MLC Advice Solutions' national manager of SMSF advice, Peter Hogan, told delegates at the SMSF Adviser Strategy Day in Sydney last week that the annuity market in Australia relies on the fact there is not a tax at the pension stage.
“[Dr Henry's] recommendation is that it doesn’t matter if you’re in pension phase or accumulation phase, you should still pay tax at the fund level at 7.5 per cent, his suggested rate,” Mr Hogan said, adding that this would eliminate the difference between being in one phase or the other.
“I personally think that would be a bad policy decision," Mr Hogan said. "I can understand it from a tax policy position why they might want to do it, but certainly we have a very poor annuity market in this country as it is and what little we have relies entirely on the fact there’s no tax at the retirement level.
“If we introduce tax at the pension level we will have an annuity market that’s very annoyed,” he said.
Adopting something similar to Dr Henry’s proposal could also make it easier for the government to implement a tax on the accrued, unrealised capital gains for super funds in the transition from accumulation phase to pension phase, Mr Hogan warned.
“Back around 1999/2000, someone I used to work with in the tax office many, many years ago was given the job of drafting some tax legislation, where they were going to tax the accrued, unrealised capital gains for SMSFs, when you move from accumulation phase to pension phase,” said Mr Hogan.
“This guy spent six to eight months of his life drafting this legislation and he released a draft for comment. I’ve been reading tax legislation for about 35 years or so and I spent about 8 hours reading this legislation – I didn’t have a clue how it was going to work.”
When the draft legislation reached Parliament, no one there – or even those in the industry – was able to understand either and so the legislation never came to light, he said.
“We sometimes [still] get people saying moving from accumulation to pension phase without collecting tax is a route and we’ve got to close it down, but I can guarantee that if anyone gets this job again we’ll end up with the same situation.
“So I think this is a benefit that is going to be around for a long time because it’s too hard to crack to collect any tax. The only way we might have a different result is if one of Henry’s recommendations is adopted,” Mr Hogan said.