Tag: certainty

Institute of Public Affairs’ submission to Treasury – lodged 16 September 2016

From the desk of Brett Hogan, Director of Researchipalogo

16th September 2016

Manager
Superannuation Tax Reform
Retirement Income Policy Division
The Treasury
Langton Crescent
PARKES ACT 2600

SUBMISSION ON EXPOSURE DRAFT OF SUPERANNUATION LEGISLATION

Dear Sir / Madam.
On behalf of the Institute of Public Affairs, please find enclosed this submission on the
Exposure Draft of the Australian Government’s:

  • Superannuation (Objective) Bill 2016;
  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016; and
  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016.

Given the limited time available for consultation, this submission will take the form of a letter
and concentrate on the proposed new objective of the superannuation system.

1. Introduction and Budgetary Context
Superannuation lies at the heart of important national policy questions about taxes, spending,
personal responsibility and the role of government.

Almost a quarter of a century after the introduction of compulsory superannuation, four out
of five Australians do not have enough savings to fully fund their retirement.

Yet rather than identify new ways to encourage all Australians to put more money into their
retirement accounts, the bipartisan approach of national policy makers is to treat the $2
trillion worth of private superannuation funds as just another source of taxation revenue.

The Institute of Public Affairs considers that for all the talk of ‘fairness’ and desire to rein in
so-called ‘tax concessions,’ it is out-of-control government spending and the desire to
increase taxation revenue that is driving these changes.

Australian Government spending has increased 1 from $271 billion per year in 2007-08 or
23.1% of Gross Domestic Product (GDP), to $445 billion in 2016-17 or 25.8% of GDP.

1 Australian Government, Budget Paper No.1:Budget Strategy and Outlook 2016-17, p 10-5

In 2019-20, spending is expected to pass $500 billion for the first time. So while it took 107
years for federal government spending to reach $271 billion it will take only another twelve
years to reach $500 billion and according to trend a total of only fourteen years to double it to
$542 billion.

Additionally, sometime shortly after 30 June 2017, Australian Government Gross Debt is
expected to pass $500 billion for the first time. Gross debt on 30 June 2007 was only $53.2
billion. 2

The Government should not seek to resolve these imbalances by raising taxes to ‘chase
spending,’ as former Treasurer Peter Costello was recently quoted as saying. 3

2. Recent Proposed Changes
On Budget Night, 3 May 2016, the Australian Government announced a swathe of new
changes to the taxation and regulatory treatment of superannuation, designed to raise $2.9
billion net over four years.

While most of these changes are not the subject of this consultation, the Institute of Public
Affairs would like to formally put on the public record its opposition to:

  • reducing the threshold for the 30% contributions tax from $300,000 per year to
    $250,000 per year;
  • reducing the pre-tax contributions limits from $30,000 and $35,000 to $25,000 per
    year;
  • limiting the amount of money that can be transferred into a retirement account to $1.6
    million; and
  • introducing a new $500,000 lifetime post-tax contributions limit backdated to 2007
    (subsequently replaced on 15 September 2016 with a $100,000 per year limit).

Restrictions on the amount of money that can be transferred into, or remain within, retirement
accounts, undermine the ability of the system to provide comfortable retirement incomes.

3. Primary Objective of Superannuation
In his Budget Speech on 3 May, the Treasurer said that “becoming financially independent in
retirement, free of welfare support, is one of life’s great challenges and achievements.” 4

The Institute of Public Affairs wholeheartedly agrees.

However, notwithstanding this philosophically sound statement, the Treasurer that evening
issued a joint Media Release with then Assistant Treasurer Kelly O’Dwyer to announce that

2 Ibid. p 10-13 3 The Australian, “Peter Costello’s Blast: Liberal Party Lacks Clear Vision,” 10 September 2016,
http://www.theaustralian.com.au/news/nation/peter-costellos-blast-liberal-party-lacks-clear-vision/newsstory/3e8974f875d3f85873eb2fb8d73a5c5d, Viewed 16 September 2016
4 Hon. Scott Morrison MP, 2016 Budget Speech, http://www.budget.gov.au/2016-17/content/speech/html/speech.htm,
Viewed 16 September 2016

the Government would “enshrine in law that the objective for superannuation is to provide
income in retirement to substitute or supplement the Age Pension.” 5

Tellingly, this Release also noted that the proposed objective “has been an important anchor
for the development of the superannuation changes included in the Budget.”

According to sections 4 and 5 of the Exposure Draft 6 of the Superannuation (Objective) Bill
2016, in fact the Government is proposing that this is now to be the ‘primary objective’ of the
superannuation system.

Section 6 states that any subsequent legislation relating to superannuation that is introduced
to Parliament must include “an assessment of whether the Bill is compatible with the primary
objective of the superannuation system.”

Contained within the Exposure Draft Explanatory Materials 7 for the two Draft Bills is a set
of five proposed so-called ‘subsidiary objectives,’ which are worth highlighting:

  • facilitate consumption smoothing over the course of an individual’s life;
  • manage risks in retirement;
  • be invested in the best interests of superannuation fund members;
  • alleviate fiscal pressures on government from the retirement system; and
  • be simple, efficient and provide safeguards.

While the Government appears to have adopted the primary and subsidiary objectives from
the Final Report of the 2014 Financial System Inquiry (FSI),8 it is noteworthy that the FSI
actually made six subsidiary objective recommendations, with the Government choosing to
leave out that the system:

  • be fully funded from savings.

