Submission on third tranche of superannuation exposure drafts

23 October 2016


Terrence O’Brien and Jack Hammond QC,

on behalf of themselves and Save Our Super


  1. Table of Contents
  2. Summary. 2
  3. Inadequate time for public comment 4
  4. Inappropriate separation of legislative packages. 4
  5. No statement relating tranche measures to objective(s) for superannuation. 4
  6. Why have annual non-concessional contribution limits?. 5
  7. If annual contribution limits continue, why lower them?. 7
  8. A significant contribution to growing complexity. 8
  9. Retrospectivity and effective retrospectivity in the new measures. 8
  10. If lowering annual contribution caps, grandfather for those close to retirement 10
  11. A better path forward. 13

Declaration of interests:

Terrence O’Brien is a retired public servant receiving a super pension from a defined benefit, ‘untaxed’ fund. He would be adversely affected by some of the measures in the second tranche.

Jack Hammond QC is in the process of retiring from his barrister’s practice. He would be adversely affected by some of the measures in the second tranche.

2.    Summary

There are much better ways than the three tranches of measures released so far to improve the lifetime welfare and savings of lower income earners, improve retirement living standards, and improve budget outcomes. The Government should go back to the drawing board on its Budget measures.

If the proposed legislation is passed by the House of Representatives, the Senate should subject it to careful scrutiny. It should refer the whole of the Government’s proposed superannuation package to a Senate Committee. The Senate Committee should invite and consider public submissions and objections. The Government’s and Treasury’s assumptions which underpin the changes should be open to public challenge.

On any view, the recently released details of the measures deserve far more detailed scrutiny than has been possible to date in the unreasonably short time made available for consultation.  Moreover, the fragmentation of the measures into tranches of drafting has prevented any integrated overview of how the measures fit together.

The third tranche Bill proposes reducing the annual concessional (ie before tax) contribution limit by 17% to $25,000 (or by 29% for those over age 50), and the annual non-concessional (ie after tax) contribution limit by 44% to $100,000.

The existing annual contribution limits were created to limit the accumulation of large super balances and have largely achieved that purpose. The number of current large super balances is small as a proportion of total super account balances: 0.5% have over $2.5 million, with most of these balances lawfully accumulated before the implementation of existing law. Those bygones are bygones, and are not a reason for further tightening restrictions on future contribution limits.

If the Government proceeds with its proposed $1.6 million general transfer balance cap (criticised in our submission on tranche two measures), that cap would make the annual non-concessional contribution cap redundant and it could be removed. Instead, the proposed reductions in contribution caps increase the obstacles to current workers ever reaching the Government’s $1.6 million cap (or any other target of their choosing), and reduce welfare by restricting savers’ flexibility to accumulate super savings as their circumstances permit.

For example, for a worker in mid-career with about $340,000 in super (the ‘sweet spot’ that maximizes the combined retirement income from a super pension and a part age pension), the proposed reduction in the non-concessional contribution limits increases the time taken to save up to the super balance cap of $1.6 million by almost 90%, to 13 years, compared to 7 years under the existing contributions cap.[i]

Consider also the living standards offered by a super balance of $1.6 million held by one person of a couple retiring today at age 65. They can expect an indexed annual retirement income of some $72,700 (from age 65 supplemented with part pension from age 82 until death or age 100, assuming an optimistic 5% nominal return net of fees and 3% inflation).[ii] This is about 90% of average weekly earnings. To retire on 90% AWE hardly seems an indecent aspiration, especially if it motivates those who are hard-working, affluent enough and thrifty enough to save hard and forgo easier options to rely on a part age pension.

To combine the general transfer balance cap with lowered annual contribution caps clearly doubles the strength of the message to savers seeking to meet their own preferred standards of retirement income. That message is: “Don’t bother”. The Government has for the first time directly prescribed what it considers a super balance sufficient for retirement ($1.6 million), and has tightened contribution restrictions to hinder reaching even that benchmark.

If alternatively, the Government did not continue with its proposed general transfer balance cap, some case for annual contribution caps would remain. If in that case the Government still wanted to lower them, it should grandfather the reductions for those close to retirement who have planned on the basis of the existing caps and have insufficient time to utilise alternative strategies. The principles for such grandfathering were established by the Asprey inquiry and have been used successfully for forty years. Continuing to utilize them would help contain the damage to trust in super and in super law-making processes.

