Fairer superannuation tax increases through grandfathering

Subject: Fairer Superannuation tax increases through grandfathering

Date: 17 July 2016

To: scott.morrison.mp@aph.gov.au

Cc: higgins@aph.gov.au, barnaby.joyce.mp@aph.gov.au,

Dear Treasurer
Fairer Superannuation tax increases through grandfathering

Congratulations on your recent re-election.

I write in advance of the Party Room discussion of superannuation tax increases announced in the May Budget to register my suggestions on a path forward for the Government.

I suggest that the Budget measures be grandfathered.

The budget Superannuation measures will continue to cost the government support

By all accounts, including exit and other polls and the electorate experience of Liberal candidates reporting lack of volunteer party workers and financial contributions, the Government’s package of superannuation measures was a significant vote loser for the Liberals. I fear this is not a transient irritation. Super savers and self-funded retirees see the Budget measures as a breach of faith, a devaluation of the living standards they have saved for, and a precedent for future attacks on superannuation savings by governments unable to discipline their own spending and live within their own budgets. This fear was confirmed by Labor’s tripling its initial super tax hikes late in the election campaign behind the cover provided by the Government’s measures, while reducing clarity about how the revenue would be raised.

Savers and self-funded retirees now face protracted uncertainty (to at least July 2017 if not beyond) while politicians wheel and deal with savers’ future
living standards.

Both ungrandfathered super tax increases and new super tax concessions should be halted.

I urge you propose in the Party Room re-examination of all the Budget measures on superannuation: both the tax increases and the new concessions that extend superannuation concessions into novel, unnecessary and un-rewarded terrain.

You might have noticed the complete lack of voter thanks for these new concessions that dissipate some $3 billion of the nearly $6 billion of revenue that the Government estimates to be raised from voters existing superannuation accounts over the period 2016-17 to 2019-20.

Those new concessions serve only to destroy the Government’s own strategic argument for faster return to budget surplus.

Destruction of trust in superannuation: a wider problem than retrospectivity.

Media reports suggest backbench criticism of the super measures focuses on the retrospectivity of the new lifetime cap of $500,000 backdated to 1 July 2007. While that measure is of course wrong and unjustly changes the legal status of valid past contributions to count them against a new restriction, by far the worse and wider problem for the Government is its casual and apparently still not understood destruction of savers’ and retirees’ trust in superannuation, and the devaluation of their lifetime savings.

Superannuation is a unique savings product. Savers put money into super with the unique restriction that they cannot access it for some 40 years or more until their preservation age; it then has to last them another 30 years or more of retirement.

Given these unique characteristics, super saving has long been understood as a compact between savers and governments covering the tax and regulatory treatment of super in the contribution phase, the accumulation phase and the pension phase. That lengthy horizon requires savers to trust government and for government to respect savers in the time and consultation given to tax increases at any point in the system – contribution, accumulation or pension phase.

That sensitivity has been shown by previous governments which grandfathered adverse super changes, but destroyed by the current Government.

The groups targeted by the Government measures have few or no options to adjust to the Government’s change in the rules of the game. To add insult to injury, these changes are proposed in the “age of zero returns”, when many superannuation fund balances are showing negative or negligible growth.

The super tax increases should be reconsidered using Justice Asprey’s guidelines.

As long ago as 1975, Justice Asprey’s Report on the tax system offered timeless good sense on how to increase super tax to ensure the increases are fair and only apply prospectively (see Attachment A).

I suggest you should argue to the Party Room that the Government should redesign the Budget measures to ensure they are fully grandfathered, such as were the large tax increases and tax shifts in 1983 and 1988, or the 2009 lowering of the limit on concessional contributions from $50,000 to $25,000 (see Attachment B).

Such grandfathered measures would completely disarm criticisms of retrospectivity and breach of trust, and would be beyond legitimate Labor criticism (not least since they copy earlier Labor means for fairly introducing super tax increases). If, nonetheless, Labor were to block the revised increases, there would be
ample support for the redesigned measures available from thoughtful crossbenchers.

Only such a step can show the Government has listened to its critics, and now truly understands the sense of violation of trust that all superannuation savers now feel. (It is striking that exit polls show that superannuation tax increases concerned both Liberal and Labor voters, and young voters.

They understand that, with the Government abandoning its earlier assurances (such as in your own address of 18 February 2016 rightly criticizing “effective retrospectivity”) and joining the left’s attack on superannuation, there is now no defence against further ungrandfathered attacks on the lifetime savings and living standards of those who once trusted the previous superannuation tax regime as a safe framework for their savings.