In referring to this objective in its Final Report, the FSI said that:

“A fully funded system, as opposed to an unfunded system, is important for sustainability and
stability. The system is designed to be predominantly funded by savings from working life
income and investment earnings, where superannuation fund members in general have claims
on all assets in the fund.”

Concepts such as facilitating consumption smoothing, investing in the best interests of
members and managing risks in retirement, let alone that the system be fully funded from
savings, actually make a lot more sense than the proposed primary objective ‘to substitute or
supplement the Age Pension.’

5 Hon. Scott Morrison MP & Hon. Kelly O’Dwyer MP Joint Media Release, “A More Sustainable Superannuation System,”
3 May 2016, http://sjm.ministers.treasury.gov.au/media-release/053-2016/, Viewed 16 September 2016
6 Superannuation (Objective) Bill 2016 Exposure Draft, https://consult.treasury.gov.au/retirement-income-policydivision/superannuation-reform-package/supporting_documents/Exposure_Draft_Superannuation_Objective_Bill.pdf,
Viewed 16 September 2016
7 Exposure Draft Explanatory Materials, https://consult.treasury.gov.au/retirement-income-policy-division/superannuationreform-package/supporting_documents/Exposure_draft_Explanatory_Memorandum_Superannuation_Tranche_1.pdf, Viewed 16 September 2016
8 Commonwealth of Australia, Financial System Inquiry Final Report, November 2014,
http://fsi.gov.au/files/2014/12/FSI_Final_Report_Consolidated20141210.pdf, Viewed 16 September 2016

Yet it is the proposed primary objective that will be reference point for the superannuation
system, and against which all subsequent proposals for change will be judged.

It is of the gravest concern that maximising personal income in retirement is not deemed to be
the primary, or even a subsidiary, objective of the system.

The OECD has found 9 that the net pension replacement rate for average income earners in
Australia is only 58 per cent (53.4 per cent for women) when the generally accepted benchmark is 70 or 80 per cent.

Australia’s 2014 National Commission of Audit reported that 10 the proportion of retirees on
a full or part pension was expected to remain at around 80 per cent over the next three
decades.

According to the Government’s own Budget Papers, 11 the cost of ‘Income Support for
Seniors’ was $43.2 billion in 2015-16 and is projected to reach $51.8 billion just four years
later.

Superannuation initiatives that are implemented under the auspices of the proposed primary
objective are unlikely to help middle-income earners to significantly boost their income in
retirement or to allow large numbers of Australians to move off the full or part Age Pension.

Instead of proposing that the goal of the superannuation system is merely to take the place of
or top up the Age Pension, the aim should be to maximise the retirement incomes of all
Australians, and reduce dependence on welfare payments.

To this end, the Institute of Public Affairs would like to offer an alternative Primary
Objective for the superannuation system:

“The objective of the superannuation system is to ensure that as many Australians as
possible take personal responsibility for funding their own retirement. The Age Pension
provides a safety net for those who are unable to provide for themselves in retirement.”

The Institute of Public Affairs is happy to support the adoption of all six of the FSI’s
subsidiary objectives, if the primary objective is so amended.

Given that a bad objective is worse than no objective at all, the second-best option would be
to make no change.

9 Organisation for Economic Co-operation and Development, Pensions at a Glance 2015, http://www.oecd.org/publications/oecd-pensions-at-a-glance-19991363.htm, Viewed 16 September 2016
10 Australian Government, National Commission of Audit 2014, Chapter 7.1: Age Pension, http://www.ncoa.gov.au/report/phase-one/part-b/7-1-age-pension.html, Viewed 16 September 2016
11 Australian Government, Budget Paper No.1:Budget Strategy and Outlook 2016-17, p 5-26

4. Timing of this Consultation
It is disappointing that the Government has allowed only nine days between the release of the
draft legislation (Wednesday 7 September) and the close of submissions (Friday 16
September).

We note that the formal consultation period on proposed changes to the Working Holiday
Maker Visa Scheme (also known as the Backpacker Tax) ran from mid-August to mid-
September, which would have assisted that review to receive over 1,700 submissions. 12

Considering the important retirement incomes, taxation, welfare and social policy issues that
are involved here, a longer period would have resulted in additional, and more detailed,
responses.

5. Segregating Consultation on the Objectives from Substantive Proposals
We also question segregating public consultation on the proposed new superannuation system
objective from the arguably more contentious tax increases and contributions limits.

While we understand that the discussions that had been taking place within the Liberal and
National Parties may have delayed formal public consultation on the substantive proposals,
given that the whole package was developed and initially announced at the same time, the
Government should have delayed consultation on the objective as well.

6. Future Changes
If the objective of the nation’s superannuation system is merely to provide income in
retirement to substitute or supplement the Age Pension, then the taxation and regulatory
proposals announced in the 2016 Budget and amended on 15 September are only the beginning.

Once the principle has been established that superannuation taxes can be increased to pay for
government spending, that all major parties have voted for it, and that it doesn’t even
contradict the objectives of the system, then there will be no stopping future governments.

Kind regards,
Brett Hogan
Director of Research

12 Australian Government, Department of Agriculture and Water Resources website, “Working Holiday Maker Visa Review,” http://www.agriculture.gov.au/ag-farm-food/working-holiday-maker-review/submissions, Viewed 16 September 2016

Sunday, October 9, 2016

Email to all Coalition Senators and MHRs from Terrence O’Brien – dated 19 September 2016

Dear Prime Minister, Treasurer, Ministers, Government Senators and Government MHRs

I wrote today to Messrs Gee and Buchholz in their roles as leaders of the Coalition Backbench Committee on Economics and Finance to convey  a copy of my submission of 16 September to Treasury on the first tranche of Government superannuation measures.