3.     Inadequate time for public comment

Many of the issues in this third tranche of material have already arisen in first and second tranches, so comments on those issues are abbreviated in this submission.   Paragraph references below are to the Exposure Draft Explanatory Materials for tranche three unless otherwise noted.

Providing only 5 working days for public input on the third tranche of complex super measures shows contempt for public consultation. These are measures that deal with Australians’ life savings, and the realisation of their plans for independent retirement. The measures extensively revise the most complicated aspects of the income tax law affecting individuals, and inject considerable new complexity.

See earlier submissions for comparisons to better consultation processes used in the past.

4.    Inappropriate separation of legislative packages

The compartmentalization across three tranches of draft material for comment has compounded the inadequacies of consultation and has made it difficult to identify connections and interactions among concepts. This submission seeks to touch briefly on some of those cross-cutting issues in the limits of the time available. But the compartmentalized and rushed consultation greatly increases the risk of unintended consequences and the likely need for future unsettling legislative change to repair errors.

5.    No statement relating tranche measures to objective(s) for superannuation

Like the two previous tranches, the third tranche draft bill lacks any statement of rationale against the Government’s stated primary objective (“.. . to provide income in retirement that substitute or supplements the age pension”[iii] ) plus five subordinate objectives.

Our earlier submissions have argued that the Superannuation (Objective) Bill’s proposed objectives for Government policies toward superannuation are unworkable and inappropriate. Yet that proposition can be tested by applying the objectives to the current draft Bill in a statement such as will be mandatory from 1 July 2017.

We are now told that “The final Explanatory Memorandum that will accompany the Bill will provide the overarching policy context.”[iv]  The lack to date of any stated policy context, four months after the announcement of the measures (and their reversal of the Government’s pre-Budget super policy positions) makes considered consultation needlessly difficult. Indeed, the whole process is like starting a construction at the top floors, and finishing up with the foundations.

The documentation asserts (para 3.3) that “The measure will improve the sustainability and integrity of the superannuation system.” No evidence is offered for either of those claims, and as our submission on tranche two measures argues, there is no sense in speaking of ‘sustainability’ in the structure of the super tax concessions: as super balances grow, the Governments tax take from contributions and accumulation grows, and the considered, well-researched and well-costed strategic decision of 2005-06 not to collect tax on most retirement income streams remains unchanged. The focus of taxation of growing commitments to life-long savings in superannuation on the contribution and accumulation phases is no more ‘unsustainable’ than the identical focus of taxation on growing sums in savings accounts, which are also untaxed in their drawdown phase.

6.    Why have annual non-concessional contribution limits?

Concessional and non-concessional contribution limits were introduced to limit the accumulation of large super balances, and seem to be largely succeeding in that objective.

The explanatory material rationalises this objective oddly: “To ensure superannuation is being used for its primary purpose of saving for retirement, and not for tax minimisation, there are limits on the amount of non-concessional contributions individuals can make.” (para 3.4)

As noted in our earlier submissions, special tax treatment of super since 1915 is not a gift to super funds or savers: it exists to remove the significant disincentive to long term saving from the interaction of a progressive tax on nominal income with the provision of a generous age pension. It makes no sense to accuse citizens who lawfully follow incentives to save in super of ‘tax minimisation’ beyond some arbitrary (but apparently ever-evolving) point. In April 2016, the current contribution limits were apparently appropriately scaled to defend thrift against discouragement by income tax and the age pension. In May 2016, citizens lawfully fully utilizing those legislated limits were apparently guilty of ‘tax minimisation’. What changed?

All saving in super is in one sense ‘tax minimisation’ – that is how the incentives achieve their intended effect. Branding savers who follow lawful incentives ‘tax minimisers’ in an attempt to rationalize an otherwise unexplained tax increase does not seem a helpful guide to policy development, but rather adds to the destruction of trust in super. It reminds all super savers that today’s lawful thrift transparently encouraged by government incentives enacted through Parliament is open to excoriation as tomorrow’s ‘tax minimisation’.

While anecdotes of very large super balances still circulate, there are relatively few such balances and most of the current high balances were accumulated under previous rules (or in the absence of rules). A 2015 report by Ross Clare for the Association of Superannuation Funds of Australia suggested that there is a small proportion (around 0.5 per cent) of super savers who have very high account superannuation balances (above $2.5 million). Most large balances existing today owe their existence to former incentives that, in times past, were unbounded or much less restricted than at present.[v]

In super taxation policy, the homely adage that ‘bygones are bygones’ is particularly important. Superannuation has a uniquely long lifespan, with current retirees living off savings which began to be lawfully accumulated as long ago as the middle of the last century. Policy design for super tomorrow requires the comparison of future marginal costs and future marginal benefits of alternatives open to choice today.