Reject false estimates of the cost of superannuation concessions

The Government has been sold a pup in the attack on allegedly costly superannuation tax concessions. It is frequently claimed the superannuation tax concessions cost some $30 billion a year. These tax expenditure estimates are conceptually totally wrong, as clearly shown by Ken Henry’s review Australia’s Future Tax System (Attachment C).

Proper gross tax expenditure estimates are probably around one-fifth of that amount, with the net cost (after allowing for lower uptake of the age pension)  lower still, and perhaps even negative.[i]

Claims that radical cuts to tax expenditures on superannuation are necessary for ‘sustainability’ fail in part because of the vast overstatement of the cost of the present concessions. But if a build-up of cost in future is the concern, the introduction of the revised Budget increases with grandfathering would constitute a valid structural improvement in the budget. Instead, what the Government is proposing is an unfair tax grab at the cost of those who have taken laws of the Government and its predecessors as the framework for their attempts to provide for their own retirement.

I have also addressed similar correspondence to many of your Parliamentary colleagues, and would of course also have addressed it to the Prime Minister, but his entry on the Liberal Party web site does not include an email address, and his preferred interactions by Twitter and Facebook do not appear suitable for serious discussion.

Yours sincerely,
Terrence O’Brien


Asprey Taxation Review Committee Full Report 31 January 1975
Chapter 21: Income Taxation in Relation to Superannuation and Life Insurance
21.9. Finally, and most importantly, it must be borne in mind that the matters with which the Committee is here dealing involve long-term commitments entered into by taxpayers on the basis of the existing taxation structure. It would be unfair to such persons if a significantly different taxation structure were to be introduced without adequate and reasonable transitional arrangements. ………

21.61. …..Many people, particularly those nearing retirement, have made their plans for the future on the assumption that the amounts they receive on retirement would continue to be taxed on the present basis. The legitimate expectations of such people deserve the utmost consideration. To change suddenly to a harsher basis of taxing such receipts would generate justifiable complaints that the legislation was retrospective in nature, since the amounts concerned would normally have accrued over a considerable period—possibly over the entire working life of the person concerned. …..

21.64. There is nonetheless a limit to the extent to which concern over such retrospectivity can be allowed to influence recommendations for a fundamental change in the tax structure. Pushed to its extreme such an argument leads to a legislative straitjacket where it is impossible to make changes to any revenue law for fear of disadvantaging those who have made their plans on the basis of the existing legislation. …..

21.81. …. [I]t is necessary to distinguish legitimate expectations from mere hopes. A person who is one day from retirement obviously has a legitimate expectation that his retiring allowance or superannuation benefit which may have accrued over forty years or more will be accorded the present treatment. On the other hand, it is unrealistic and unnecessary to give much weight to the expectations of the twenty-year-old as to the tax treatment of his ultimate retirement benefits.

21.82. In theory the approach might be that only amounts which can be regarded as accruing after the date of the legislation should be subject to the new treatment. This would prevent radically different treatment of the man who retires one day after that date and the man who retires one day before. It would also largely remove any complaints about retroactivity in the new legislation.
Examples of grandfathering superannuation tax increases to ensure fairness

When the Hawke Government began addressing super tax design issues, it was clearly influence by the Asprey principles summarized above. Two cases which particularly illustrate the interdependence between taxation of the three phases of superannuation are worth sketching in more detail.

In May 1983, the Hawke Government announced higher taxation of lump-sum superannuation payments. Previously, only 5% of such funds were added to the retiree’s assessable income, and taxed at the retiree’s highest marginal income tax rate. Even at the then highest marginal tax rate of 60%, this was highly concessional: (0.05*0.60 = 0.03) – a 3% tax rate.

The Government proposed to impose a tax rate of 30% on the whole of the lump sum, but the change was grandfathered to ensure there was “no element of retrospectivity”.[ii] The Government announced a delayed implementation date of 30 June 1983. For a lump sum received before 1 July 1983, it continued to be the case that only 5% was assessable, as under the old arrangements. For lump sums received after 1 July 1983, only that portion saved after the implementation date attracted the higher taxation arrangements (modified during consultations to include a tax rate of 15% of the lump sum below a certain threshold and 30% above that threshold). Of the remaining portion saved before the implementation date, only 5% was added to assessable income and taxed under the old rule.[iii]

Paul Keating has reflected on the reforms of that era:

That change preserved the concessionality of the system to 1983 while changing the tax treatment of superannuation post-1983. This meant that those people who, for a large part of their working lives had enjoyed the concessionality of the superannuation provisions, would have those accumulations protected under a ‘grandfathering’ concession —that is, with no retrospectivity—while income after 1983 would be taxed on a less concessional but sustainable longterm basis.[iv]

In 1988, a 15% tax was imposed on employer contributions and deductible contributions (the contributions phase), and the earnings of super funds (the accumulation phase) were also taxed at 15%. This in effect brought forward from the retirement phase the revenue to government from the super saving stream. Without other adjustment, that would have reduced the amount that super balances would grow to by retirement, and would have reduced the after-tax lump sum a retiree could receive. So at the same time, the higher lump sum benefit tax imposed in 1983 was lowered.

