Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 496

$5 million cap punishes 30 years of super saving

Anyone hoping superannuation regulations will remain unchanged again in the next Federal Budget on 9 May 2023 is likely to be disappointed. Super was untouched in 2022 but the Financial Services Minister, Stephen Jones, has done enough jawboning to indicate he is ready to target high balances in super. This is despite the superannuation system introduced by his party 30 years ago in 1992 encouraging savers to use the wonders of compounding to build such large amounts.   

Most large superannuation institutions have rolled over and even the industry lobby group, the Association of Superannuation Funds of Australia (ASFA), supports a cap. In its submission to the October 2022 Budget, ASFA said:

“A balance of $5 million in concessionally taxed superannuation cannot reasonably be justified as necessary to support a comfortable lifestyle in retirement. ASFA estimates that introducing a $5 million cap on the amount that an individual could hold in superannuation would lead to additional revenue of around $1.5 billion a year, although the exact amount raised would depend on how excess balances were invested after they were withdrawn from the superannuation system.”

Likewise, the Australian Institute of Superannuation Trustees (AIST) supports the cap and nominates a date, 1 July 2024, when the amount in excess of $5 million should be withdrawn from super.

It's not often a new limit on super members is waved through so readily. It's either that the industry and retail funds know they are substantially unaffected at $5 million, or it’s better to promote a high cap than resist a smaller cap. It adds further complexity and another regulation to a retirement system that already confuses most Australians. 

Super is only for retirement income, not bequests

The Government needs some political wins to rein in the budget deficit and the 11,000 Australians with more than $5 million in super are an easy target. That oft-quoted number comes from 2018 and it’s probably closer to 20,000 or 30,000 now. The Retirement Income Review claimed a person with $5 million in super receives annual tax concessions worth about $70,000 because balances over $1.7 million are taxed at only 15%.

Minister Jones believes the first step is to define the purpose of superannuation, which has languished since the days of the 2014 Financial Systems Inquiry (FSI). In October 2015, Treasury announced:

“The Government has accepted the recommendation of the FSI that the objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.”

Once a purpose or objective is in place, Jones has the framework he needs to set a cap, with statements such as:

“I’ve got to say $5 million is a lot closer to the purpose of superannuation than $100 million ... If people have got superannuation balances in excess of $100 million, or even $50 million, I think it’s pretty hard to argue that that’s about retirement income ... It might be about estate management, it might be about tax management, but it’s not about retirement income, and that really is not the purpose of superannuation.”

Confirming his view on 3 February 2023 on ABC Radio Breakfast, Jones said the consultation paper on the objective would be issued “very, very soon”. I have previously written on different objective here, arguing that superannuation policy always considered its role as part of an estate.

The growing momentum is supported by think tanks such as the Australia Institute, who upped the ante by producing a paper called 'Self-funded or state-funded retirees? The cost of super tax concessions' claiming super tax concessions will cost the budget about $53 billion in the 2022–23 year which is marginally more than the age pension cost and an increase from 1.5% of GDP to over 2% in 20 years.

Other arguments for a lower cap include David Knox of Mercer (also featured in this edition of Firstlinks) who favours a limit of double the current $1.7 million transfer balance cap, although that is set to rise to $1.9 billion on 1 July 2023 due to CPI linking, which would take the proposed cap to $3.8 million. The Grattan Institute says lowering the cap to $2 million per person would raise almost $3 billion annually.

Five reasons against introducing a $5 million cap

To put the $5 million in perspective, let's consider what is possible based on other superannuation rules. By 1 July 2024, both the Transfer Balance Cap and the Total Superannuation Balance will probably reach $2.1 million per person due to indexation. Over 70% of people enter retirement in a couple and it's legitimate to focus on household assets rather than individuals. A married couple will have access to $4.2 million in a tax-free super pension by 1 July 2024. 

Why are we introducing a new $5 million cap at the same time that other limits are rising close to the same level? It's more complexity in the super system. A one-person household with $5 million and $1.6 million in pension will pay far more tax than a household couple with $4.2 million tax-free. 

