A debate is raging over the definition of ‘superannuation’, and in particular whether it should contain any reference to the amount of superannuation or quality of life the superannuation should provide. This is as something of a stalking horse, for the Labor Government, to walk away from election commitments, and then impose quantitative limits on the size of superannuation accounts and the size of the budgetary cost of the attendant tax concessions. For myself (in an ideal world) I’d cap the size if super funds, but this would be in conjunction radical other changes, namely: all contributions deductible, no fund tax on contributions, or income, and all benefits coming out, would be assessable. As soon as the fund exceeded the cap size, the excess would be paid to the member, as an assessable benefit. The cap size would be open to debate, but I think would not be less than $2m or more than $5m.

What the Assistant Treasurer said

This ‘stalking horse’ was on show at the AFR Wealth and Super Summit on 8 November 2022. The Assistant Treasurer, Stephen Jones, has indicated that the objective of superannuation needs to be settled and legislated before a sensible debate can be had on the taxation of superannuation., Mr Jones confirmed, in his address, that the Government will seek to legislate an objective of super. Once a clear objective of super is settled, Mr Jones said a meaningful conversation can begin around the taxation of super. “Those who support the status quo will need to demonstrate how concessional tax arrangements for high balance super funds meet the common objective. Those who argue for change will need to show how that approach meets the objective”, Mr Jones said. Putting that in context, he said:

“The concessional taxation of superannuation is a lightning rod for discussion. When I see the size of some funds, I’m not surprised. For example, we have 32 self-managed super funds with more than $100 million in assets. The largest self-managed super fund has over $400 million in assets. If the objective of super is to provide a tax-preferred means for estate‑planning, you could say it is doing its job. I celebrate success, but the concessional taxation of funds like these has a real cost to the Budget which needs to considered. Mercer estimates that the tax concessions on a single $10m self-managed super fund could support 3.1 full age pensions.”

What the Financial Review said

On the same day (8.11.22) the Financial Review posted an article entitled ‘Labor sets sights on Rich Lister super tax breaks’. It says “Financial Services Minister Stephen Jones will tell The Australian Financial Review Super & Wealth Summit in Sydney on Tuesday that Labor is gearing up for a debate on tax concessions once the government outlines its definition of the purpose of superannuation and puts it into legislation.

Financial Services Minister Stephen Jones.  Natalie Boog

Treasurer Jim Chalmers last week signalled that a wind-back of tax concessions was on the agenda, saying the government would scrutinise “what tax concessions are costing the budget and their distributional impact”. Curtailing the tax concessions paid to people with multimillion-dollar super accounts would raise billions of dollars annually, narrowing the structural budget deficit, which is estimated to be about $50 billion a year. Some of the dollar fund size amounts being bandied about, are as follows.

  • $1.7m – which is the current limit on the amount which members can have in a fund, that enjoys the nil% tax rate, in the fund, on assets supporting a pension benefit. Under current rules, however, retirees with more than $1.7 million in super can leave the excess funds in their accumulation account and receive a generous concessional tax rate of 15 per cent on earnings and contributions, well below the top marginal income tax rate of 45 per cent.
  • $2m – The Grattan Institute has done modelling on a superannuation cap of $2m, which says would affect about 80,000 people and save the budget about $2.8b a year.
  • $5m – Some of the super sector’s influential lobby groups have lent support to the idea of limiting balances at $5 million – a move that would affect at least 11,000 Australians. The Association of Superannuation Funds of Australia, which has backed limits, estimates capping superannuation balances at $5 million would save taxpayers $1.5 billion annually.

The review said most people with more than $5 million in superannuation accrued their balance before the introduction of tighter contribution limits, which largely eliminate the possibility of new funds of this size in future, but the accounts are expected to stay in the system for decades.

One day later (on 9.11.22) the Australian Financial Review reported on this in an article entitled: ‘Debate flares on purpose of superannuation‘. An idea of the range of possible wordings or concepts, can be gained from this.

 

The quantum idea has been pushed by the Australian Superannuation Funds Association (ASFA) which represents the APRA regulated superannuation industry. It has become famous for its research into, and publication of, two grades of ‘retirement standards of living – ‘modest’ and ‘comfortable’. To be ‘comfortable’ in retirement, it says that an individual needs an annual income of $47,383 pa (and a couple $66,725 pa) and to lead merely a ‘modest’ lifestyle and individual will need $30,063 (and a couple $43,250 pa). This, they note, compares to the amount of the age pension –  $26,689 pa for an individual and ($40,238 for a couple).

Politics and recent history

The Coalition’s financial services spokesman, Stuart Robert, said on Tuesday he favoured a simple objective in line with David Murray’s Financial System Inquiry in 2014, which made no mention of terms like comfort. The Murray review proposed an objective of superannuation as a means “to provide income in retirement to substitute or supplement the age pension”. The Turnbull government tried to legislate the Murray objective, but faced intense pushback from Labor and industry groups, who wanted the legislation to refer to the provision of a “comfortable” or “adequate” lifestyle. Then assistant treasurer and former National Australia Bank executive Kelly O’Dwyer said references to an adequate, comfortable or dignified retirement were subjective, and would leave superannuation subject to “constant political interference”. Ms O’Dwyer was also concerned that there was no consensus around how concepts such as “adequacy”, “comfort” or “dignified” are understood, let alone measured. The Coalition feared that introducing a goal of providing Australians with a comfortable retirement would increase the burden on the government of the day to measure super policies against a concrete objective and would probably require an adjustment of tax breaks so that low-income earners received greater tax concessions.

Major super funds divided

With another debate over super’s purpose on the horizon, major superannuation funds have not coalesced around an objective. The following gives some idea of the variation.

 

Asked on Tuesday at the summit for specific wording on an objective he would support, AustralianSuper chief executive Paul Schroder said he favoured a simple definition akin to that proposed by David Murray and the Coalition. “The purpose of super is to deliver retirement incomes to all Australians in conjunction with the age pension,” he said.

Industry Super Australia chief executive Bernie Dean said a well-designed legislated objective of super should safeguard the retirement savings of members now and for future generations. “We’re looking forward to the government’s consultation process because it’s an opportunity to assert in law the long-standing principle that super savings are preserved to provide workers with income in their retirement, alongside the pension,” Mr Dean said.

FSC chief executive Blake Briggs said he supported a “simple objective” reflecting the expectations of everyday Australians that superannuation is for providing an income to improve the quality of life in retirement. “The FSC agrees with the government that the priority should be to first legislate a commonly shared objective for superannuation before considering changing tax settings, to avoid ‘putting the cart before the horse’ and reduce the risk that tax changes undermine consumer confidence in the system,” Mr Briggs said.

Mercer Australia chief executive David Bryant told the Summit he wanted the definition to include a reference to a “dignified retirement”.

 


 

[Tax Month – November 2022 – Previous Month, 11.11.22]