The Australian

4 February 2017

Terry McCrann

The embarrassing mush that Federal Treasury produced in its annual Tax Expenditures Statement was bad enough in its own terms. What’s worse was how it pointed to the total decline into utter irrelevance of an institution that used to be the very foundation of rigorously rational policy analysis and advice.

In very simple terms, the central department in commonwealth governance is useless. This should be, this is, a deeply disturbing development. Federal political governance is broken. So too is the bureaucratic. Almost literally, nothing Federal Treasury says is of the slightest value.

Now, Treasury’s budget forecasts, MIS-forecasts, have already long placed an embarrassing question mark over its analytical credibility. Year after year Treasury not only got its forecasts wildly wrong, but in doing so demonstrated a disturbing disconnect from reality.

Sure, you can excuse, up to a point, a margin of error in getting specific forecasts not quite right; but it is an altogether different matter if that error — correction, errors, plural — flows from a more basic, more pervasive failure to actually understand what is going on in the world.

Former treasurer Wayne Swan owns the “four years of surpluses” line that he infamously trumpeted in his 2012 budget speech — we “own” the $135 billion of deficits that actually happened.

But Treasury was a co-owner of the incompetence in its analytical framework and application. Now we have its claim in the Tax Expenditures Statement that the family home’s exemption from capital gains tax cost the federal budget a staggering

$61.5bn a year, every year, and rising inexorably with increasing property values. A claim that was seized on and breathlessly projected — how surprising — by the Fairfax press.

Once upon a time, so-called tax expenditures had a very legitimate, indeed necessary, place in the Treasury analytical firmament and policy advice: to keep both budgets functionally and governments politically honest.

A government can provide a handout either by a specific spending allocation or by a tax deduction or rebate for that expenditure made directly by the citizen. Even though the two are not mirror opposites it is an important contribution to the public policy debate, and to fiscal clarity, to broadly identify such “spending” on the revenue side of the budget.

But what was intelligent and specific has developed into a sort of Marxist Keynesian all-pervasive orthodoxy, to ruthlessly identify all variations from a tax norm as a tax expenditure, and running now to 160 pages of detailed mush.

Treasury’s tax norm in the family home case is the marginal personal income tax rates. So the $60.5bn “tax expenditure” flows from not applying the capital gains tax at all ($27.5bn) and then also adding the cost of the 50 per cent CGT “discount” ($34bn).

This shows an analytical approach of mind-bogglingly blinkered ideological stupidity. Taking it to its “logical” conclusion, the Treasury should estimate the “tax expenditure” of not taxing all income at the 49 per cent top marginal tax rate (for this year, including Joe Hockey’s “budget repair” levy). Including by the bye, company tax as well: why should the income of a company deviate from the personal income tax norm?

Indeed, in ideological purity, it should estimate the tax expenditure of not taxing all income at 100 per cent. Anything that the government leaves you with is just as much a “gift” as a direct spending item.

Now Treasury thinks it cleverly escapes from the ultimate lunacy of its ideological

— it is not analytical — approach, by defining the tax norm for estimating tax expenditure deviations as the progressive personal income tax scale, including the low-income tax-offset.

It acts as if these scales have been mandated from heaven. It doesn’t seem to understand that such a progressive tax scale is just as much a deliberate policy design choice as choosing to only tax 50 per cent of a capital gain.

So in denying that, stating that capital gains “should” be taxed at the full personal tax rate; in logic it should also be stating that all personal income “should” be taxed at the top marginal rate. Or alternatively — why not? — at the lowest marginal tax rate.

This brings us to the really disturbing heart of the Treasury ideological inanity: the inability to understand the qualitative difference between revenue and spending. The one is not the negative of the other spending.

A decision not to tax is not the same thing as a decision to spend. To state that it is, was of course exactly captured in the unified — ideological Treasury bonding with political government — assertions of the Rudd-Swan-Gillard years that tax increases were budget “saves”.

Yes, the very specific decision to provide a form of spending by a tax deduction/rebate, can be so identified. That for example a government payment for childcare is qualitatively the same as providing the tax offset.

But would Treasury care to identify what form of government spending could replace the non-taxation of a capital gain on the sale of a family home? What is the “spending spending” that could mirror the “tax spending”?

We could do much the same with most of the other so-called “tax expenditures” in the 160 pages: emanations all of, as I note, a Marxist-Keynesian mindset. But I want to finish on a related example which demonstrated an even greater harm to the national interest: Treasury’s “climate action modelling”.