As opposition to introducing the cap withers, let’s look at the case for no change. And yes, I admit that I have a dog in this race.  

1. That’s how long-term compounding works

When Chris Jordan, the Commissioner of Taxation, was asked at a conference how members had accumulated such large amounts in their SMSFs, he said balances were usually accumulated for over 30 years or funds held one or two investments that had done extremely well. He called the large SMSFs "accidents of history" and he added, "Don’t design the system for the last worst person.”

You don’t need to be Einstein (who never actually said compound interest is the Eighth Wonder of the World, but let’s go with it) to use a calculator and work out the dramatic impact of compounding. Anyone with a good income and spare savings who decides to invest in equities in super for decades will accumulate large amounts of money. That’s the power of compounding.

Sure, $5 million is a lot of money but it does not take vast wealth to accumulate such an amount with consistent investment over long periods. Consider how many working-class people now own $3 million homes in the western suburbs of Sydney by committing to a long-term savings pattern over 30 years called – wait for it ... it’s a devious scheme that should be capped – ‘paying off your home’. And many also qualify for the age pension.

Consider these examples:

This is consistent saving over time. Successive governments of both colours not only allowed but encouraged significantly higher amounts than these to go into superannuation.

2. Retrospective changes hit those who saved in super not homes

Australians are living longer and many will spend 40 years in retirement. The days of work until 60 and drop dead at 70 are long gone. Since the introduction of compulsory super in 1992, Australians have been encouraged by the superannuation system and governments of the day to forego current day consumption to save for retirement. The system has legitimately allowed annual contributions (concessional and non-concessional) over 30 years plus one-off injections of up to $1 million.

The most obvious personal investment alternative over years is to upsize the family home. In my own case, I lived in the same house from 1989 to 2020, or 32 years. Instead of trading up to a more expensive home, savings went into superannuation. Is Stephen Jones telling me I should have bought the fancier house capital gains tax-free and now worth the GDP of a small Pacific nation? 

So why is the person who decided to forego the extravagant home, Ferrari and lifestyle spending for 30 years and invest in a government-sponsored retirement system now forced to take out an excess? As Chief Executive of the SMSF Association, John Maroney, argues:

“Constant changes to the superannuation tax settings erode confidence in the system and discourage members from making long-term savings plans.”

3. Cost calculations assume no change in behaviour

People respond to incentives. The calculations on the cost of superannuation assume a person with a personal marginal tax rate of 45% makes big tax savings by going into super taxed at 15%. Then this 30% tax saving is repeated for, say, 40 years on the super earnings to give the overall cost. Consider this example from The Australia Institute:

“Assume someone on the 45% marginal tax rate puts away $10,000 in real terms every year for 40 years into a fund earning 7.5% nominal or 5.0% after inflation of 2.5%. With the tax of 15% on contributions and earnings that person would have a sum of $784,310 at the end of 40 years. However, if the contributor had to pay the actual applicable marginal tax rate of 45% then the balance at the end of 40 years would fall to $306,496.8. The difference, $477,813.20 is due to the tax concessions on both the contributions and the income in the fund. Hence the taxpayer contribution accounts for 61% of the 'self-funded retirement' in this example.”

Two qualifications are needed on the overall costings.

First, the main reason for the large super balances is not the compulsory Superannuation Guarantee, the size of which is limited and today stands at only $27,500 a year. Large balances are accumulated due to non-concessional contributions (NCCs), which on several occasions in the past, were permitted up to $1 million. Even now, the downsizer contribution allows $300,000 per person or $600,000 per couple without counting towards the Total Superannuation Balance. These NCCs are made from after-tax dollars after tax was already paid at the marginal tax rate.

Second, the cost calculations take no account of how behaviour may change. In 2016, when the estimated cost of superannuation was about $30 billion, ASFA made the following calculations:

“When you take into account the savings the government makes on the age pension as a result of super, and the impact of behavioural change (people shifting money from one tax-effective vehicle to another) that would occur if super tax concessions were removed, a more accurate estimate would be around $16 billion a year. This is shown in the diagram below.”