You will see I am critical of the process of consultation, the apparent separation of the new super tax expenditure measures from the tax increases on super, the Government’s proposed objective for its superannuation policy, and the content of some of the new expenditure measures.

My criticisms draw on the four articles by the Centre for Independent Studies which I forwarded with my earlier correspondence with you.

Yours sincerely

Terrence O’Brien

(Address and contact number supplied)

Sunday, October 9, 2016

Email to Andrew Gee, MP and Scott Bucholz, MP from Terrence O’Brien – dated 19 September 2016

Mr Andrew Gee, M.P., Chairman
Mr Scott Buchholz, M.P., Secretary

Coalition Backbench Committee on Economics and Finance 
Parliament House, Canberra, ACT

Dear Sirs

Further to my e-mail of 8 September to you in your capacities as leaders of the Coalition Backbench Committee on Economics and Finance, I attach a copy of my submission of 16 September to Treasury on the first tranche of Government measures.

You will see I am critical of the process of consultation, the apparent separation of the new tax expenditure measures from the tax increases on superannuation, the Government’s proposed objective for its superannuation policy, and the content of some of the new expenditure measures.

My criticisms draw on the four articles by the Centre for Independent Studies which I drew on in my earlier correspondence with you.

Kind regards

Terrence O’Brien

(Address and contact number supplied)

Sunday, October 9, 2016

Terrence O’Brien’s submission to Treasury – lodged 16 September 2016

16 September 2016

SUBMISSION ON FIRST TRANCHE OF SUPERANNUATION EXPOSURE DRAFTS – Terrence O’Brien, (Address and contact number supplied)

1.     Inadequate time for public comment

Providing only 7 working days for public input on the first tranche of complex super measures shows contempt for public consultation.[i]

An interested citizen may wonder: what is the reason for such a rushed consultation process for the subset of new super measures that are revenue ‘give-aways’, when all the closely related Bills to raise taxes on self-funded retirees and reduce the super savings opportunities of those nearing retirement are still weeks, if not months away?

To illustrate how far Australian super lawmaking  processes have degenerated to the cost of confidence in super, contrast the current exercise with the planning for and consultation around the last major change of strategic direction in Australian super law, the Costello Super Simplification exercise of 2006 and 2007.[ii]  A substantial discussion paper was issued with  the May 2006 Budget announcement of the measures, with an extended consultation over four months until September 2006.[iii] There was keen interest to comment: more than 1,500 written submissions and more than 3,500 phone calls from across the community. Modest revisions to the original ideas were incorporated into revised costing for the forward estimates period and incorporated into legislation introduced by end 2006, with effect from 1 July 2007.

2.     Inappropriate separation of legislative packages

It is wrong to separate consultation on the Budget super measures into a first tranche of $2.8 billion in revenue give-aways over the forward estimate period and a later tranche of yet-to-be-finalised tax increases of some $6 billion.  Both sets of measures are built on similar, highly contested assertions about the purpose, fairness, cost and effectiveness of super concessions. Logically, they ought be considered together, in both consultation and Parliamentary processes.

It would be economically irresponsible if the Government were to seek to legislate sequentially a first tranche of give-aways followed by a second tranche of tax increases.  If, for example, some of the $2.8 billion in new concessions proved on examination to be poor quality and unlikely to meet its stated objectives, that should affect the consideration of the $6 billion in super tax increases that in part pay for the new concessions.

One possible outcome of separate tranches is that the give-aways might be passed with populist cross-bench support despite Labor’s announced rejection of most of them[iv], and the tax increases postponed or rejected, further damaging the budget.  Alternatively, the tax increases could also be passed at a second stage (or further increased as Labor proposes[v]) with Labor and Green support.  The only clear message to super savers from these uncertainties is that superannuation law making has become chaotic and untrustworthy.

The Government should guarantee that all the Bills implementing the Budget’s super measures will be introduced to Parliament simultaneously as a package.

Not only should the new concessions and the increased taxes be considered together, they should all be subject to public examination by Parliamentary Committee, with the Committee calling on submissions and evidence from the public.  This would help overcome weaknesses in the derisively short consultation processes concluding today.

3.     Damaging mis-statement of objective(s) for superannuation

The Superannuation (Objective) Bill’s proposed primary objective for Government policies toward superannuation wrongly states that super merely “substitutes or supplements the age pension”.  This is as if the government stated the objective for  labour market law was that paid employment should ‘substitute or supplement government income support such as the Newstart Allowance’.[vi]  The Government’s intended super objective loses all sight of the fundamental economic and moral cases in an increasingly rich society for:

  • reducing systemic income tax and age-pension disincentives to long-term saving;
  • supporting thrift; and
  • increasing self-provision for retirement.

With this maladroit statement, the Government has turned its back on insights that have been clear since at least 1942[vii], and were applied through 30 years of super reforms during the Hawke-Keating[viii] and Howard-Costello years[ix].

The Explanatory material to Superannuation (Objective) Bill 2016 and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 adds five subsidiary objectives (most rather abstract) to the primary objective in the Superannuation (Objective) Bill, with all six to be subject to unspecified, case-by-case ‘balancing’. This destroys any coherent guidance for policy, so again the message to super savers is that anything could happen to the taxation of their life savings.

