Inflation will play havoc on proposed super cap

In the latest SMSF Adviser podcast, Aaron Dunn, CEO and co-founder of Smarter SMSF, said the $100 million SMSF balances the government said are what is being targeted are in reality few and far between.

However, although the government has said the $3 million cap will only affect around 80,000 people – another arbitrary figure – by the time it comes into force, it will be impacting many more.

“While some of the criticism around the proposed $3 million cap is we shouldn’t have it at all, some of the other criticism is, if you’re going to do it, it’s just the way that you’re going about it doesn’t really make a lot of sense,” Mr Dunn said.

He said while the media has data on how many $100 million superannuation balances exist, that in a generation they will have disappeared because of the number of legislative changes that have taken place.

“That said, once that member has died, there is a mandated obligation to have to take some of that money out of superannuation, because the survivor, the tax dependent of that person has a limit in their own right as to how much they can have within a concessionary tax environment,” he said.

“So the people that have that money, through no fault of their own other than good investment performance, have seen their balances grow and grow quite significantly.

“Yes, they’re going to get tax concessions, but it’s going to be for a finite period of time.

“Now the argument is $3 million is deemed to be rich, but we know quite clearly that the 80,000 [the government said this proposal is going to affect] is going to be more than 80,000 because of the fact that we have people who will die.

“We know the $3 million cap doesn’t start until 1 July 2025 so therefore, in current dollars, it’s probably $2.8 million once we started playing indexation and so forth.

“So we’re just not getting the whole story here and I think we would like to further understand the dialogue and come up with something that is workable.”

Mr Dunn said while tax concessions are becoming a much larger burden on the government’s coffers, any new limit to superannuation needs to be done in an “appropriate and measured response”.

He said there is a lot of confusion around how the rules will work and this type of information chaos can be traced back to 2017 when superannuation reform rules were introduced with the transfer balance cap.

"The transfer balance cap indexes in line with movements in inflation so we started at $1.6 million and we’re now at $1.9 million,” he said.

“We’ve seen those $100,000 incremental changes because of inflation but there is a rule around what’s called ‘disregarded small fund assets’ that was put in place during the implementation of those reforms, because there were concerns that people would be buying and or shifting assets in and out of retirement phase to try and avoid having to pay capital gains tax.

“What they did was introduced this concept of ‘disregarded small fund assets’ but when they drafted the legislation, they referenced the figure of $1.6 million.

“That figure is actually still a hardwired figure inside the Income Tax Assessment Act.

“And people are saying, ‘well, actually, everything’s gone up so is that number also up too?’

“The answer is no, they are actually hard figures and all of a sudden you’ve got to keep remembering a range of these different thresholds that exist.

“This will be but another one that doesn’t have any alignment to indexation, that is going to create more confusion, because I think people just understand that it needs to keep pace with the inflationary impact that it has on money itself.

“Therefore, when times are moving pretty quick like they are at the moment $100 today is not $100 in a year’s time, and we need to adjust for that.

“Again, that would be an appropriate response as part of what we’d like to see going forward.”