CAANZ superannuation leader Liz Westover told SMSF Adviser there is work that needs to be done in regards to the taxation of superannuation, but added that it is a “conundrum for the industry at the moment”.
“On the one hand, we’re telling government at the moment, don’t tinker with superannuation [because] the constant changes are undermining confidence in the system; on the other, we’re saying, well, actually, we might need all these changes around taxation and superannuation,” Ms Westover said.
She said that while it was certainly worth looking at changes to tax and superannuation, the industry first needed to establish a range of objectives for superannuation, or risk undermining public confidence in the super system.
“First and foremost we need to establish a set of objectives, not only for super but [for] our retirement income system and then we can assess any potential changes against those objectives,” she said.
If one of the objectives established is to provide an adequate standard of living in retirement, Ms Westover said, it may then be appropriate to look at some of the proposals put forward, such as reducing the concessions for assets over $2.5 million within a superannuation fund.
“A balance of $2.5 million or $3 million may be appropriate for an adequate retirement so those people no longer need the support of government through tax concessions to save further – they should certainly have the option to save further within superannuation, but they lose those tax concessions,” she said.
Ms Westover added that the industry needs to “assess whether tax-free [superannuation income] over 60 is still reasonable”.
“It’s really [about] sitting down and doing the proper analysis of the implications of where those tax concessions actually lie and lining them up against each other, and what’s ultimately going to meet the objectives that we set down for our retirement income system,” she said.
Eric is not far from what the IDC on Retirement Incomes wanted back in the 1980s. All benefits as pensions based on life expectancy at age of start, $1 for $1 income test but the quid quo pro was unlimited deductibility, no taxation in accumulation or in the fund and no preservation (since it would always come out as taxable income and offset any social security benefits). In other words super would be a forward income averaging device over a lifetime with allowance for reversionary pensions for dependants.
This topic has brought on an interesting debate, however, I believe there are other areas that need to be included. Superannuation, whether SMSF or other, offers tax concessions to provide for our retirement, but those concessions have been used to minimise tax. I submit the following for consideration. From a set age, be it 65, 70 or whatever, I believe there should be a compulsory conversion to pension mode. If we then re-instate those pensions as taxable income, with some tax concessions up to a set pension income threshold, the concept of being solely a tax minimisation would diminish and the excess would flow back into our tax system.
A couple of quick points.
Greg E, the other option for excess benefits is simply make pension payments taxable income just like they used to be. The taxable component was added to assessable income and tax payable if applicable, this was only in 2005 BTW. Secondly put a cap on tax exempt income in dollar terms inside the fund to cap ECPI claims. This would be not be a burden on the admin system as other income must be reported anyway.
Secondly any claim that the super system does not ameliorate the aged pension liability is hard to understand.
Pension thresholds are also going back to the pre Howard gambit of approximately 10 years ago on 1 January 2017.
As a result some people will lose up to $14k in ages pension.
The debate is not that hard nor complex in my view.
DavidL – the problem is that even someone with $350k still receives the age pension. I agree, it is crazy. Surely retirees should have to exhaust their super before they get handouts from the government.
I’m confused. If there are SO MANY people with SO MUCH MONEY in superannuation that the tax concessions are apparently an issue, then surely it follows that the number of people ultimately reliant on the age pension must fall over time. Or is my maths somehow wrong?
Everyone entering the workforce from 1 July 1992 will have at least 45 years worth of contributions and earnings stashed away as superannuation savings to help fund their retirement.
Even someone on minimum wage should have around $350k saved up by retirement.
That’s the equivalent of 18 years worth of age pension payments at the maximum rate that the government won’t have to pay to that couple!! And many people will have way more than the minimum amount thanks to additional contributions made over their lifetime.
If governments stopped pissing our taxes down the drain the budget wouldn’t be in such a mess, and we wouldn’t even be having this discussion.
I understand that long term savings require stability, and periodical changes could destabilise.
But GFC showed that during crises, Governments are as powerless as a leaf in a storm (Iceland, the mighty US, our own bank guarantee…) Preemption requires potential disasters to be scanned and averted, if need be, by making changes.
Our super system was designed to significantly reduce the age pension burden, and tax concessions were offered. This goal now seems a mirage, and a review (and balance) are warranted.
I hope we are not suggesting nothing should change in policy settings? Why are favourable changes not considered changes?
Government is not an amorphous other person, it is us. Who will speak up for the tax payer when lobby groups seek benefits but will not give up any?
Treasury mucked up superannuation when it imposed the 15% “bring forward” tax in the 1980s. It was very short sighted.
If more of this uncertainty goes on, people will be looking for alternatives such as personalized life assurance (not available from the local club but available elsewhere).
Raman, based on your premise that changing circumstances justify governments having a changed reaction, then any laws, policy could only be considered a commitment at the instant they were enacted.
Superannuation is a long-term activity with funds inaccessible to participants for decades. Superannuation would be an extraordinarily high risk activity for participants if laws, policies etc were transitory and I suggest only a fool would make contributions to superannuation if this proposition was enforced.
Superannuation laws, policy etc must remain stable for timeframes near to the contribution time of participants for them to have confidence in superannuation and lock funds away for decades at a time.
In terms of solutions, perhaps across the board grandfathering (whenever any change is made) is a way ahead ?
