Correcting Morrison’s senseless superannuation strategy

The Centre For Independent Studies

Robert Carling – Spectator Flat White

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

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

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

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

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

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

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

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

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

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