It is a significant misdirection to tomorrow’s super policy to point to relatively few large super balances built on decades of savings under the less restrictive laws of the past as justification for additional restriction in future laws, when current laws already heavily restrict any future accumulation of high balances.

If the Government proceeds with the proposed $1.6 m general transfer balance account cap, it is not clear why any non-concessional contribution limits would be necessary going forward; their role today would in future be taken by the cap. These comments focus, as does the draft Bill, on the non-concessional contribution cap which bear the brunt of the Government’s new restrictions, being cut by 2 ½ times the percentage cut in concessional contribution cap. This is notwithstanding the fact that against the pre-paid consumption tax which is the most defensible benchmark for neutral treatment of long term savings, non-concessional contributions are (as their name rightly suggests) no concession at all. Indeed, against that benchmark, users of a non-concessional contribution, having paid tax at their top marginal tax on their contribution, are still over-taxed by the 15% tax on subsequent earnings within the fund.[vi]

Continuing with any annual non-concessional contribution limits merely restricts the flexibility with which individuals can adapt to their personal circumstances and maximise their super savings when they are able to, up to the limit of the cap.  For example, a small business owner may envisage retiring and rolling the proceeds from selling their business into a super fund. Or another individual may receive a bequest. To reduce the rate at which they can save towards the cap would seem to serve no revenue purpose, but would reduce their welfare and potentially the total that could be saved in super. Alternative tax-efficient forms of long-term saving such as negatively-geared real estate or the principal residence would likely produce a less productive allocation of scarce capital from an economy-wide perspective.

If, nevertheless, the Government were to seek revenue from past balances lawfully saved by taxing them more heavily, there should be a very clear understanding of the effective retrospectivity of that course, with all of the costs to trust in super, legitimacy and future savings. Such retrospective measures should not be misrepresented as responding to a prospective problem.

7.    If annual contribution limits continue, why lower them?

The measures propose a 44 % cut in the annual non-concessional contribution cap, and a 17% cut in the concessional contribution cap (or by 29% for those over age 50). Yet the explanatory materials claim:

By reducing the non‑concessional annual caps and restricting their use to those with balances less than the transfer balance cap, this measure will better target the tax concessions to encourage those who have aspirations to build their superannuation balance up to the limit of the transfer balance cap while retaining the flexibility to accommodate lump sum contributions from one-off events such as receiving an inheritance or selling a large asset. (para 3.4)

Contrary to this unsubstantiated claim, lowering the contributions limits sends the opposite message — discouragement — compared to simply leaving the existing limits in place. Consider the case of a super saver in Tony Negline’s ‘sweet spot’: about $340,000 in super, the amount that maximizes the combined retirement income from a super pension and a part age pension.[vii] To move from that super balance to $1.6 million by non-concessional contributions would take almost 90% longer, 13 years after the proposed cut, compared to 7 year under the existing cap.

That is a powerful message:  not only is the Government for the first time prescribing a maximum to the most tax-assisted saving limit to force reallocation of lawful savings by those who have already saved a lot; it is simultaneously prescribing lowered limits in annual saving rates for those in their late-career savings phase that will prevent many not already at the cap from ever reaching it.

The combined message from tranche two and tranche three measures is that the optimum saving strategy is $340k or so in super, a part age pension, a valuable house and many other options to keep savings outside the pension asset test.

The upshot of this and the other two tranches’ measures is likely to be to increase total Government retirement income costs over time, while crimping the rise in Australians’ retirement living standards – failures of policy that apparently have not been detected within the government’s asserted analytical framework of one principal objective plus five subordinate objectives for super policy.

As SMSF adviser Daryl Dixon has noted:

There’s about 2000 people with a hell of a lot of money in super. Right?

There are at least 20 to 30 thousand with a lot of money in an owner–occupied house worth 5 to 10 million or more, and there’s no capital gains and there’s no tax on the profits of the house.[viii]

8.    A significant contribution to growing complexity

By far the greatest source of complexity in the superannuation measures is the introduction of the new structure of ‘transfer balance accounts’, ‘general transfer balance caps’, ‘personal transfer balance caps’ and ‘excess transfer balance’ taxes, as detailed in our submission on the second tranche measures.