 

The Treasurer nonetheless asserts that the primary objective has “guided the development of the Government’s reforms”.[x]  But as if to prove the uselessness of the government’s proposed ‘primary plus five other’ objectives, it is striking that the two draft Bills and the two draft Regulations in the first tranche do not themselves include illustrative statements showing the compatibility of their measures with the primary objective of the legislation (or any of the other five, for that matter) as would become compulsory if the Superannuation (Objective) Bill became law.  If the Government believes its stated objectives have any meaning, it should use them to provide clear and quantified illustrations of the estimated effects of its legislative proposals on self-sufficiency in retirement and numbers on the age pension.

4.      A better objective

An objective that better captures the reality of superannuation’s purpose is recommended by John Roskam: “The objective of the superannuation system is to ensure that as many Australians as possible take personal responsibility to save for their own retirement. The age pension provides a safety net for those who are unable to provide for themselves in retirement.”[xi]

5.      New tax expenditures on super

Critics of existing super concessions currently dominate public debate with false claims that the costs of present incentives are excessive, unsustainable and unfair. (Robert Carling’s paper for the Centre of Independent Studies explains why these claims are overblown, with many of the estimates “unfit for purpose”.)[xii] Against the backdrop of these criticisms, any proposals to create additional incentives costing $2.8 billion over the forward estimates must clear a high hurdle by demonstrating their cost effectiveness measured against any stated objective of government policy.

All measures in the first tranche fail that cost-effectiveness test. All seek to induce additional voluntary contributions into super by subsidy or concessions which are both complex and modest from the individual’s perspective, albeit costly to the revenue in aggregate.  The broader budget package destroys confidence in super through what Scott Morrison accurately called ‘effective retrospectivity’ [xiii], making complex new incentives less credible to savers than if confidence had been maintained.[xiv]

For an example of complexity defeating any intended beneficial impact, the Low Income Superannuation Tax Offset offers a non-refundable tax offset of up to $500 to the super fund of a low income saver with adjusted taxable income less than $37,000 and who has had a concessional super contribution made on their behalf. To the practically-minded, this $1.6 billion give-away poses three questions: how much, if anything, can someone earning under $40,000 a year afford to lock away in superannuation? How many of us could say what our ‘adjusted taxable income’ was, in terms of superannuation law? And what incentive to the low paid to save from very modest income for up to 40 years before they can access it is offered by a non-refundable tax offset to their super fund of up to $500?

Another illustration in Explanatory Statement to Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 also highlights both the trust problem and the witlessness of those who write these illustrations.  “Ed is aged 67 and retired in July 2017.” He has $250,000 in his superannuation fund, and after downsizing to a smaller home, has $150,000 to invest.  Under one of the Government’s new give-aways costing $130 million, he is said to add the $150,000 to his super fund.  (The treatments of super balances under the income and assets tests for the age pension are complex, but it may well be that the main effect of downsizing his house and adding $150,000 to Ed’s super balance would be to greatly reduce the part aged pension he may be eligible for.)  After watching the super policy circus of the last 18 months in which three political parties competed to re-write the superannuation rule book to the disadvantage of self-funded retirees, why would Ed decrease investment in his principal residence and increase his exposure to super rule changes? Ed needs a good financial adviser.

Some measures seek to induce additional super contributions from those on low incomes, or into the super accounts of low income spouses.

Possible beneficiaries from these measures fall into three categories:  those who will have low income over their lifetimes; those who are lower income earners in high income households; and those who are low income at the start of their careers, but who will be richer later.

The first group will mostly not accumulate sufficient super balances to lift them above the means and income test thresholds for age pension eligibility at any plausible subsidy, and they will rightly retire on the age pension. That’s what it’s for. So for them, what was the point of the Government’s measure?   At best it might induce minor lifetime savings over their working life at the cost of suppressing their modest living standards while they worked.  As Simon Cowan has pointed out, exacting saving from people whose greater need was to spend the money merely boosts the demand for other forms of government income support.  For example, “A family of four with a single income earner on $75,000 a year pays $7,125 a year into superannuation but receives around $7,500 a year in family tax benefits alone.”[xv]

Lower income earners in high income households may indeed pocket taxpayer subsidies to achieve super splitting strategies with their partners. But they might well use those strategies anyway without subsidy. (Such strategies reduce the damage to lifetime savings from further retrospective rule changes by tomorrow’s governments to attack high super balances.) Or they may persist with family financial planning to pool their super funds in retirement.  (While ‘a man is not a financial plan’, couples are emboldened in this super pooling by trust in each other, common sense, common practice and family law, which treats superannuation entitlements as joint assets in a relationship.)

It is obvious why super funds, surely one of Australia’s worst examples of crony capitalism, want to use bogus ‘feminist’ arguments to harness taxpayers’ funds multiply the number of super accounts with low balances and high fees.  It is not clear why the Government should legislate to implement the social engineering implicit in such attempted equalization of spouses’ super balances.

Finally, for those who are temporarily low income at the start of their careers, there is no case for the Government trying to front-load their lifetime savings profile away from the savers’ own preferences.  Better the Government facilitate those preferences by not excessively restricting higher super savings later in life through miserly restrictions on concessional and non-concessional contributions.  This is another example of the interconnection between the first tranche measures and the super tax increases of the second tranche which necessitates their joint consideration.

6.      A better path forward

There are much better ways than the first tranche measures to improve the lifetime welfare and savings of lower income earners, such as illustrated in papers for the CIS by Simon Cowan (cited above) and Michael Potter[xvi]. 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.

