Defining super: what you need to know
While the superannuation industry has no objection to implementing a broader objective for super, it appears the government may have already lost sight of the important safeguards within super. Let’s explore why this is important for you.
So far, we have received two tranches of legislation supporting the government’s superannuation reform with their centrepiece of tranche one being the objective of superannuation. The ‘draft’ primary objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension. That sentence pretty much sums up the entirety of the Superannuation (Objective) Bill 2016. Of course, there is more to it, but you need to read the explanatory material. What does it all mean and what impact does it have on the government’s superannuation reform package?
To the average superannuation member and SMSF trustee, this bill serves little purpose because they already belong to a superannuation fund that has its own purpose and it is the sole purpose test. In fact, all material supporting the legislation says that the objective of superannuation does not replace the purpose of superannuation. Confused yet?
The issue is confusing, but in simple terms, the objective of superannuation is a system-based piece of legislation that effectively dictates to policymakers what must be taken into consideration when formulating any new superannuation policy. The sole purpose test is, of course, an instructional manual, albeit a loose one, to superannuation trustees about the operational requirements of a fund and why the fund exists. At least both have a common theme and that is the provision of retirement income.
As stated above, the explanatory memorandum accompanying the bill does provide us with further guidance about the primary objective by identifying subsidiary objectives that should be taken into consideration.
For those that have not had the chance to look at the recently drafted legislation and its accompanying material, the subsidiary objectives that support the primary objective are:
• Facilitate consumption smoothing over the course of an individual’s life;
• Manage risks in retirement;
• Be invested in the best interests of superannuation fund members;
• Alleviate fiscal pressures on government from the retirement income system; and
• Be simple, efficient and provide safeguards.
On face value, it hasn’t taken the government long to fail to meet their own policy objectives if we are to believe it has taken into consideration these subsidiary objectives while drafting tranche two of the superannuation reform measures. In fact, before we even try to measure tranche two against the objectives, it should be remembered that the government has already abandoned parts of tranche one, namely it has abandoned its decision to remove the work test for individuals aged 65 to 74 as a softener to the opposition, which by my account fails points one through five on multiple levels.
While superannuation is no laughing matter, I can’t help but smile each time I refer to subsidiary objective number five. It states that an objective of all future policy should be simple, efficient and provide safeguards. If there is a better segue into tranche two of the superannuation reform package, I’d be happy to hear it.
In many respects, it is pointless trying to dissect to any great detail the technicalities of the reform package and we are conflicted if we try to explain to trustees what it all means prior to it becoming law, given people only hear what they want to hear and the proposed law will inevitably change.
This, however, doesn’t stop us from questioning the validity of the proposals. I’m not opposed to the introduction of a transfer balance cap, but it seems that in application it is extremely flawed particularly when measured against the objective of superannuation as stated, but more importantly to me and all other superannuation members, the sole purpose test.
Let’s just reflect for a moment on one core purpose of the sole purpose test – to provide benefits to a member’s beneficiary in the event that a member dies prior to retirement. Add to that the requirement for all SMSF trustees to consider the insurance needs of its members.
Let’s assume an SMSF holds a life insurance policy for $2 million over one member of the fund who is aged 42, married, with a spouse aged 39 and two young children under 18. If that member dies and the fund pays the insurance proceeds as an income stream to the member’s spouse, on face value the spouse will have utilised their entire transfer balance cap resulting in all future superannuation proceeds being considered accumulation, unless they commute the benefit to a lump sum, but outside of six months this may have other consequences. The law provides that it is better for both spouses to die so the benefit is paid to the children as it will not count towards their future cap, well at least $1.6 million anyway.
This is only one example of the subsidiary objectives being ignored or perhaps deemed too difficult to provide for. Another is providing an exemption for structured settlement but not TPD.
While there is no objection to having an objective, we should not lose sight of the purpose and if superannuation safeguards the payment of benefits due to pre-retirement death or disability and provides some comparatively insignificant taxation benefits – comparative meaning that most people would prefer not to lose a loved one if given the choice – this should be viewed in an entirely different light to wealthy individuals trying to stash money away for a rainy day in a tax-effective shelter, and the legislation should reflect this.
Tim Miller, founder, Miller Super Solutions