Cap contributions at $11K, says Grattan Institute
The Grattan Institute’s suggestion of an $11,000 cap on concessional contributions has been met with opposition in the SMSF sector, with some claiming it would “throttle retirement savings”.
In its Insight blog yesterday, Rice Warner said the Grattan Institute’s proposal to limit concessional contributions to $11,000 per year would pose a number of administrative hurdles.
The Grattan Institute said in its report, titled Super Tax Targeting, that 80 per cent of the contributions above this $11,000 level come from people who are likely to retire with enough assets to be ineligible for an age pension, even without such big super tax breaks.
Rice Warner, however, argued the proposal could create problems.
“How do we treat compulsory SG contributions over the $11,000 cap under the Grattan proposal?” Rice Warner questioned in the Insight blog.
“Do we tax them at the highest marginal rate or treat them as a non-concessional contribution (even though some members below the maximum SG base will not be paying tax at the highest marginal rate)?”
Speaking to SMSF Adviser, Rice Warner consultant Nathan Bonarius said implementing a flat 12 per cent tax across both the accumulation and pension phases of superannuation may be an easier option for the government to introduce greater equity to the system.
“If you tax [superannuation earnings] at 12 per cent instead of 15 per cent in accumulation and 0 per cent in pension, it’ll be reasonably cost-neutral, so people over the entire length of their career wouldn’t be worse off,” he argued.
“It would be broadly more equitable because you’d be charging the same rate of tax for people regardless of their age or whether they’re drawing the money down or not.”
Mr Bonarius said nothwithstanding any changes the government might look at implementing, it is vital to consider any unintended consequences or problems that may arise.
SMSF Owners’ Alliance executive director Duncan Fairweather also had concerns about the $11,000 cap proposal, stating it would “confine superannuation to merely being a substitute for the age pension”.
“This narrow approach defeats the purpose of superannuation. If people can only save enough for retirement to be a bit better off than the pension then, rationally, they will spend their retirement savings as fast as they can and go on the pension,” said Mr Fairweather.
“Where is the incentive to save more and be financially independent?”
Mr Fairweather said this was not the way to grow Australia’s savings and provide everyone with a chance to live comfortably at a level related to their pre-retirement income, a concept known as the ‘reasonable replacement rate’.
“Grattan’s plan would throttle retirement savings and condemn millions of Australians to spend the last years of their lives in genteel poverty,” he said.
“Grattan quotes ASFA’s estimate that a retired couple need super savings of $640,000 for an ‘affluent lifestyle’. At a 5 per cent return, that would give couples an income of $32,000 – hardly affluent."