 

 

[i] The following discussion refers to the first tranche package of revenue give-aways for which Treasury originally provided exposure drafts on 7 September 2016:

  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
  • Superannuation (Objective) Bill 2016
  • Explanatory material to Superannuation (Objective) Bill 2016 and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016
  • Explanatory Statement to Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016

To these were added, at some time during the short consultation period, two more exposure drafts:

  • Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 – Low Income Superannuation Tax Offset
  • Explanatory Statement to Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016 – Low Income Superannuation Tax Offset

There was no extension of the consultation period to allow for the later provision of this last pair of drafts.

 

[ii] Peter Costello, A Plan to Simplify and Streamline Superannuation: Detailed Outline, Canberra, May 2006

 

[iii] Peter Costello, Simplified Superannuation – Final Decisions, Press Release 093 , 5 September 2006

 

[iv] Bill Shorten, Address to the National Press Club – Canberra – Wednesday, 24 August 2016:

“In a time of budget pressures, the Government should be closing unsustainably generous high-income loopholes in superannuation; not opening new ones.

This is why Labor will oppose the Government’s plans to:

–          Allow catch-up concessional superannuation contributions

–          Harmonise contribution rules for those aged 65 to 74

–          Allow tax deductions for personal superannuation contributions.

Despite the merit of some of those propositions, this new spending cannot be a priority, especially when it will set the Budget back $1.5 billion over the forward estimates and $14.7 billion over the next ten years.” http://www.billshorten.com.au/address_to_the_national_press_club_canberra_wednesday_24_august_2016

 

[v] Bill Shorten Address above, “We will not tie the $500,000 lifetime contribution cap back to 2007.

Instead, our changes will apply from Budget night.

This means Australians who have invested for their retirement in good faith based on clear rules, no matter how generous, will not be punished after the fact.

….

At the same time, I am proposing we lower the threshold for high-income super contributions from $250,000 to $200,000.”

[vi] I owe this analogy to John Roskam (cited below) and Rebecca Weiser and Henry Ergas, Strangling the goose with the golden egg:  why we need to cut superannuation taxes on Middle Australia , September 2016, IPA Research Essay, http://ipa.org.au/publications/2545/strangling-the-goose-with-the-golden-egg .

While 80% of age-eligible people receive some age pension, and only about 20% of those of workforce age receive government income support, the analogy still holds:  no one thinks a citizen should be indifferent between being  unemployed and receiving welfare.

[vii]  Robert Menzies, The Forgotten People, 22 May 1942 http://www.liberals.net/theforgottenpeople.htm

“The great vice of democracy – a vice which is exacting a bitter retribution from it at this moment – is that for a generation we have been busy getting ourselves on to the list of beneficiaries and removing ourselves from the list of contributors, as if somewhere there was somebody else’s wealth and somebody else’s effort on which we could thrive. ….

“Now, have we realised and recognised these things, or is most of our policy designed to discourage or penalise thrift, to encourage dependence on the State, to bring about a dull equality on a fantastic idea that all men are equal in mind and needs and deserts: to level down by taking the mountains out of the landscape, to weigh men according to their political organisations and power – as votes and not as human beings?  …..

We have talked of income from savings as if it possessed a somewhat discreditable character. We have taxed it more and more heavily. We have spoken slightingly of the earning of interest at the very moment when we have advocated new pensions and social schemes. I have myself heard a minister of power and influence declare that no deprivation is suffered by a man if he still has the means to fill his stomach, clothe his body and keep a roof over his head. And yet the truth is, as I have endeavoured to show, that frugal people who strive for and obtain the margin above these materially necessary things are the whole foundation of a really active and developing national life.”

[viii] Paul Keating, The Story of Modern Superannuation , Australian Pensions and Investment Summit, Sanctuary Cove, Queensland, 31 October 2007

[ix] Peter Costello, Address to the Investment and Financial Services Association, Tuesday, 13 June 2006,  http://www.petercostello.com.au/speeches/2006/2105-address-to-the-investment-and-financial-services-association-canberra

[x] Scott Morrison, Superannuation reforms: first tranche of Exposure Drafts, Media Release 7 September 2016. http://sjm.ministers.treasury.gov.au/media-release/094-2016/

[xi] John Roskam, The Turnbull Government Backs An Unprincipled Purpose Of Super, 9 September 2016, http://ipa.org.au/news/3555/the-turnbull-government-backs-an-unprincipled-purpose-of-super

[xii] Robert Carling, How should super be taxed?, Centre for Independent Studies, Policy,  Vol. 32 No. 3 (Spring, 2016), pp13-18, https://www.cis.org.au/commentary/policy-magazine

[xiii] Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide, http://sjm.ministers.treasury.gov.au/speech/001-2016/ :  “Our opponents stated policy is to tax superannuation earnings in the retirement phase. I just want to make a reference less about our opponents on this I suppose but more to highlight the Government’s own view, about our great sensitivity to changing arrangements in the retirement phase. One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.”

[xiv] On the damage to trust in super caused by ungrandfathered tax increases, see Terrence O’Brien, Grandfathering super tax increases, Centre for Independent Studies, Policy, Vol. 32 No. 3 (Spring, 2016), pp3-12. https://www.cis.org.au/commentary/policy-magazine

[xv] Simon Cowan,  Building a better super system, Centre for Independent Studies, Policy,  Vol. 32 No. 3 (Spring, 2016), p 20. https://www.cis.org.au/commentary/policy-magazine

[xvi] Michael Potter,  Don’t increase the super guarantee, Centre for Independent Studies, Policy,  Vol. 32 No. 3 (Spring, 2016), pp27-36, https://www.cis.org.au/commentary/policy-magazine

Sunday, October 9, 2016

Save Our Super’s Submission to Treasury – lodged 14 September 2016

Save Our Super’s Submission to Australian Treasury on the Australian Government’s First Tranche of Exposure Drafts of Proposed Superannuation Changes.