While the concepts of concessional and non-concessional contribution limits are at least familiar to savers from the present law, lowering them as proposed adds to complexity through the need to plot their interaction with the new transfer balance cap apparatus. The Explanatory Materials take some 9 pages to explain the interaction of the contribution limits with the transfer cap (pages 9 to 18).

9.    Retrospectivity and effective retrospectivity in the new measures

Under present law, an individual can make $540,000 of non-concessional contributions by bringing forward 3 years’ of the current non-concessional contribution cap of $180,000. Various media commentary has advised super savers to make use of this provision before new laws take effect (if passed by Parliament) on 1 July 2017.[ix]

However it seems from the ‘transitional provisions’ of the Bill discussed at paras 3.57 to 3.66 of the draft explanatory materials that the new Bill, if passed by Parliament, would retrospectively (in the narrowest sense of the term) penalize that bring-forward, by allowing a $180,000 contribution for 2016-17, but allowing only a reduced $100,000 for each of 2017-18 and 2018-19 (assuming no indexation by the CPI of the contribution caps by 2018-19).

Precisely how the saver will be retrospectively penalized after 1 July 2017 for a lawful bring forward of non-concessional contributions made before 1 July 2017 is not clear in the time made available for consultation and with the draft explanatory material. Para 3.44 flags another area where treatment of defined benefit schemes has not yet been resolved by advisers. However, paras 3.41 to 3.43, and new material governing how the Commissioner for Taxation must (or may) respond to ‘excess’ contributions through the issue of release authorities (13 pages of material from para 10.1 to 10.68) contain illustrations of the assessment of penalty taxes under Division 293. Once again, the extraction of penalties in such a situation is a retrospective change of law in the narrowest sense.

Beyond this issue of narrow retrospectivity, there is the broader issue of ‘effective retrospectivity’ as defined by Treasurer Morrison in his address of 18 February 2016.[x] A generation of savers (those aged around 40 to 60) now enjoying peak career earnings and planning lifetime peak contributions to their super balances in the lead up to retirement would have their savings plans destroyed by the radical cuts to contribution caps (and especially the 44% cut to non-concessional contributions caps).

Many of those late career savers are too close to retirement to be able to devise alternative strategies for self-funded retirement, and will likely choose a path of more reliance on a part age pension and the construction of wealth in avenues not penalized by the age pension means test. To limit the destruction in trust in super among that savings group, the Government should grandfather its measures along the principles outlined by Justice Asprey and used over the last 40 years in other tax increases on superannuation. Application of those principles is further references below.

10. If lowering annual contribution caps, grandfather for those close to retirement

The challenges of facilitating gradual increases in super taxes while not destroying confidence in super were addressed most thoughtfully by the late Justice Kenneth Asprey, who was commissioned by the outgoing McMahon Government to report on the Australian taxation system. Asprey made his Committee’s final report to the Whitlam Government. His recommendations at first had little apparent effect, but it they drove all the major advances in Australian tax reform over the following quarter century:

The capital gains tax, the fringe benefits tax, dividend imputation, the foreign tax credit system, the goods and services tax (he called it a “broad-based value-added tax”) — all were proposed in the Asprey report.[xi]

The Asprey insights into the need to grandfather super tax increases, and his principles for how to do that while preserving necessary policy flexibility to respond to changing circumstances, are summarised in the following Box.

More recently, the Gillard Government’s Superannuation Charter Group led by Jeremy Cooper addressed concerns about the future of the super savings and the way policy changes have been made.[xii] The Charter Group reported to the second Rudd Government in July 2013 with useful proposals in the nature of a ‘superannuation constitution’ that would codify the nature of the compact between governments and savers, including:

  • People should have sufficient confidence in the regulatory settings and their evolution to trust their savings to superannuation, including making voluntary contributions.
  • Relevant considerations, when assessing policy against the principle of certainty, include the ability for people to plan for retirement and adjust to superannuation policy changes with confidence.
  • “People should have sufficient time to alter their arrangements in response to proposed policy changes. This issue becomes more acute for those nearing or in retirement, who have fewer options and less time available to them (for example, to increase contributions or remain in the workforce longer).” [xiii] (emphahsis added)

Box: Grandfathering principles: Asprey Taxation Review, Chapter 21, 1975

Principle 1    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. ………

Principle 2    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. …..

