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
What a pile of rubbish! How will stopping the rich “encourage” the average Australian? Tall poppy syndrome on the grand scale.
One could go the whole hog, have a 40-50% GST and abolish income tax altogether. But it’s still a tax on working. It is also a tax which exempts foreigners drawing income from Australian real estate etc and spending it back home. Google and Apple etc would love it.
GST raises old problems in new guises.
Increase the GST rate to 12.5% on everything and this discussion will be terminated – even on cold roast chooks.
I always feel much happier when I hear the word ‘Simple’ (Simple Super). Anything that a Government Member, Government Committee – or a Bureaucrat touches, amends or produces cannot be simple. Why am I happy — I like a little humour >>>
Come on Reece – you’re off with the fairies. Do you never experience RBLs and the surcharge. The 2007 changes were called Simpler Super for good reason. These proposals are totally impractical and as others have commented based on flawed principles.
I cannot believe that a couples’ comfortable lifestyle costs $58k per year while a modest income is $34k. This year we spent (after medical fund rebates) $28,000 on doctors and hospitals. I completed a cash flow last week for a client who does not live the high life and her income requirements are over $50k per year. She is a widow. My point is that $1 mill for a couple is not enough. I recommend that my clients aim for $2 mill in todays dollars to ensure a hassle free retirement. The problem with Taxpayers’ Australia via Reece Agland’s article is that the dollars are completely unrealistic. We have to do our spreadsheets and use real figures.
Personally, I consider Treasury to be pretty hopeless at long term, logical, tax policy. However, I would be quite happy if they did a nasty attack on super and sent more work to tax and estate planning lawyers such as ourselves.
The real truth about tax is that there are only 2 classes of taxpayers and they are not the rich and the poor. They are the well advised and the rest. It was ever thus.
The unfairest aspect of the whole system is that the earnings of a super fund is tax free once a pension commences. There is no logical, equitable or economical reason for this.
Given the size of the super pool the country cannot afford to have hundreds of billions of dollars invested in “tax free land” where the government also gives the owners free hand outs in the form of a refund of franking credits.
Good discussion but it is a bit late to redesign the system completely. Those on higher incomes pay higher marginal rates of tax – that is how it used to work in Australia and fair enough. Why do the bleeding hearts crowd then expect that when these people stop earning their higher incomes they should pay more on their retirement income (like having a wealth tax). I don’t think that is fair.
For all those that think that there should be a tax on pensions, good luck getting a lot of 90 plus year old self funded pensioners to stay up to date with their tax affairs and start lodging accurate tax returns again. I don’ think that is a good idea.
It seems like super is the last and easiest golden egg for Treasury to get their hands on. Why not just put up the marginal tax rates and be honest about it.
Lifetime averaging of super contributions has merit as it provides flexibility. As Anne points out, people can save more in the later stages of their working lives when they have paid off their house, educated their children and have a greater capacity to save. Re-engineering of the super system should be aimed at enabling more people to put more money into their super savings because the system is failing its purpose now most people dont save enough to be financially independent in retirement. If you are successful and earn more you can save more and enjoy a better standard of living in retirement. Along the way you will also have paid a lot more tax, including on non-concessional contributions to your super. In fact, higher income earners pay the lion’s share of income tax. The FSI’s Interim Report sees virtue in policy stability for confident, long term investment in super. We agree.
Duncan Fairweather
SMSF Owners’ Alliance
Great to see the debate. For those that want to provide me with their views personaly, in particular Dr Dwyer I can be contacted at ragland@taxpayer.com.au.
Though must say I have no envy of the wealthy, good on em I say but they don’t need and the government doesn’t need to provdie them tax incentives to save for retirement, therefore I believe there should be a point at which the tax incentives are switched off.
If we must do something on this issue I’d rather see accelerated pension pay out rates above certain balances than taxes being levelled. ie if society decides you should have no more than say $2m “sheltered” in super then the you sharply up the pension those people above must pay to bring them back down to $2m. Not take more tax off them
I don’t know if I agree that the Government needs to step in to incentivise particular behaviour.
On an extremity, say if the Government got rid of all the superannuation concessions. I doubt whether that will translate to what would have gone into superannuation to be ALL consumed. I would envisage a shifting of investment from superannuation to non-superannuation investments.
