26 November 2016
Terry McCrann Business Columnist Melbourne
The great irony — and, presumably, greatest unintended consequence — of the government’s move to reduce the tax benefits of superannuation for higher-income and wealthy people, is to guarantee that over the longer term, precisely only those people will use super to fund their own and their children’s and indeed grandchildren’s retirement.
Everyone else will take the tax benefits from super over their working lives to build a nest egg, but in retirement they will reduce their superannuation balances to get partial or full access to the Age Pension.
Because, quite simply, it will be the rational thing for the wealthy and the less wealthy alike to do.
Truly, a government led by a man who sees himself as the very embodiment of the 21st century will have succeeded in not simply wasting tens of billions of dollars of taxpayer money every year, forever — or until the next change in the supposedly now “set in concrete” rules for super — but also in taking Australia back to a 1950s future when super was limited to a privileged white-collar elite.
This irresistible outcome turns on the government’s hard cap of $1.6 million (indexed for inflation) for an individual super balance, and the way it intersects with the two major other tax-advantaged investments, the family home and negatively geared investment property (and indeed, negatively geared investments generally), and the welfare system.
First off, it becomes almost impossible for anyone in future to actually reach that $1.6m through pre-tax contributions (whether mandatory, related to salary and wage income, or voluntary) under the new annual limit of $25,000. Of which, of course, only between $17,500 and $21,250 would make it into super after contributions tax, depending on your income, and apart from very low-income earners who would never trouble the limit anyway.
It gets worse when you add the reality that most people don’t — and never will — start contributing anything close to the maximum early in their working lives. How many people kick off their working lives earning the $277,000 required to get a $25,000 employer contribution?
Add the 21st century reality of fragmented and interrupted lifetime working patterns and that $1.6m cap becomes an entirely hypothetical fantasy for almost everyone. But that’s so far as pre-tax contributions are concerned.
The way you top up your super balance today and the way you would even more need to top up the balance in the future is through big after-tax contributions approaching retirement.
The most obvious way is to sell the family home and put — under the rules now abolished — up to $540,000 per person, $1.08m per couple — into super. It is this which the government has now quite precisely targeted to stop, by reducing the maximum to $300,000/$600,000.
The initial budgetary proposal to have a lifetime limit for after-tax contributions rather than an annual maximum made more sense; the problem was that the $500,000 chosen was just too low.
It is also why the government’s decision to allow one last go at putting in up to $540,000/$1.08m is so egregiously stupid and favours the wealthy. I’ll come to that in a moment.
First, we need to consider the impact of the $1.6m hard cap, which actually isn’t.
You will be allowed to go above the $1.6m (remember, indexed) if over your life you can get there through pre-tax contributions and the earnings they generate. What you won’t be allowed to do is go above it by putting in after-tax contributions.
So if you were at, say, $1.5m approaching retirement, you could not put in the up to $300,000 in after-tax contributions when you sold your family home, only $100,000. So a rational person wouldn’t sell that capital tax-free asset. But there’s nothing to stop you front end loading your after-tax contributions and then letting after-tax contributions take you through and well above the $1.6m.
To take an extreme example: start at the age of 20 putting in the $100,000 after-tax a year, every year. Indeed, there’s nothing to stop you starting at the age of one and getting to the $1.6m supposed limit while still at school.
So the future trick will be to get to the $1.6m hard cap at an age somewhere in your 30s or in your mid-teens; then you let after-tax contributions of $25,000 a year and the earnings on the total take you as high as it can.
Such a person could easily get to $4m by retirement. Yes, at that point only the earnings on the $1.6m (indexed) would be tax-free. But earnings on the other few million would be taxed only at 15 per cent. Better than being taxed at 47 per cent (or who knows what) in your hands as personal income.
Now I wonder who on earth could start putting in $100,000 a year, every year, from the age of, say, 20; or even more, from the age of one?
I’ve got a sneaking suspicion it would be someone who has wealthy parents. Or indeed wealthy grandparents.
Treasurer Scott Morrison said it was outrageous for super to be used as an exercise in estate planning. What’s he’s done is to make it an even more exclusive version of estate planning: for those who can transfer $100,000 per child — or grandchild, or indeed, in their generosity, members of their wider family — every year. Rather than leave bequests in their will.
This also applies to those who can take advantage of the last chance to pump in up to $540,000 before July 1. I know of at least one person who has done it for each of his children.
So in short, only rich people will be able to build balances significantly greater than $1.6m under Morrison’s new super system. Everyone else will struggle to get to that figure; and having failed to get there, it would make sense to adjust their balance down to ensure they got some access to the pension and, if it’s still around, the critically important health card.
They would have pocketed all the tax benefits along the way, which were designed to be repaid by having them off the pension in retirement, and yet gone straight on to the pension.
Further, Morrison has specifically ruled out the option of people cashing in the $1m or $2m modest family homes — and who knows what that figure will be in 2030 and 2040 — and putting that money into super to stay off the pension.
The bottom line is to create whole new genres of estate planning for rich and everyone else alike. Wealthy people will do it in part through their children’s super, verily down to how many generations are extant, while not only reaping the tax benefits along the way but maximising them in their and their children’s retirement.
Everyone else will do it either through the family home or even more than now negatively geared property and other investments, while also taking the tax benefits on offer with super along the way. And then in retirement, take the super money and spend or bequest it or whatever, to also get the pension.
It really is hard to think of a more asinine policy initiative in recent decades. It completely undermines the super system to generate minimal sustained savings, while supercharging investment in tax-advantaged family homes and negatively geared assets.
There’s one final point: I would suggest with absolute certainty that Treasury wouldn’t have a clue how seriously this will impact negatively, on both sides of future budgets.