The Treasury of then secretary Ken Henry and his right-hand man David Gruen — Henry’s gone to lusher fields in the National Australia Bank, but Gruen now resides in the warm embrace of the prime minister’s office — purported to show we could dramatically increase the cost of energy and it would make all-but no difference to economic growth. This announced a Treasury not simply divorced from reality but from the entire history of the human race; with its advance based entirely — entirely — on energy becoming increasingly cheap, plentiful and secure. Time to drain the Treasury swamp.

The Australian

7 February, 2017

Monica Rule

Scott Morrison’s controversial super changes come into effect in just four months.

Perhaps the outstanding issue for wealth management in recent times has been the major changes announced for superannuation.

For many people, there is a sense that the changes have only become clear very recently as the final legislation did not get passed until the end of 2016. Worse still, many people were misled by earlier reports which attempted to capture the changes before they were finalised by the government.

Either way, we suddenly find ourselves in February 2017 with only four full calendar months before Scott Morrison kicks off the new regime on July 1. Self- Managed Super Fund members need to understand the basics: Today I want to spell out the key changes and importantly identify some variations that have become clear this year.

The $1.6m cap

The change most people are familiar with is the $1.6 million transfer balance cap. For the sake of convenience I will simply refer to this as the “cap”. What you may not know is that the cap will apply in two instances.

First, it is the limit on the amount of net capital that can be placed on an SMSF member’s pension account where the earnings are tax exempt. Amounts above the cap need to be moved to the accumulation phase or taken out as a lump sum. The second instance is where the cap will apply to a member’s total superannuation balance. If a member’s superannuation balance exceeds $1.6m, they will be prevented from making further non-concessional contributions into their SMSF.

Now I should point out that there are some contributions which do not count towards the $1.6m pension cap or superannuation balance cap.

Compensation payments for personal injury, received by SMSF members and contributed into their SMSFs are not counted towards the $1.6m superannuation balance cap or the $1.6m pension cap. This means members can have a pension account in excess of $1.6m.

On the other hand, if a small business taxpayer transfers the proceeds from the sale of active assets up to the value of $1,415,000, or capital gains from the sale of an active asset of up to $500,000 into their SMSF (under the Small Business CGT concessions) the contribution will count towards their superannuation balance. If the amount exceeds $1.6m, then the member will be restricted from putting any more non-concessional contributions into their SMSF.

Transition

SMSF members turning 65 during the 2016-17 financial year need to understand the changes to the bring forward non-concessional contributions cap. There will be a transitional non-concessional bring forward cap of $460,000 or $380,000 depending on when the bring-forward cap was triggered. If you want to take advantage of the full $540,000 cap you need to make the whole bring-forward, non-concessional contribution of $540,000 before June 30, 2017.

There will also be a $500,000 limit that stops you from being eligible for the catch- up concessional contributions, where you can use any of your unused concessional contributions cap, from July 1, 2018, on a rolling basis for up to five years. Where an SMSF member exceeds their $1.6m pension cap by up to $100,000 at June 30, 2017, the new law allows the member six months to remove the excess from the member’s pension account. However, the member will still be recorded as having exceeded their $1.6m transfer balance cap and will not be eligible for any indexed increases of the cap in the future, even if they reduce their pension account balance below $1.6m.

Different treatment

Members need to be aware that withdrawals from their pension are recorded differently depending on the type of withdrawal. While a partial commutation reduces a member’s $1.6m pension cap, an ordinary pension payment does not. This is an important distinction for members who want to put more money into their pension account.

Reversionary pensions and death benefit pensions are also treated slightly differently under the $1.6m pension cap. Although both pensions count towards a dependant recipient’s pension cap, reversionary pensions are not counted towards the cap until 12 months after the deceased member’s death. The amount counted towards the cap also differs. For a reversionary pension it is the amount in the deceased’s account at death whereas with a death benefit pension, it is the accumulated amount when it is paid to the dependant.

Estate planning also needs to be considered more carefully where the deceased member’s children receive their superannuation entitlements. The children may not be able to take a pension of up to $1.6m, or may be able to take a pension in excess of $1.6m, depending on whether the deceased was receiving a pension at the time of their death. While the changes may cause concern, in my opinion knowledge is your best defence. Understanding how the changes will apply to you and taking early action will help you to navigate these changes with more certainty.

Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook.

www.monicalrule.com.au

The Australian

31 January 2016

Monica Rule

One of the biggest issues facing all advisers this year is how to guide investors through the forthcoming changes in super — importantly, there is a need here to get your house in order or you could be facing a hefty tax bill.