Once again, to avoid the imposition of a new tax on a retrospective basis, the taxation treatment of the pre-1983 component of retirement benefits and amounts accumulated between 1 July 1983 and 30 June 1988 was grandfathered. Treasury has rightly noted, however, ‘Grandfathering of this nature (which was also a feature of the 1983 amendments to the taxation of superannuation) has added to the complexity of superannuation taxation arrangements.’ [v]

More recently, the 2009 lowering of the limit on concessional contributions from $50,000 to $25,000 was coupled with transitional measures to protect those already over 50 years of age. The 2009-10 Budget papers noted, ‘Grandfathering’ arrangements were applied to certain members with defined benefit interests as at 12 May 2009 whose notional taxed contributions would otherwise exceed the reduced cap. Similar arrangements were applied when the concessional contributions cap was first introduced. [vi]

Similarly, regulatory changes that affected savers’ planning for retirement late in their working careers have been phased in to spare those closest to retirement, and give advance notice to those further from retirement to make adjustments to their economic affairs. An example was the 1997-98 Budget confirmation of phased increases in the preservation age from 55 to 60 by 2025.[vii]

A further illustration of recent relevance from the intersection of superannuation and the aged pension is the grandfathering of existing account-based superannuation pensions outside the aged pension income test, rather than deeming them as income counted against the test from 1 January 2015 as part of the revisions to that test.[viii]

How to cost superannuation tax concessions?

Under a comprehensive income tax benchmark the concession to superannuation is the difference between the tax paid if the superannuation contribution and the earnings were taxed as income at the individual’s personal tax rate (plus the Medicare levy) and the tax paid in the fund (generally 15 per cent). Under this benchmark the superannuation concessions have an estimated cost to revenue of over $26 billion in 2007-08 (Australian Treasury 2007).

An alternative way to calculate the value of the tax concession is to use an expenditure tax benchmark. The two types of expenditure tax benchmarks are: a pre-paid expenditure tax based on direct taxation of labour income with an exemption for saving; and a post-paid expenditure tax based on the taxation of a direct measure of expenditure on goods and services.

Under the pre-paid expenditure tax benchmark, the value of the concession is the difference between the tax paid if the superannuation contribution were taxed as income at the individual’s personal tax rate (plus the Medicare levy) and the tax paid in the fund, less the tax paid on earnings in the fund. Benefits are tax exempt under this benchmark, which is consistent with the tax exemption of superannuation benefits in Australia’s retirement income system. Under this benchmark, the superannuation tax concessions would have an estimated aggregate cost to revenue of $4.6 billion in 2007-08.

Under the post-paid expenditure tax benchmark, both contributions and earnings would be tax-exempt but benefits would be fully taxable when paid. Under this benchmark the tax concession is expected to be less than under the prepaid expenditure tax benchmark, as individuals will generally have a lower tax rate on their retirement income than their income while working.

N.B. These estimates are not necessarily indicative of the cost of the superannuation concessions over the long term. The tax concessions help to reduce budgetary expenses in future years, particularly Age Pension payments, through the effect of the means tests.

Source: Australia’s Future Tax System: Retirement Income
Consultation Paper, Box 3.1, 10 December 2008

[i] Australia’s Future Tax System: Retirement Income Consultation Paper, Box 3.1, 10 December 2008.

[ii] Paul Keating, Taxation arrangements for lump sum retirement and kindred benefits, Press Release No 27, 30 May 1983.

[iii] Ken Henry et al, Australia’s Future Tax System – Retirement Income Consultation Paper , Appendix B: A History of Superannuation, Canberra, December 2008.

[iv] Paul Keating, The Story of Modern Superannuation, above.

[v] The Treasury, Towards higher retirement incomes for Australians: a history of the Australian retirement income system since Federation, Economic Roundup Centenary Edition, Canberra 2001.

[vi] Australian Government, Budget 2009-10, Budget Paper No 2, part 1, Revenue Measures, Canberra 12 May 2009.

[vii] Trish Power, Accessing super: Preservation age now 56 years (since July 2015), MLC Super Guide, 5 July 2015.

[viii] Liam Shorte, Age pension changes: keeping your super grandfathered, Intelligent Investor, 26 August 2014.