Principle 3    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.   …..

Principle 4    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.

Principle 5    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 ….

These Charter Group suggestions would also appear to support the use of grandfathering in the case of the Government’s proposed restriction on non-concessional contributions.

Since at least 1994, concessional contributions caps have specifically recognized that capacity to save rose later in workers’ careers, so caps for those over 50 were substantially higher than for those under 35.[xiv] For an over-50 in 1994, the annual concessional contribution limit was $62,200, and had been indexed to over $105,000 by the time of its abolition under the Costello simplification reforms of 2006. These earlier high caps of course help explain why some very high super balances still exist today.

Treasurer Swan’s 2009-10 Budget lowered the annual concessional contributions cap from $50,000 to $25,000 for those under 50. But for those aged 50 and over for the 2009-10, 2010-11 and 2011-12 financial years, the cap was lowered from $100,000 to $50,000 per annum.

The 2009-2010 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. [xv]

Similarly, regulatory changes that affected savers’ planning for retirement late in their working careers were phased in to spare those closest to retirement and to give advance notice to those further from retirement to make adjustments to their financial affairs. An example was the 1997-1998 Budget confirmation of phased increases in the preservation age from 55 to 60 by 2025..[xvi]

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.[xvii]

Further details showing how grandfathering adverse changes to superannuation and related retirement income parameters has been used over the last 40 years are contained in Terrence O’Brien’s paper for the Centre for Independent Studies, Grandfathering super tax increases.[xviii]

11. A better path forward

There are much better ways than the three tranches of measures released so far to improve the lifetime welfare and savings of lower income earners, such as illustrated in papers for the CIS by Simon Cowan and Michael Potter[xix]. A sensible selection from and development of those ideas would improve self-sufficiency and thrift, improve superannuation outcomes, improve retirement living standards, and improve budget outcomes. The Government should go back to the drawing board on its Budget measures.

If the proposed legislation is passed by the House of Representatives, the Senate should subject it to careful scrutiny. It should refer the whole of the Government’s proposed superannuation package to a Senate Committee. The Senate Committee should invite and consider public submissions and objections. The Government’s and Treasury’s assumptions which underpin the changes should be open to public challenge.

On any view, the recently released details of the measures deserve far more detailed scrutiny than has been possible to date in the unreasonably short time made available for consultation.  Moreover, the fragmentation of the measures into tranches of drafting has prevented any integrated overview of how the measures fit together.

[i] Tony Negline, Saving or slaving: find the sweet spot for super, The Australian, 4 October 2016.

[ii] Trish Power, Crunching the numbers: a $1.6 million retirement, SuperGuide, 23 May 2016.

[iii] Scott Morrison and Kelly O’Dwyer, Superannuation reforms: first tranche of Exposure Drafts , 7 September 2016

[iv] The Treasury, Superannuation reform package – tranche three, online Consultation Hub, accessed 21 October 2016.

[v] Ross Clare, Superannuation and high account balances, Association of Superannuation Funds of Australia, April 2015.

[vi] Ken Henry et al, Australia’s Future Tax System: Report to the Treasurer, Part Two; Detailed analysis, Volume 1, Box A2-1p 97

[vii] Tony Negline, Saving or slaving: find the sweet spot for super, The Australian, 4 October 2016.

[viii] Daryl Dixon and Nerida Cole on Nightlife with Tony Delroy, ABC, 12 July 2016.

Election over: now they want to take more of your Super and Labor may allow it

[ix] See, for one example, Will Hamillton of Hamilton Wealth Management, Six most common questions on superannuation, The Australian, 1 October 2016.

[x] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016

[xi] Ross Gittins, A light on the hill for our future tax reformers, The Age 15 June 2009.

[xii] Jeremy Cooper, A Super Charter: Fewer Changes, Better Outcomes: A report to the Treasurer and Minister Assisting for Financial Services and Superannuation, Canberra, 5 July 2013.

[xiii] ibid, p 47

[xiv] AMP, Submission on Concessional Contributions Caps for Individuals Aged 50 and Over, March 2011.

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

[xvi] Trish Power, Accessing super: Preservation age now 56 years (since July 2015),

MLC Super Guide, 5 July 2015.

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

[xviii] Terrence O’Brien, Grandfathering super tax increases, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp3-12.

[xix] Michael Potter, Don’t increase the super guarantee, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp27-36,

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