Tax planners will find creative solutions to the cap, such as transferring balances to lower balance members in an SMSF. A common way to receive the income of large SMSFs at the moment is to set up a family trust or investment company to receive the pension payment and members draw out only what they need at their personal marginal tax rate, which in some cases may be nil.

With an estimated saving of $1.5 billion on the calculated cost of the superannuation system of $53 billion, is it worth all this effort and angst to save 2.8% of super’s ‘cost?'? The Stage 3 tax cuts which remain government policy will cost $254 billion over 10 years and they will benefit far more ‘rich’ people.

Even within superannuation itself, abandoning the scheduled increases in Transfer Balance Caps and Total Super Balances from 1 July 2023 would save more money, as would reducing the Division 293 threshold (where high-income earners pay higher tax on super contributions) from the current $250,000 to say $180,000, as super fund HESTA has advocated.

Instead, this proposal introduces another layer of complexity and Australians will turn more to expensive houses to capitalise on a competing tax advantage. Money out of super and into houses ... that's just what the country needs.

4. Super high balances will reduce over time

The strongest lobbying opposing the cap comes from the SMSF Association. This is to be expected because more of the 1.1 million members of SMSFs would be forced to divest money from super than in retail and industry funds. Chief Executive John Maroney argues that extremely high super balances are a legacy issue and limits on contributions imposed in 2017 will remove these balances as older members die.

When large balances built up by previous generations are passed to children, the money will need to leave the super system.

5. The devil will be in the detail

How might the proposed $5 million cap work? Let’s check some potential implementation problems:

a) Forced asset sales

One proposal says amounts over $5 million should be withdrawn from super by 1 July 2024, but this may force asset sales. According to ATO statistics for SMSFs, over 10% of the assets of SMSFs with balances over $5 million (and over $10 million as the average number of people in each SMSF is about two) is in ‘Non-residential real property’. Much of this is professionals such as doctors, lawyers and architects who run their business from an office which is owned by the SMSF. This asset is not intended to be liquidated and, in some cases, might comprise the majority of the fund.

A further 4% is in ‘Residential real property’ and about 15% is in ‘Unlisted trusts’, and some of these trusts, especially in alternative assets and commercial property, are tied up for long periods.

Funds already need to hold liquidity to meet pension payments, but some funds will not have ready cash to withdraw from the super system. Maroney says:

“It’s our position that any proposal to restrict retention of extremely large balances in superannuation needs to be handled carefully to ensure that any rule changes allow adequate time to manage the restructuring that would be involved, especially where large illiquid assets are involved." 

b) Tax on unrealised capital gains

In the same way that balances are currently allocated between pension and accumulation and taxed accordingly, a third tier could tax earnings on asset levels proportionally above $5 million at the top marginal tax rate. This would avoid the need to sell assets.

However, tax is only payable on realised capital gains. If an asset has been held for many years, maybe decades, no tax has been paid on the unrealised capital gain. If the asset is sold when the balance is over $5 million, an SMSF may generate a huge capital gain. Will this be taxed at the maximum personal rate even if it has been held in super for 19 years of its 20-year investment life? 

c) Market falls reduce balances below $5 million

As Chris Jordan identified, many of the larger balances are due to windfall gains on investments. It is common for start-up tech investments to be held in an SMSF, and if the value increases dramatically, the balance could surge past $5 million. But then in a tech crash, or if the start-up hits problems, it can fall just as quickly. Will a member go in and out of the $5 million cap and how will this be treated? 

d) Impact on downsizer scheme

The Government proudly introduced the downsizer scheme to allow more money to move into superannuation, but a downsizer contribution does not count towards any caps and does not affect the Total Superannuation Balance. Does this mean a downsizer contribution that takes someone over the $5 million cap will have its earnings taxed at top marginal rates?

This change is politically easy

Changes which impose costs on a group of stakeholders usually face fierce opposition, but Stephen Jones is finding this one a walk in the park. Industry funds, retail funds and their lobby groups are supportive because the large balances mainly reside in SMSFs. 