First, Save Our Super submits that all of the Government’s proposed superannuation legislative changes, which the Treasurer announced on 3 May 2016 as part of Budget 2016, should be put simultaneously to the Australian people as a complete package of Exposure Drafts for their consideration. The package should not be split up into separate tranches, and each tranche then be treated as being independent of the other/s. They are not; they are interdependent.

The first tranche’s proposed tax expenditure of $2.61 billion depends on the proposed tax increases of $5.7 billion intended to be raised by the remaining proposed superannuation changes. It should not be a two-step process. That is unsound public policy.

For example, as may be the case, the Government should not first try to get the tax expenditure changes through the Parliament and then seek to rely on their passage, to justify the tax increases to be raised by the Government’s remaining proposed superannuation changes.

Further, sufficient time should be given for proper public consultation of the complete package of Exposure Drafts. Much more time than the nine days allowed for the first tranche should be allowed for such a fundamental and far-reaching package of superannuation changes.

Secondly, Save Our Super submits that the proposed objective of superannuation should be uncoupled from any reference to the statutory Social Security age-pension. They serve different purposes. The statutory Social Security age-pension provides a safety net. It is for those Australians who, for whatever reason, have been unable to have available for their retirement years, sufficient funds to provide an income to enable them to live in an appropriate manner .  

John Roskam of the Institute of Public Affairs has suggested that:

”An objective for superannuation that was centred on dignity and choice in retirement could be expressed in the following way. ‘The objective of the superannuation system is to ensure that as many Australians as possible take personal responsibility to save for their own retirement. The age pension provides a safety net for those who are unable to provide for themselves in retirement’.” (see, http://ipa.org.au/news/3555/the-turnbull-government-backs-an-unprincipled-purpose-of-super).

Save Our Super supports and adopts that approach. It submits that the Government should do likewise.

Sunday, October 9, 2016

Email to all Coalition Senators and MHRs from Terrence O’Brien – dated 9 September 2016

Dear Prime Minister, Treasurer, Ministers, Government Senators and Government MHRs

I wrote yesterday to Messrs Gee and Buchholz in their roles as leaders of the Coalition Backbench Committee on Economics and Finance to convey four recent studies on superannuation and retirement income policy to be published by the Centre for Independent Studies  in the forthcoming edition of its magazine, Policy.  I hope the studies will be helpful to consideration of the Budget superannuation measures.

I also conveyed my impressions of some important developments since the four studies were finalised. I undertook to circulate the studies and my letter to other Government members, and do so today as attachments to this letter.

Yours sincerely

Terrence O’Brien

(Address and contact number supplied)

Attachments to the email dated 9 September 2016:

https://saveoursuper.org.au/letter-to-mr-andrew-gee-m-p-chairman-and-mr-scott-buchholz-m-p-secretary-from-terrence-obrien/

https://www.cis.org.au/app/uploads/2016/08/32-3-obrien-terrence.pdf

https://www.cis.org.au/app/uploads/2016/08/32-3-carling-robert.pdf

https://www.cis.org.au/app/uploads/2016/08/32-3-cowan-simon.pdf

https://www.cis.org.au/app/uploads/2016/08/32-3-potter-michael.pdf

Sunday, October 9, 2016

Treasurer sees sense on non-concessional super cap

logosoa15 September 2016

The Treasurer’s decision to scrap the $500,000 lifetime non-concessional cap is sensible.

In our view it was never necessary in the first place.

If an upper limit is set on tax-free superannuation accounts it shouldn’t matter how and when the limit is reached.

So the new, reduced non-concessional cap of $100,000 a year is also unnecessary. If an overall account balance cap is set then annual concessional contribution limits are not needed. Conversely, with contribution limits in place (the new cap on non-concessional contributions and the reduced concessional cap) there’s no need to have an overall $1.6 million retirement account balance cap at all. Having both contribution and balance caps adds unnecessary complexity to a system for which simplicity is one of the government’s stated objectives.

However, scrapping the retrospective lifetime $500,000 cap on non-concessional contributions will remove a headache for many people whose retirement savings plans were disrupted by the budget announcement. They will now be able to plan ahead with more confidence.

It is unfortunate that it comes at the cost of withdrawing the budget measures to harmonise contribution rules for people aged 65 to 74, including getting rid of the work test.

The Treasurer’s decision comes after widespread expressions of concern from self-managed fund members, many of whom have been in touch with Coalition members and senators, and representations from SMSF Owners and others.

The scrapping of a major plank of the superannuation changes announced in the May budget confirms our view that the changes were not well thought through at the time. They were driven by revenue needs rather than what is best for the superannuation system.

There are still many unanswered questions about how the $1.6 million cap will work in practice and it may be several weeks before the Government releases further draft legislation that will hopefully answer such questions.

If a cap on tax-free account balances is thought necessary at all, the limit should be doubled.

Research undertaken by Professor Ron Bewley, former head of the School of Economics at UNSW, concludes that an upper limit of $3.2m is necessary to provide an income sufficient to last throughout retirement.

