While the government is likely to avoid changes to super in the immediate future, tax changes to superannuation may not be that far off.
The superannuation system was saved from radical overhaul in the May 2014 Federal Budget, but it is becoming increasingly apparent that the tax concessions to the wealthy are unsustainable in the long run. A number of people, including Liberal heavyweight Malcolm Turnbull and Treasury Secretary Dr Martin Parkinson, have intimated that the excessively generous deductions in superannuation available to the wealthy are unsustainable and need to be considered in any genuine tax reform process.
The government’s promised review of the tax system is the most likely conduit for any changes, although in order to maintain its pre-election promises (to not make adverse changes to superannuation in its first term) the government will most likely put off implementation of any changes until after the next election.
Taxpayers Australia is of the view that the superannuation system should be designed to get as many people into self-funded retirement as possible. The reality is the superannuation guarantee (SG) rate (even at its eventual 12 per cent) will be insufficient to meet most people’s needs. People will need to make personal contributions to their superannuation and this should attract concessional tax treatment to make up for the money foregone through doing so.
This means we need to keep the tax-effective nature of contributions to encourage personal contributions above the SG rate.
While most of us will need superannuation to provide for our retirement, the wealthy do not. Without it they would still be able to make adequate preparations for their retirement years. The question then becomes do they need, and should the system continue to provide them, generous tax concessions. With some studies concluding that 40 per cent of the available tax concessions go to the top 5 per cent of Australians, this is a fair argument.
The difficulty is how do you create a system that encourages those who can (and need) to contribute more, while ensuring the already wealthy are not able to minimise tax through abuse of the system.
The solution in our minds is to have lifetime contribution caps and tax on earnings of funds over certain thresholds.
The first step is to determine what is an adequate level of superannuation savings needed to pay for a reasonable retirement. The Association of Superannuation Funds of Australia’s (ASFA's) Retirement Standard is often seen as the benchmark. It says a modest retirement will require an average couple to have $33,509 in income a year, and for a comfortable lifestyle the annual income required is $57,817. If we assume an annuity returns 6 per cent per annum this would require an annuity of around $1 million.
Taxpayers Australia proposes that along with the current annual limit there should be a lifetime limit on concessional and non-concessional contributions and tax on the income earned by funds with large assets. We propose:
• a concessional lifetime limit of $600,000 indexed each year to CPI in $5,000 increments
• a non-concessional limit of $1.8 million (total contribution limit of $2.4 million) indexed each year to CPI in $5,000 increments
• any concessional contributions over the indexed $600,000 would be taxed at the top marginal rate and count towards the non-concessional lifetime cap
• non-concessional contributions in excess of the lifetime non-concessional contribution cap would be returned to the individual
• individuals in retirement phase with $1 million or more (indexed each year to CPI in $5,000 increments) in assets at the start of the financial year have all their income taxed at 15 per cent, and rebate up to the first $15,000 in tax
• superannuation accounts with $2.5 million or more (indexed each year to CPI in $5,000 increments) in assets in accumulation phase should also be taxed at 30 per cent on their income earned.
Such proposals will ensure that people have an opportunity to grow their superannuation balance, but that the very wealthy cannot park their assets so as to have a tax-free retirement income stream. It will reduce the costs of the superannuation tax concessions to the very wealthy and discourage excess amounts of money being put into superannuation.
We believe our proposals will provide billions in savings from superannuation concessions while making the system more equitable without discouraging middle income earners from topping up their superannuation with personal contributions. This should negate the debate that superannuation concessions are too skewed to the already wealthy.
Reece Agland, superannuation products and services manager, Taxpayers Australia
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