It is also crucial that investors understand the mechanics of capital gains tax relief if they are considering selling assets prior to the new rules coming into force.

The new $1.6 million cap, which takes effect from July 1, places a limit on pension accounts that receive tax-free investment earnings. If you have more than $1.6m in your pension account, you must either retain the excess in your accumulation account (where the investment earnings are taxed at maximum of 15 per cent) or withdraw the money from superannuation.

If the excess is not removed, you will incur an excess transfer balance tax of 15 per cent in the 2017-18 financial year and your pension will be deemed as not being in pension phase from the start of the financial year.

This may mean your pension income is no longer tax free when you receive it. If an SMSF member moves some of their pension assets back to the accumulation phase before July 1, 2017, they can apply for capital gains tax relief so they only pay tax on the capital growth of assets from July 1.

SMSF trustees can choose which assets they provide the relief to and do not need to sell assets to apply the CGT relief. However, the CGT relief is not automatic and an SMSF will need to make an irrevocable election, in the ATO’s approved form, before it lodges its 2016-17 tax return. The relief deems an asset to be sold on June 30, 2017 for its market value and repurchased at that price. This ensures only gains from July 1 onwards will be taxed.

If the CGT relief is applied and an SMSF asset was segregated prior to November 9, 2016, then the entire capital gain arising from the segregated assets will be disregarded. If an SMSF uses the unsegregated method (because it has assets that support both a pension account and an accumulation account) then the notional capital gain on the non-exempt portion will be included in the SMSF’s assessable income for the 2016-17 financial year. It is worth knowing, however, the SMSF can elect to defer the notional gain until the asset is sold.

SMSF members also need to be aware that by choosing the CGT relief, they must wait a further 12 months before the CGT discount can be claimed.

New year’s checklist

Members affected by the new law will need to discuss their situation with their accountant or financial planner. Here’s a list of the key items to be considered:

• Members under the age of 60 with multiple pensions need to consider whether to commute the pension with the higher taxable component to minimise the tax payable on their pension

• Members with a pension which commenced prior to January 1, 2015 need to decide whether they wish to preserve their entitlements to the age pension and the Commonwealth Seniors Healthcare

• If a member is withdrawing the excess amount from their SMSF, then they need to weigh up the benefit of the $18,200 tax-free income threshold and their marginal tax rate compared to the 15 per cent superannuation tax

• The new reduced contribution limits may make future contributions more

• Whether to maintain assets with unrealised capital losses at their original cost base, and reset the cost base of assets with large

• If there are plans to sell assets soon, it may be more tax effective not to apply the relief due to the 12-month waiting period to claim the CGT

• Whether choosing the CGT relief will produce the best tax result. It may depend on when the member retires and the expected growth of the SMSF assets. For example, if a member is within the $1.6m cap and will retire soon, it means their SMSF will wholly convert to pension mode. Applying the relief to an asset may cause the SMSF to be taxed on the deferred notional capital gain when the asset is sold. If the relief was not chosen, this tax may not arise as the pension’s earnings exemption would otherwise apply.

Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook.

The Age

25 January 2017

John Collett

Workers are retiring at age 61, on average. Just two years ago they were retiring at age 58.

Roy Morgan Research surveys more than 50,000 people a year on all sorts of things, including asking those intending to retire in the next 12 months what age they will be when they retire.

The sudden rise in the retirement age maybe a blip and doesn’t mean that the age of those intending retirees is going to keep rising at the same rate.

But there are likely to be factors that have made the current crop of soon-to-be retirees work for longer.

Many of those on the cusp of retirement are probably feeling that the odds of them being able to afford a comfortable retirement have lengthened.

Rules tighten

There’s the tightening of access to the age pension that took effect at the start of this year. And the qualifying age for the age pension is gradually rising from 65. For those born since January 1,1957, it is 67.

The “preservation” age, the age at which we can access our super savings when retired, is increasing from 55 and will be age 60 for anyone born since July 1,1964.

And then there are the lower caps on how much can be contributed to super.

It’s true that most of these measures, apart from the pension age rising to 67, are targeted at the better off. Ordinary workers are not affected and anxiety is being created by perception, not reality.

After all the political argy-bargy over changes to the age pension and super during the past several years, that they should have had their confidence in the system knocked is no surprise.

Many older people are concerned that if they put money into super that a future government might make it more difficult to access their money as a lump sum or tax-free.

