indexed to $1.8m (i.e. by another $100,000). As Nina has not transferred any further amount into the retirement phase, her UCP remains at 25%. Her Personal TBC is now
$1.65m (i.e. 25% of the further indexation increase of $100,000). In this year, Nina decides to transfer the maximum amount she can into the retirement phase.
This will be her Personal TBC for the 2022-23 year ($1.65m) less her TBA balance of $800,000. This means Nina can transfer another $850,000 into the retirement phase without exceeding her Personal TBC.
Once Nina has used all of her available Cap Space, her Personal TBC will not be subject to further indexation. Notably, this is the case even if Nina later partially commutes some of her retirement phase income stream and makes her TBA balance fall below her Personal TBC.
Range of Potential Personal TBC
Members (A to D) Cap Space utilised in 2018 – 2021 (assuming indexation in 2021).
Cap Space Accessed
Unused Cap %8
Members (A to D) Cap Space utilised in 2022 – 2025 (assuming further indexation in 2025).
Cap Space Accessed
Unused Cap %
As illustrated above, the amount of proportional indexation largely depends on an individual’s UCP, each time there is indexation of the General TBC.
The result of this process is an individual’s Personal TBC is likely to be unique to themselves if they are in the category where they do not utilise their full TBC at the point of commencing a retirement phase income stream.
The burden is therefore likely to fall to individuals with smaller superannuation balances.
Current Issues and Challenges
Overly complex calculation and too widely targeted
The above examples demonstrate the complexity of the proportional indexation calculation which, over time, will require very effective record management systems to track and be effective in ensuring individuals are not subject to inadvertent breaches of their TBC.
According to the Explanatory Memorandum9 (EM) to the enabling legislation, the introduction of the TBC was to better target superannuation concessions thereby ensuring the system’s sustainability over time. The EM estimated the introduction of the TBC would affect less than one per cent of Australians with a superannuation interest. If this estimate is accurate, then arguably this particular calculation which is carried out on the full population (in retirement phase) represents a very inefficient and costly tax administration for what was meant to only have a one per cent application.
Design not hitting target
By its very nature, proportional indexation essentially rewards and benefits those who are able to defer the commencement of their retirement phase income stream to a later date. As a consequence, it may actually encourage those who are ready to retire (with amounts in excess of the General TBC) to defer and leave their superannuation balance in the accumulation phase until indexation does occur. Such behaviour would appear contrary to the intent and objective of proportional indexation.
Inconsistent treatment with other superannuation caps
The proportional indexation of the Personal TBC is unprecedented when compared with other indexation that takes place under the tax law. For instance, the Low Rate Cap Amount10 which represents a lifetime cap on the tax-free level of superannuation lump sums an individual can receive in their lifetime is indexed in line with AWOTE, in increments of $5,000. There is no proportional reduction based on how much of the previous Low Rate Cap Amount has remained unused.
Too many rates, caps and thresholds
It has taken industry participants and the ATO considerable time and effort to educate individuals on the concept of the TBA (including debits and credits) and the consequences of breaching their Personal TBC. At times, there has even been some confusion with the Total Superannuation Balance (TSB) which has also been pegged to the General TBC for the purposes of assessing eligibility to the following superannuation concessions:
Non-concessional contributions caps (NCC) and associated bring forward caps;
Tax offset for spouse contributions; and
Segregated method to determine their earnings tax exemption (SMSFs and small APRA funds only).
We submit that there was a logical nexus and a familiarity developed with the $1.6 million between the General TBC and the TSB (at least for the above mentioned superannuation concessions). However, as proportional indexation comes into effect with an individual potentially having a Personal TBC not equalling the General TBC, The Tax Institute is concerned that the Personal TBC will further exacerbate what is becoming a very complex suite of rates, caps and thresholds operating within the superannuation system.
A lack of consistency has been applied historically across the various caps and eligibility criterion for superannuation concessions. Some caps are indexed based on either CPI or AWOTE whereas others are referenced to a specific date and/or data set.
The non-concessional bring forward non-concessional contributions cap (that allows some individuals to use 3 years of the non-concessional contribution cap in a single year), provides an example of the anomalies apparent in the reference points for access to superannuation concessions.
The bring-forward non-concessional contributions cap is assessed based on an individual’s TSB, with thresholds referencing both the General TBC and the General NCC.
Source: Paragraph 5.47 of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 – Explanatory Memorandum.
Specifically, the references to $1.4 million, $1.5 million and $1.6 million reflect a calculation that takes a multiple of the NCC (originally set at $100,000) and subtracts it from the General TBC11.
Notably the table above gets very complicated and may produce anomalous eligibility thresholds given the indexation of the General TBC is based on CPI and the General NCC on AWOTE. This problem is further exacerbated if, in a given income year, the NCC is indexed but the General TBC is not (due to the higher $100,000 incremental hurdle).
Access difficulties to Personal TBC
Currently, financial planners and advisers have difficulties accessing clients’ TBA and TSB balances given the information is only accessible via the ATO and restricted to the individual and their tax agents.
Without this information, it is extremely difficult for advisers to provide appropriate financial advice which will not cause their clients to inadvertently breach their caps. Unfortunately, we foresee this problem only getting worse if and when proportional indexation comes into effect with an individual’s Personal TBC diverging from the General TBC12. This ultimately affects the quality of the advice provided and may lead to errors, giving rise to complaints and the need to remediate.
