Superannuation - don't let past mistakes influence current policy
25 May 2015
As the saying goes, there are a few realities in life: death and taxes. Well it's fair to say that we can add another to that list: rule changes on superannuation.
With the announcement of the Federal Budget we have again been hearing about the potential superannuation related changes. Whilst the Government has reiterated no changes in their current term, both sides of parliament are concerned that the rules are still too generous. In particular they are paying attention to very large account balances, some in the tens of millions of dollars.
Why invest in super?
Superannuation is the cornerstone of retirement income and must remain a desirable entity in which to compulsorily and voluntarily build wealth. The continual tinkering with the rules runs the risk of turning people away from superannuation. Instead, they will pursue either negative gearing strategies to manage tax, exacerbating an already hot property market, or not see the value in saving and spend the money instead.
Investing savings into superannuation demonstrates a long-term commitment to accumulating capital for retirement. Without clear incentives thousands of people will opt out of additional superannuation contributions, failing to build sufficient wealth, and in the vast majority of cases, fall back on the currently very generous age pension. Any potential rule changes need to carefully consider this fine balance. The more self-funded retirees in Australia the better off we'll all be.
Past and present changes
There is no doubt that the rules were far too generous in the past and change was required. The prior rules allowed significant contributions to superannuation – these are simply not possible today. For example, prior to Peter Costello limiting after-tax contributions (now known as non-concessional) in 2006, there was no limit to how much could be added from after tax dollars. In addition, the concessional contribution limit was $105,113 in 2006/7 for individuals over age 50 – and that applied per employer!
The Government did have Reasonable Benefit Limits (RBLs) that were designed to reduce the tax concessions for large superannuation balances, which was sensible. However, the 1 July 2007 Simpler Super changes abolished RBLs, seeing large funds enjoy the same tax free treatment in pension phase as everyone else.
So it is understandable that when the Government sees $2m or more in a super fund in pension phase enjoying tax free benefits, it wants to find a way to tax the fund and its members. But if they wait the tax will come naturally. Simpler Super also abolished the ability for an adult child to receive their parent's superannuation as an income stream. Instead it must be received as a lump sum. This lump sum attracts a 15%-17% tax liability on the taxable portion of the fund and it also means that, in the example above, $2m finds its way out of the concessionally taxed superannuation environment and into the marginal rate tax system as ordinary money. It would take 11 years for an individual to get that back into superannuation using the $180,000 per annum (or $540,000 over three years) non-concessional contribution limits. This is the point - under the current rules it will take a very long time to build a large superannuation balance, and it is virtually impossible to build a $5m plus superannuation balance. So if the Government does nothing time will recover the tax.
What this means for you
It is also worth noting that the age pension for couples cuts in when assets (excluding your home) fall below $1.15m. Furthermore, assuming four per cent taxable earnings on a personal investment portfolio, and applying the low income and senior Australian tax offsets, you could invest $800,000 individually or $1.5m as a couple and pay less than $1,000 each in tax. Any superannuation reform affecting such individuals will be counterproductive.
When advising successful people nowadays, they have large mortgages due to rising house prices, they started having children later in life, they are educating their children privately, they can only contribute $30,000 (if under 50) to superannuation concessionally, many attract the additional 15% contributions tax, and they haven't enjoyed 25 years of growth on our sharemarket from 1983 to 2007 that averaged 17% per annum*! Generally they come up for air when they are in their early 50s, and it is only then that the mortgage is gone, the kids are through school and they have additional cashflow to commit to savings. The current superannuation contribution limits require consideration of earlier planning, scenario analysis and potentially sacrifices in order to maximise the superannuation and retirement planning outcomes.
So when the Government looks to how they may change the superannuation system let's hope they don't confuse the generosity of the past with the rules as they stand today.
*Data Source: All Ordinaries Accumulation Index annual returns 1900-2014