Lower returns

But low returns on safe investments, such as term deposits, have probably also contributed to a feeling that it’s prudent to keep working for longer.

The Australian sharemarket had a bumper year in 2016 with a total return, including dividends, of 11.8 per cent. But that followed a return for 2015 of 3.8 per cent and a return of 5.6 per cent in 2014.

However, the returns on super over the past three calendar years have not been bad because most people have their retirement savings with their funds’ balanced option, which spreads the money between asset classes.

That means if one or two asset classes don’t do that well, some of the others will pick up the slack.

Superratings’ data shows that the median-performing balanced option returned 7.3 per cent during 2016, 5.6 per cent in 2015 and 8.1 per cent in 2014.

The reality is that super is doing the job that it is meant to do and further major changes seem unlikely.

And for home owners, the chances of a future government ever including the value of the house in the assets test for the age pension are vanishingly small.

Data from the Australian Prudential Regulation Authority ­yesterday showed total contributions into the super system dropped 1.5 per cent over the year to September, a $1.5 billion drop year-on-year.

A near 5 per cent drop during the three months to September added to the 11.3 per cent contributions fall suffered by the sector in the June quarter, as the proposed super shake-up met with a “triple-whammy” of market-moving votes — Brexit, the Australian election and US election — to frighten savers on to the sidelines.

The fall comes as the government’s super reforms are set for debate in the Senate, where Labor has flagged its intention to seek amendments to the bill, after the package passed the House of Representatives last night.

Opposition treasury spokesman Chris Bowen said the reform package was “better than nothing” and said Labor would support its passage through the Senate if its amendments were not successful. “What we will do … is make sensible suggestions about how it can be improved,” Mr Bowen told parliament.

The reforms, unveiled at the May budget and which were the source of heated debate during the federal election, will limit non-concessional super contributions to $100,000 a year and introduce a $1.6 million cap on tax-free pension accounts.

While there was an absolute increase of 7.4 per cent in super ­assets to $2.1 trillion over the year, the APRA figures also revealed a dramatic slide in net contribution flows, which slumped nearly 20 per cent.

The wealth management industry is set for a rough ride over the coming decade as fund inflows wane, with super managers staring at a generational shift where baby-boomers start to draw down on savings. Supported by compulsory contributions from employers, the funds management industry has recorded enormous growth over the past 20 years, but shifting demographics will soon start to threaten the rivers of gold.

Jeremy Cooper, architect of a recent government review into the super sector, said the industry was expecting to move into the net drawdown phase in the 2030s, but those estimates would have to be revised if the 18.7 per cent slide in net contributions this year established a trend.

“More people were taking money out of the system than they were the previous year, by quite a bit,” Mr Cooper told The Australian.

“It may be explicable by some one-off thing, but it’s still quite a big jump.

“The proportion of people entering retirement is steadily increasing, but you wouldn’t have expected it to jump that big.”

About 700 Australians retire every day and the retiring population will grow at an average rate of 2.5 per cent for the next 10 years.

Chris Kelaher, chief executive of wealth management group IOOF, which has more than $100bn in funds under management, said the proposition that super contributions were going to taper off into nothing was “just a bit naive”.

“Obviously there’s a point in time in the future where the net flows into the system may vary negatively,” Mr Kelaher said. But he said greater longevity and longer pension phases would help support demand for wealth management.

Mr Kelaher said this year’s dip in personal flows was due to the US and Australian elections and the Brexit vote, but he argued that after the government’s reforms were passed people would ramp up contributions.

“You’ve had a triple whammy this year,” he said.

“You put those … things together and then you’ve had very soggy markets in January and everyone’s sitting on the sidelines and figuring it out.”

Association of Superannuation Funds of Australia chief executive Martin Fahy said the tax changes to superannuation would make the system more equitable and sustainable, and he called on the Senate to pass the reform package. “This legislation should be passed without undue delay to provide the certainty people need to make voluntary contributions to their superannuation,” Mr Fahy said.

The APRA data also showed more people were moving away from large funds and into self-managed super funds, where assets had grown 8 per cent over the year to $636bn.

Elsewhere, research from Morningstar showed the majority of super funds recorded losses in October, with a median return of negative 0.7 per cent. Industry funds were the top performers over the past 12 months, with Cbus returning 6.6 per cent.

It should never be this way — no doubt it was never the express intention of the new regime — but this is how it has come to pass.

Let me use some case studies I have used before, but now are more relevant than ever. At their worst they clearly reveal the new discrimination now legally enshrined in the system

We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income. All income is paid to you tax-free.