See: https://www.smsfoa.org.au/images/expert_advice/160609_Dr_Ron_Bewley_So_how_much_should_the_superannuation_cap_be.pdf

Changes to superannuation have far-reaching and long lasting effects on people and should only be contemplated after extensive consultation. The truncation of the Tax White Paper process, the rushed consultation on the objective of superannuation, the unexpected budget changes and this latest announcement fell short of the principles of good policy making on superannuation which for most Australians is their most significant investment outside the family home and the key to a comfortable retirement.

SMSFOA Contact:
Duncan Fairweather
Executive Director
SMSF Owners’ Alliance
dfairweather@smsfoa.org.au
0412 256 200
www.smsfoa.org.au

Sunday, October 9, 2016

Bleak View – Bill Leak Cartoon

cartoonbillleakflightsuperjumbo

Sunday, October 9, 2016

Morrison, O’Dwyer will keep messing with superannuation policy

The Australian

17 September 2016

Judith Sloan – Contributing Economics Editor, Melbourne

 

The biggest take-home message from this week’s superannuation changes by the government is that the Coalition can never be trusted on superannuation.cartoonbillleakflightsuperjumbo

Its leaders say one thing and do another, trying to out-Labor the ALP when it comes to imposing higher taxes on savers who are seeking to provide for their retirement.

And how should we interpret the government’s backflip on the crazy backdated lifetime post-tax super cap? During the election campaign, Malcolm Turnbull was adamant: “I’ve made it clear there will no changes to the (superannuation) policy. It’s set out in the budget and that is the government’s policy.” I guess that was then. What a complete fiasco the superannuation saga has been. Mind you, Scott Morrison and Revenue and Financial Services Minister Kelly O’Dwyer have only themselves to blame. They were hoodwinked by extraordinarily complex and misleading advice given by deeply conflicted bureaucrats. The only conclusion is that they are just not that smart.

How do I know this? Because Treasury has been trying to convince treasurers for years that these sorts of changes must be made to the tax concessions that apply to superannuation. Mind you, these concessions apply because superannuation is a long-term arrangement in which assets are locked away until preservation age is reached.

It was only when the Treasurer and O’Dwyer took on their exalted positions that Treasury was able to execute its sting. Other treasurers (even Wayne Swan) had the wit to reject Treasury’s shonky advice.

But here’s the bit of the story I particularly like: when it came to the proposal that those pampered pooches (the advising bureaucrats) should pay a small amount of extra tax on their extraordinarily generous and guaranteed defined benefit pensions (the 10 percentage point tax rebate will cut out at retirement incomes above $100,000 a year), they baulked at the idea. This is notwithstanding the fact they have been members of funds that have paid no taxes during their careers and they will have also built up substantial accumulation balances on extremely concessional terms. Clearly, no one in Treasury has heard of the rule that what’s good for the goose is good for the gander.

Let us not forget that the superannuation changes announced in the budget represent a colossal broken promise by the Coalition government not to change the taxation of superannuation, a promise reiterated on many occasions by Morrison when he became Treasurer.

While trenchantly criticising Labor’s policy to impose a 15 per cent tax on superannuation retirement earnings of more than $75,000 a year, he made this pledge: “The government has made it crystal clear that we have no interest in increasing taxes on superannuation either now or in the future. Unlike Labor, we are not coming after people’s superannuation.”

When you think of all the criticism Tony Abbott faced, including from the media, about his broken promises on (supposed) cuts to health, education and the ABC — actually the growth of spending in these areas was merely trimmed — it is extraordinary that there has not been the same focus on this unequivocally broken promise of the Turnbull government.

To be frank, I am not getting too excited about the government’s decision to scrap the loony idea of having a backdated post-tax lifetime contribution cap. It was never going to fly.

The fact David Whiteley, representing the union industry super funds, is endorsing the tweaked super package is surely bad news for the government. He has declared “this measure, combined with the rest of the proposed super reforms, will help rebalance unsustainable tax breaks and redirect greater support to lower-paid workers who need the most help to save for retirement”.

Actually, the government does the saving for these workers by guaranteeing them a lifetime indexed age pension. It is the middle (and above) paid workers who need the most help to save for retirement.

It will also be interesting to see Whiteley’s stance when O’Dwyer seeks to push through changes to the governance of industry super funds and default funds. Here’s a tip, Kelly: he won’t be your friend then. My bet is that O’Dwyer will lose again on this front.

In terms of the replacement of the lifetime non-concessional cap, the government’s alternative is extremely complex and potentially as restrictive. Post-tax contributions will be limited to $100,000 a year (they can be averaged across three years), but only for those with superannuation balances under $1.6 million.

The fact the market value of these balances fluctuates on a daily basis makes this policy difficult to enforce. Is the relevant valuation when the contribution is made or at the end of the financial year?

And what about the person who is nearly 65 and is barred from making any further contribution, but the market drops significantly after their birthday? O’Dwyer’s response no doubt would be: stiff cheddar, egged on by her protected mates in Treasury who bear no market risk at all when they retire.

What the government is clearly hoping to achieve is that, in the future, no one will be able to accumulate more than $1.6m as a final superannuation balance. At the going rate of return that retired members can earn on their bal­ances without taking on excess risk, the certain outcome is that there will be more people dependent on the Age Pension in the future. But Morrison and O’Dwyer will be long gone by then.

There is also a deep paternalism underpinning this policy. An income slightly north of the Age Pension is sufficient for old people, according to Morrison and O’Dwyer. After all, Morrison had no trouble describing people with large superannuation balances as “high income tax minimisers”.

We obviously should have been more alert to the possibility of the Turnbull government breaking its solemn promise not to change the taxation of superannuation.