Reliance on ATO
Of particular concern is that the Personal TBC determination rests solely with the ATO, who in turn must rely on all Fund providers to report all relevant member’s transactions accurately and in a timely fashion. Any errors or omissions in the reporting may lead to subsequent re-reporting which may trigger a re-calculation of the Personal TBC. However, the individual and/or their financial adviser may have acted and relied upon the ATO’s calculation.
Notably in a recent AAT case13, a taxpayer submitted that they were led into error by misleading content on the ATO website when managing the excess over their Personal TBC. However, the Tribunal found in favour of the ATO and also confirmed that the Tribunal had no jurisdiction to address any application against the ATO even if its website could be said to be misleading This was the case, notwithstanding there was acknowledgement that the taxpayer had relied on the ATO information in good faith and made an honest mistake.
Furthermore, there appears to be no rights to object to any inadvertent breach of the individual’s Personal TBC in such a situation and is a real concern given the fact that the Commissioner does not explicitly have any discretionary powers to disregard an excess transfer balance (even if information obtained from the ATO contributed to the breach).
Culpability for errors or omissions unclear
As alluded to in the previous issue, it may also be unclear as to who is culpable for an inadvertent breach of the cap as a consequence of any error or omission in member reporting. With such a large superannuation system and the volume of transactions that occur, one can expect reporting errors
or omissions to arise from time to time that require re-reporting to the ATO. To the extent re-reporting causes a subsequent breach of the cap and/or denial of any related superannuation concessions, it is unclear who is culpable for that breach. This is particularly the case if the individual has multiple accounts with various Fund providers and there are errors or omissions experienced by more than one Fund provider.
Severe tax consequences for excess transfer balances not rectified
The breaching of the TBC may often lead to an individual disputing their excess transfer balance with the ATO and refusing to commute the excess. Individuals may give explicit instructions to their Fund not to process a commutation authority issued by the ATO. However, Trustees have no choice but to act and process a commutation authority that it receives14. Failure to do so within the prescribed 60 days will result in the income stream ceasing to be a retirement phase income stream15.
This in turn results in the income stream ceasing to qualify for the earnings tax exemption16 with the eligibility deemed to have been lost from the start of the income year in which the commutation authority was not complied with. Notably this tax outcome poses an administrative challenge particularly for large funds that operate retail Master Trusts and offer their members superannuation interests in unitised asset pools. Specifically, it becomes extremely difficult to even determine what portion of the income and gains from the unitised (pension) asset pools is attributable to that particular member. Furthermore, the Trustee would also need to assess the tax character of that income and gains, plus any applicable tax offsets in order to determine the effective earnings tax rate that ought to have been applied to the deemed assessable income.
More importantly, the Trustee’s compliance with a commutation authority may give rise to a complaint by the member for not complying with their explicit instruction or request not to process.
Outcomes and Conclusion
The current superannuation system is overly complex and costly to administer. There is merit in making it much simpler for all stakeholders.
The Tax Institute submits that simpler rules would assist in:
Members and their advisers better understanding and managing the TBC; and
Reducing the cost for both industry participants and the ATO to administer these rules.
The removal of proportional indexation specifically achieves both these objectives.
As with other existing superannuation caps, adopting the General TBC will ensure every individual has the same TBC regardless of when they entered the retirement phase. This will provide certainty to individuals and their advisers to better plan for their retirement, without having to rely on gaining access to ATO information.
The call for permanent relief for inadvertent and small breaches is aimed at red tape reduction and thereby increasing the overall efficiency of the superannuation system. At present, it can take up to 120 days before an excess transfer balance amount is withdrawn from retirement phase. Any such breaches tend to involve every party within the system and is therefore a very costly and time- consuming exercise. We submit this particular option strikes a good balance between maintaining the integrity and efficiency of the superannuation system. It should also obviate any breaches which may result from any misreporting and re-reporting of member transactions by Fund providers and reduce the number of disputes and complaints raised by the individual against the Trustee and/or the ATO.
Whilst the proportional indexation methodology is designed to target higher member balances, its universal application is more likely to impact superannuation funds with lower balance members. The Tax Institute considers it to be undesirable to significantly increase the complexity inherent in a system that has limited application against the object of the measure. There is still time to remove this provision from Division 294 before the first indexation event occurs and we urge the Government to carefully consider this submission.
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”.
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
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.
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.
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.
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
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.
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.
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
Somehow all of this was forgotten by Morrison.
said, it would not surprise if an industry fund like AustralianSuper
provided capital to support a private equity bid for Virgin.
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
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.
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.
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
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
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
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.
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
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.
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.
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.
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
As a simpler and more politically acceptable option,
the FSI recommended the introduction of Comprehensive Income Products
for Retirement (CIPRs).
Annuity-style pension products
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.
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.
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.”
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
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.
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
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.
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
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.”
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.
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.
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.
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
“But then we have to open up the way this damn thing works and fix it.”
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.
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.
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
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.
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.
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
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.
now the music has stopped. What these big industry funds have sold to
members as “balanced” funds doesn’t look so balanced any more.
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.
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.
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.
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
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.
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.
APRA stands condemned for letting industry super funds get away with
second-rate governance and poor management of risk through the full
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.
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
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?
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?
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.
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 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.