If reduction / removal of existing concessions flows from the law of unintended consequences, by symmetry, so was making all benefits post 60 tax-free in the dying days of Howard Costello government. I did not notice a whimper of protest about this ‘tinkering’, nor was then any consultation with those who fund the concessions (tax-payer).
Short of a plebiscite or referendum each time any change is mooted, we would be doomed to status quo.
Like Keynes who famously boasted that he changed his mind when circumstances change, Governments must react to emerging conditions – all the time.
Law of Unintended Consequences is intended.
Is this an example of the law of unintended consequences ?. Offer tax incentives (concessions) to encourage super contributions. When the contributions have been made (and time has passed) , act astonished that people have used the laws of the land to contribute to superannuation and are now expecting their tax concessions to be provided. Ahh no, that isnt what we meant to happen , is it ?.
I support Terry Dwyers assertion that the voters who have legally contributed funds under the rules (and promises) of the day should be consulted.
Thanks Gary, your logic is reasonable.
But in fostering the retirement savings with concessions, the taxpayer (you and I…) is foregoing current revenue in the hope that the age pension burden might be reduced. That was the Keating vision.
Recent research has thrown this in doubt. With intermediate rent seekers using up the flows, market volatility sapping confidence, financial illiteracy and disengagement putting off savers and with the risk of fraud looming, the smart money is now predicting that it is a forlorn hope. Rapidly ageing demography (less workers per consumer) does not help.
A more targeted spending might improve the outcomes more equitably. This is the new hope!
Why not increase super tax to personal levels? Because personal tax is way too high.
Furthermore there will no longer be any incentive for people to lock away their money for years. I’m in my 30s and I am already very reluctant to do that, since I think there’s a massive risk of a future government preventing me from accessing my own money when I reach 65, and also because I think that my best investment right now is paying off my mortgage. The only reason why super is even palatable to me right now is because it’s concessionally taxed. I’d be seriously pissed off if it was taxed at my marginal rate.
DavidL: it is easy to blame tax-hungry governments and forget the blamers also consume goods & services funded by their taxes. Agree wastage must be avoided, but in our materialistic society, rich / middle class waste scarce resources through luxuries – from the perspective of the poor. Go back to communism?
Gary Lindsay: why not increase super tax to personal levels? Henry review said so, with a limited protection. That got nowhere!
Unfortunately, Terry and Ramani, “sensible” ideas never get any traction in the Australian political landscape.
Governments are only concerned with collecting taxes (mostly to pay for their ineptitude) because it’s the easiest option; industry groups are only concerned with protecting their market share and revenue base…..and the poor old taxpayer (ie, us – the ones with all the money but no say in any of this) just get taken for a ride by all these “experts” who apparently know what’s best for us!
A better idea might be to reduce personal income tax to the level of super so that super isn’t as much of a tax dodge. Then make the tax system simpler.
But I don’t see that happening, there are way too many vested interests and way too many politicians who want to remind everyone that they’re important.
I read Terry Dwyer’s sensible comments as saying members’interests should be the acid test by which any suggestion must be calibrated. His objection ‘not their money’ would, if interpreted literally would rule out almost everyone: industry sectors, policy-makers, professionals (lawyers: Terry, accountants, actuaries: me, regulators: me, if exes are counted) and the media!
Given pervasive disengagement, all that we could hope for is useful proxies measured against the acid test above. It is to be hoped that out of the resulting chaos, we might get some workable ideas after the very large dose of self-interest of the vocal proxy groups is filtered out. The mismatch inherent in getting these very long-term outcomes through our political process renewable every three years (without counting the states) makes managing a complex bank’s asset-liability mismatches a walk in the park. But we must try…
If we want to be taken seriously as an industry then we need a mature industry response. Saying that the current concessions should continue forever with no adjustments is unrealistic and reduces the industry’s credibility.
It is entirely reasonable that people with large balances (e.g. $2m or $3m) should have to pay some tax on pension income. If the proposal to remove the exemption on pension income for people with large balances is too hard to administer then here are some alternatives:
1. Have an upper limit on super balances. Everything above say $2.5m must be taken out of super as a lump sum.
2. Impose a levy (eg 1% p.a.) on super balances above $2.5m
It is much easier for the government to aggregate balances than to aggregate investment income, so these alternatives are relatively easier to implement.
Liz Westover is right in that the super industry (if it can be called that) is a tower of Babel, speaking in tongues. Anything but homogeneous.
Why are we surprised? The retail and industry sectors only agree on their common antipathy to SMSFs. Herding cats would be easier.
If instead of being fixated on the industry’s own tax bill, the warring tribes could consider the sustainability from the taxpayers’ perspective, the compulsion and preservation that underwrite the providers would be justified.
If we are going to have this continuing talk about taxing members funds above certain limits or of them loosing superannuation tax concessions.
Then those members that get to this stage should also have the right to opt out of the compulsory superannuation contribution regime. If they aren’t allowed to do that then the forced contributions into the super fund should still be allowed to access the tax concessions.
The industry’s views are or should be irrelevant. It is not their money. What should count are logic and the views of the voters whose money it is.
Nor should it be a matter of counting out the “amount of a concession”. The logic of superannuation treatment in tax law flows from a recognition that labour income should be averaged over a lifetime since human beings are depreciable assets. It should not be a debate about handouts.
Finally, if super payouts are taxed it makes other alternatives such as personally-designed life assurance look better