Last year, O’Dwyer described superannuation tax concessions as a “gift” given by the government. I thought at first she must have been joking. But, sadly, her view of the world is that everything belongs to the government and anything that individuals are allowed to keep should be regarded as a gift — the standard Treasury line these days.

The final outcome will be a policy dog’s breakfast that carries extremely high transaction costs and delivers little additional revenue for the government. Superannuation tax revenue has disappointed on the downside for years and there is no reason to expect this to change.

But by dropping just one ill-judged part of the policy, the government thinks it can get away with pushing through the rest of it. The dopey backbenchers clearly have been duped into accepting it, even those new members who maintained a commitment to lower taxation and small government before they were elected.

It’s a bit like a real estate agent who shows you four atrocious houses. The fifth house is slightly better and you take it. The reality is that the fifth house is also dreadful but you have been tricked into accepting it on the basis of the contrived comparison.

There are still major flaws in the government’s policy. If there is an overall tax-free super cap, why have any limits on post-tax contributions at all? The figure of $1.6m is too low. And the indexation of this cap should be based on wages, not the consumer price index. The changes to transition-to-retirement should be dropped and the concessional contributions cap raised to $30,000 a year, at least, for those aged 50 and older.

But I’m not holding my breath. When Morrison said the government had “no interest in increasing taxes on superannuation either now or in the future”, he told an untruth. Just watch out for more revenue grabs in the future.

Wednesday, May 8, 2019

At last, common sense on superannuation policy

The Australian

16 September 2016

Editorial

Common sense has prevailed; the retrospective superannuation cap is gone. Yesterday, the government said it would substitute a prospective annual cap of $100,000 on after-tax contributions for its unacceptable $500,000 lifetime cap with the clock wound back to 2007. Malcolm Turnbull has achieved a principled compromise on an issue that stoked anger within the Coalition and its base. It was a week of compromise, in fact, as government and opposition found enough common ground to pass $6.3 billion worth of savings measures. We need more of this. Through a lower house with a majority of one and an upper house with a sizeable crossbench, the Prime Minister must articulate a compelling economic narrative and negotiate his way towards the national interest.

In April last year, former treasurer Peter Costello warned of unintended consequences facing policymakers. “Increasing superannuation tax will make negative gearing more attractive again,” he wrote in The Daily Telegraph. Abolition of the $500,000 lifetime cap means we are less likely to see a shift of funds away from superannuation into other more bankable investments. The government went wrong in its budget in May when it approached the rules on superannuation not as retirement income policy but as an ill-considered revenue grab. As such, it was difficult to defend and became one of the reasons for the Coalition’s lacklustre campaign leading up to the July 2 election.

The effect of the superannuation changes would have been to blunt the incentives for self-funding retirees, a class needed to take the pressure off the (already unsustainable) Age Pension. The changes also sent a destabilising message: that governments could change the rules of the long-term investment game that superannuation represents. It was not just the $500,000 lifetime cap that rankled but its retrospectivity. Soon after the budget, a former senior public servant, Terence O’Brien, crystallised the problem in a letter to this newspaper: “A 60-year-old can today expect to live past 90, so superannuation needs to finance a further 30 years of sustained retirement living standards, ideally in a predictable taxation environment. There might be 20 to 25 governments over that 70 years of a typical worker’s saving and retirement, so it is important that there be some sense of fundamental ‘rules of the game’ governing superannuation rule-making and taxation — a ‘superannuation charter’, if you will.”

Paul Keating’s superannuation changes of the 1980s were grandfathered so as not to disadvantage people who had relied on the old rules when making investment decisions. So, too, were John Howard’s 2004 changes affecting the superannuation of MPs. Scott Morrison and Kelly O’Dwyer, then assistant treasurer, failed to convince when they insisted that the $500,000 lifetime cap was not in truth retrospective. Now, at least, there is the basis for restoring trust in the integrity of the system. And, in a political sense, there is the basis within the Coalition for renewed confidence in Mr Turnbull now that the superannuation policy has been shifted from the spurious “fairness” of the centre-left closer to a commonsense position on the centre-right. It was Mr Costello, again, who had put his finger on the problem. “The Coalition is flirting with higher tax on superannuation,” he wrote last December. “The longer it does so, the more it will give ground to Labor on the issue.” Even so, political posturing aside, there should be enough overlap in substance by now for Mr Turnbull to broker an agreement on superannuation with Bill Shorten. Opposition Treasury spokesman Chris Bowen had focused his criticism on the retrospectivity of Coalition policy, a policy to which Labor gave tacit approval by building its savings into its own costings for the election campaign.

In question time yesterday, struggling to be heard above the hyperpartisan ruckus, Mr Turnbull gave the opposition credit for its compromise on Tuesday’s omnibus savings bill. The Prime Minister said he wanted Australians to know that “with a little less grandstanding, a little less name-calling, a little more constructive negotiation, we (in parliament) can achieve great things for Australia”. As usual, the tone of question time suggested anything but consensus. Even so, the Prime Minister has little option other than the path of negotiation and compromise. Politics is the art of the possible and what is possible for Mr Turnbull is heavily constrained by the parliament elected on July 2.

As the Prime Minister put it in a Fairfax Media report yesterday: “The Australian people have elected the parliament that we’ve got and we are determined to work with it.” He suggested that negotiation could allow the passage of the double-dissolution trigger bills — for the Australian Building and Construction Commission and the Registered Organisations Commission — without the need to call a joint sitting of parliament. And the same spirit of compromise may see the government split its $48.7bn company tax package to pass on savings straight away to small business.

Sunday, October 9, 2016

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