For the sake of simplicity, we will assume that this super pension started after December 2014, which means the account balance is deemed under Centrelink’s income test. Apart from your home and your super, you own $50,000 of personal use assets including your car. You have no other assets.

All of our examples will consider the assets test thresholds that will apply from January next year.

Case study 1
You have $1.6 million in super assets. In this case you will receive no age pension and therefore your income is $80,000 per annum.

Case study 2
You have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382 including the pension and energy supplements. Total income is therefore $44,382.

Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.

Case study 4
What about $700,000 of super assets? You will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.

Case study 5
Finally, what about those without $1 million in super assets? You receive no age pension and need to live off all their super pension of $50,000.

What does all this mean? You can have less assets but more income each year.

To spell it out, you can have $500,000 in super and you will be better off in terms of annual pension payments — super and government pension combined — than a couple with $700,000.

What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.

Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75% more income.

The government says it changed the super system to make it fairer and more equitable. These are the reasons for the $1.6 million pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above do these arguments really hold?

For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.

After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?

Anyone earning $50,000 each year, which increases at 2 per cent each year while their super grows by 5 per cent after all taxes, fees and charges, and receives compulsory superannuation, will have $400,000 in super assets after 31 years of work.

At that point if they were to retire they would receive 100 per cent of their pre-retirement income.

Clearly there is a distinct disincentive for people in this situation to work for longer or to try and earn a higher salary.

Of course you can always argue the person with higher savings in the system is better off — we don’t know how future pension incomes will work and they have the option to spending their capital if they want … but that’s not the point. The point is the system has built-in discrimination.

Tony Negline is author of The Essential SMSF Guide 2016-17 published by Thomson Reuters.

The Australian

9 November 2016

Judith Sloan | Contributing Economics Editor | Melbourne

The government knows its superannuation legislation is deeply flawed. Its efforts to contain the consultation process — allowing a week for parties to comment on hundreds of pages of new law — haven’t prevented those who actually understand these things to declare much of it is unworkable.

Where tax legislation language is appropriate, the new laws use inappropriate accounting concepts. The rules contain unrealistic start points and maximise the compliance costs associated with the transfer balance cap of $1.6 million.

For those with several superannuation accounts, including one providing a defined-benefit income stream, expect to be unfairly treated. By using the one multiplicand (16) of annual pension income irrespective of age to calculate the implied transfer balance amount, anyone over the age of 70 is essentially done in the eye.

But it is good for the public servants who have given the government such dodgy advice, who will retire on unimaginably generous money courtesy of a recent salary increase and the benefit from the new rule.

But here’s the thing: the government doesn’t care. In particular, the responsible minister, Kelly O’Dwyer, doesn’t care. All she wants is the legislation to be rammed through parliament and she will do almost anything to achieve this dubious objective. The fact that, in due course, there will be many more older people on the Age Pension doesn’t worry her. She will be gone by then.

The fact there will be even higher taxes imposed on superannuation in due course because the Liberals were more than happy to impose additional taxation on current and retired superannuants to the tune of $6 billion over three years won’t bother her either.

She doesn’t care about the extraordinarily high compliance costs or the fact the changes benefit the industry (read union) super funds at the expense of self-managed superannuation funds. She’s from the Graham Richardson school of politics — whatever it takes.

And then we have the Labor Party wheeling and dealing, even though the super policy it took to the election was a Harry met Sally policy: we’ll have what they are having and book the same savings.

Now it turns out that this was actually a bit of a porkie and Labor wants to impose some further changes that will raise an extra $1.4bn over the forward estimates.

Labor Treasury spokesman Chris Bowen wants the annual non-concessional contributions cap to be $75,000 rather than $100,000 and the 30 per cent contributions cap to kick in at an adjusted salary of $200,000 a year rather than $250,000.

And Kelly can say good night to her carry-forward arrangements in relation to unused concessional contributions as well as eliminating the work test for older people. These were really the only sweeteners in the Liberals’ super package announced at budget time, apart from the pointless low-income superannuation tax offset.

All the time, Liberal backbenchers stay mum, in part because most wouldn’t have a clue and in part because those who should object are more worried about their career prospects than prosecuting the case for lower taxes and small government.

The only ray of hope is that Malcolm Turnbull regards the changes demanded by Labor as a bridge too far (and Labor won’t budge) and that enough crossbenchers won’t co-operate.

Going back to the policy drawing board would be the best outcome at this stage.