Any system design in my opinion should act not as a deterrent and place hurdles / restrictions in saving for retirement. I agree with the lifetime concept but see some merit also in the model for government unfunded funds – particularly the constitutionally protected funds. No CC caps on the way in, but caps on the money out (currently close to $1.3 million). So arbitrarily, if I pick a figure of $2 million, gets unrestricted concessions and flexibility to contribute as much within the limit in any year, with the excess amount starting to claw back some of the tax concessions.
Most of my clients who access the concessional caps are not “the wealthy” they are people in their 50’s who have paid the mortgage educated their children and now plan to save for an independent retirement self sufficient with no dependency on the govt. or small business owners who should be allowed to contribute with tax benefits given the role they play in the employment arena.
Look at the 5 % and leave the 95% alone to save for their retirement. If you are contributing to super each year rather than spending it and then looking for govt support in retirement then you should have a tax concession.
Super is always on the agenda when any govt has a black hole to fill.
I worked hard all my life, lived frugally, forsook a better lifestyle to save money for our retirement. If the government makes it too difficult to live in Australia then we will go live somewhere prettier and cheaper, pay tax to a less greedy Government.
This is completely unprincipled and reflects social envy more than rational tax principles.
Superannuation should simply be treated as forward lifetime income averaging for income from personal exertion. There should be no limits on deductibility, no taxation of earnings, but benefits should come out as life pension or annuity certain based on life expectancy at commencement.
The way Taxpayers Australia talks they have swallowed, hook, line and sinker the Treasury nonsense about superannuation tax concessions. I prepared the first Treasury Tax Expenditures Statement in 1982. The footnotes made it clear that the listing carried no tax normative implications. Unfortunately no one ever read them.
But faced with the sort of idiocy Martin Parkinson is talking up, one can expect taxpayers to seek alternative long term saving vehicles and I, for one, am happy to assist them
I’m with Peter – this proposal has absolutely nothing to offer to help lower income people to get more money into super. There are vast numbers of these right now who aren’t able to put in up to their $30K limit. The problem is not the limits or concessions it is because THEY DON”T HAVE ANYMORE MONEY TO PUT INTO SUPER!!
This proposal is only about stopping those nasty rich people getting a tax concession.
The only reason the concession is greater to the rich person is because they are getting taxed at vastly higher rates in the first place.
If one person is getting punched in the head 100 times and another only 10 and the Govt says we are going reduce the punches in the head 10% on what you currently suffer Mr Agland says it is unfair the person getting punched a 100 times gets to drop his punches in the head by 10 versus the person only getting punched 10 in total by 1.
These are reasonable proposals, emphasis on the word “reasonable” and similarity to RBLs, which were a nightmare for all concerned.
Only a person’s individual tax agent could get info on the phone on RBLs used. The rest of industry had to wait 6 to 8 weeks for a written report. Very hard to give any advice under those circumstances.
If the suggested changes eventuated, there MUST be a break in this ATO mindset that they need to MEASURE EVERTHING! We are supposed to have been under a self assessment tax system for the last 30 years. Computers insidiously changed that in the ATO, like it did to many businesses, without them even realising.
Given 98% of superannuants and their advisers are likely to do the right thing and self assess within such limits, the smart thing for the Govt to do would be to sit back and collect 98% of the savings, NOT introduce more wasteful bureaucracy.
Cannot disagree with the logic and conclusions. The only argument will be on the cut-offs suggested, but they do not look to unreasonable either. I would also assume that funds that already exceed these contribution limits will be exempt from the contrib. caps, but not the income caps and will not be permitted to make further contributions. The one area that is not mentioned are the capital gains tax roll-over receipts of a fund. These already have caps which are not part of the concessional or non-concessional limits. From the article above, I assume the contribution of say $1m in capital gains would continue to be OK, but if they take the members account over the $2.5m balance they would be subject to the higher tax.
The above does nothing to encourage poorer people to contribute, and leaves the tax benefits of additional CC to wealthly i.e Marginal tax rate – 15%.
Simple suggestion – include SG in taxable income, and allow a rebate of 15% for CC payments to super. That contributors all get a 15% tax break…
Peter
Why complicate an already complex system.
Retirement income requirements are relative ie what may be an adequeate Lifestyle requirement for a retiree previously on $200k per year will of course be different to an individual previously on $75k per year.
Change the tax free nature od super in pension phase and tax it at say 10% across the bgoard. Pproblem solved
An excellent article Reece – I totally agree.
We have a successful system that only needs tinkering. This article is a drastic and unnecessary change. Keep the system and just change the pension tax rate from 0% to 7.5%. I know my clients you refer to as very wealthy pay their fair share of taxes and duties. Stop with the wholesale changes!!