In its pre-budget submission, ASFA said that while the superannuation system is well designed and working for the majority of Australians, it acknowledges that there is merit in addressing concerns about fairness in the system.
ASFA stated that one of the ways equity across the system can be improved is through the removal of the indexation of the transfer balance cap and removing balances above $5 million from the concessionally taxed superannuation system.
“Superannuation is about ensuring people have adequate income in retirement, it is not about facilitating excessive wealth transfers,” said ASFA chief executive Martin Fahy.
ASFA said it is concerned that when the SMSF transfer balance cap (TBC) is indexed on 1 July 2021 from $1.6 million to $1.7 million, it will cause confusion for members as every individual will have their own TBC between this range, which aligns with calls from other industry bodies.
“The Retirement Income Review Report raised concerns over equity of the system, while ASFA considers that wholesale changes to the system are unwarranted, we consider that there is an opportunity for modest changes to ensure the system remains fair and efficient. In this regard, the transfer balance cap (TBC) is due to be indexed for the first time with effect from 1 July 2021, increasing from $1.6 million to $1.7 million,” ASFA stated.
“This will be confusing for fund members and will raise a number of issues in how the change is communicated to members and administered.
“Given the complexity of having multiple TBCs and to ensure the system remains equitable, indexation of the cap could be removed. This decision could be reviewed after the SG has reached 12 per cent in 2025.”
Another concern from ASFA is in relation to the effects on the sustainability of tax concessions within superannuation enjoyed in relation to investment earnings for high-balance members.
“This tax concession can be substantial for large accounts. The RIR Report observed that there are at least 11,000 superannuation fund members with balances within superannuation of over $5 million,” ASFA said.
“While the current caps on superannuation contributions limit the ability for members to build up excessive balances in the future, there is a real question regarding the appropriate treatment of high balances that were achieved in the context of more generous contribution caps in the past.”
ASFA said that the transfer balance cap regime limits the amount a member may take into the pension phase. However, “excessive” balances may still be present in accumulation accounts and therefore subject to a tax concession of up to 30 per cent of the tax on earnings (that is, 45 per cent personal tax rate less 15 per cent tax on fund earnings).
ASFA has proposed that those superannuation fund members aged 65 or over with total super balances exceeding $5 million on 1 July 2022 would be required to withdraw the excess from superannuation.
“Going forward, the withdrawal requirement would be applied to a member’s excess balance as they reach age 65,” ASFA said.
“The need to remove excess balances from superannuation may have liquidity implications for some small funds with large, illiquid assets such as property.
“These impacts would be mitigated by having a start date for the measure of 1 July 2022 and allowing, as a transitional measure, excess balances to be retained within affected self-managed or small APRA funds but subject to tax on the earnings at the top marginal rate.”
I have seen many changes to SMSF rules, TBC has become ridiculously become unrealistic due to the volatile economy. With all the hullaballoo about raising the cap each year as promised by the government but to date it has not happened. On top of that Investment Strategy, especially overhauled ones, is ridiculously unnecessary as it means nothing to clients and merely a “tick and flick” for regulators.
A good proposal surely $5M is enough. Property is easy to get out. Lump Sum benefit & no stamp duty
This TBC was the most complicated change to Super System from a Govt that claimed simplification. TBC just did the opposite and in this stage is getting more complicated. It would have been simpler to tax income at personal tax rates in the super above a threshold, say 120k per member p.a. The suggestion by ASFA is a good one for simplification and equity – however not the best one. Not sure what were the reasons for choosing the TBC in preference to just setting a threshold for annual tax-free income in the retirement stage. The only thing it has done is create a lot of economic activity for Advisers/Accountants and yet there will be errors, which could have been an unintended consequence, but should have been easy to anticipate for someone with the responsibility of legislating.
Mostly agree but I think it would be simpler to have it taxed at the individual level rather than the super fund level. With people having more than one super fund, and this information not being readily available to the Fund, it is not right to have this impost at the fund level. TBC is so ridiculously complicated. I’m finding errors on a regular basis in lodged TBCs and that is just for the ones I have access to via the TAP.
Good points. Noted about TBC errors- was very much expected.
Thanks, I overlooked the complication of people having super in other funds, as I have just one SMSF. However, I think it may be OK for ATO to take the burden of sending Additional Tax (similar to Div 293) or Tax refund based on individual TFN.. at least errors will be reduced.
My fund is in Accumulation and hoping this TBC confusion and terrible design/legislation will vanish before mine moves to Pension Phase.
The proposal of $5m is an excellent one, but probably wishful thinking as the Govt wants to tax those who have high savings in Super.
Just tax it on withdrawal with a 15% offset and remove all caps on pensions
Agree. It is the fairest and simplest way.
So assuming an inflation rate of 2% someone that retires today gets a TBC of $1.6m while someone that retires in 15 years gets a TBC of $1.2m (in real terms). How is that equitable?
SMSFA association suggestion of fixing the TBC at its current (indexed) value for a member once they start their first retirement phase income stream better.
Sensible suggestions from ASFA. Or maybe just have a standard $100,000 increase in TBC every 5 years, say. Most won’t get to use it anyway.
Do we really need more rule changes in super and so put another nail in the confidence that super can be relied upon? Rules exist already to 1) stop members materially contributing to super once they reach $1.6 m and 2) shrink super funds on death to $1.6m to a surviving member … in time the large balance superfunds will literally die out. Why are we worried about 1000 or so Australian’s who lawfully used the rules of the past and today to invest to become self-sufficient. Does ASFA feel it needs to propose such changes to just be relevant as an organisation? does it not worry about “regularising” rule changes to super is a greater danger?
That is the plan, limit savings and when the baby boomers are extinct the money assets will end up outside super, thus attracting income tax at higher rates. The savings pool is so large now & you cant trust governments to keep their hands out of the superannuation honey pot.
So you mean its just a total super cap of $5M not $1.6/7M? #changetosuityou.