Of course, $5 million is a lot of money, but it is often the result of a multi-decade savings journey that a retiree has pursued with discipline on other spending, appreciating the impact of 30 to 50 years of compounding at decent investment returns. A house bought near a major city 40 years ago has improved by similar amounts. It’s prudent investing over a long time under a government-sanctioned retirement scheme, in the same super system which will encourage a couple to hold $4.2 million tax free by the same implementation date. Oh, that's fine, is it?

 

Graham Hand is Editor-at-Large for Firstlinks. This article is general information.

 

159 Comments
Will Wallis
March 01, 2023

Surely those excess-savers with more than $3 million should now be exempt from adding more to their Super.

Victor D
March 18, 2023

Above $3m balance, pay 30% tax. Die, and the taxable portion of the fund (accumulated concessional contributions + accumulated earnings which were taxed each year) pays 15% plus Medicare levy.
So the total tax rate for anyone with money in super at death is 30% + 15% + 2 % = 47%.

Good luck treating super as a way to pass on wealth.

Katrina
March 01, 2023

‘Tax artists’….love that term.
What do I do to become one?

Mark B
February 25, 2023

"$5M cap punishes 30 years of super saving", really? You've had 30 years of benefit in the Super system with super low tax rates, I would say that's not too bad and worth every year (would you have done it differently if a cap was in place earlier?). We need to be careful about claiming unfairness with all this changing the rules to stop the excesses!

Not sure too many people claimed they wanted to stay on the old Super rules when Costello made Super withdrawals tax free after age 60!

Let's get a grip on this and not be too greedy, there are a lot of less fortunate people in the world.

robin
February 26, 2023

i have 7m in my super ...i lived in a caravan for 8 years ,then extemely modest units ...i put money in super and saved 15% on income tax but will get taxed at my marginal rate when i withdraw some of it ..i could have bought /upgraded to a 6m house that probably went up in value more than my super and pay no tax on selling it .i have actually by my actions contributed 15% tax on that investment to the 99% ....i could have also bought a farm ...also tax free ...
now i still live in a modest house worth 1m ..but once the changes come in ill pull out super and buy a bigger house and a farm ...then the 99% will get no tax from my earnings ....not even 15% ....and i am sure all the rest of the 1% will do the same ..leave in 1.9m free as a pension or 15% and pull out the rest to go to tax free areas ...

so its not as simple and easy as you think ...in my case the 99% will get less tax from me .....

Mark B
February 27, 2023

Wow, robin you've no doubt done very well, I hope that it makes you very happy! Maybe you didn't read my last sentence?

At least from your strategy the state Govt will be glad of the stamp duty that you'll pay out. I hope the farm works out well for you, sounds like too much work to me. It will certainly be interesting to see what things people do to avoid paying a "fair share" of tax with the changes, it definitely won't be simple as you suggest but there are always ways and who really knows what's fair at the end of the day?

rich
February 27, 2023

Robin, is it worth it? The stamp duty to pay on buying the bigger house [2m?]; renovations [nothing comes perfect, even if brand new, in fact especially if brand new], GST on furnishings, on upkeep services. The risk of overpaying, or being sold a lemon. The hassle of moving, or the work of maintaining a farm.
Whereas, increased tax payments can build better hospitals, or furnish our defence force with equipment to absolutely deter an authoritarian dictatorship who might 'provoke a reason' to trash the country and take our commodities [remember Ukraine].
The government needs more taxes, and those with 7m in super are ideal to be targeted, regardless of how they got there. You will still live comfortably and your balance will still continue to grow!

Lyn
February 28, 2023

robin, what a great aussie-made-good story, is this the sort of stuffing that Mr Chalmers wants to knock out of our people? We need another several million like robin but Mr C wants to cut them down & makes me wonder if Mr C has tall-poppy syndrome re himself.

Mark
February 28, 2023

@Lyn. No one is being prevented from being wealthy.

People with high balances are saying if it come about I'll just A, B or C and still pay less tax anyway...

Alex
April 19, 2023

@rich, the government doesn't need more taxes - they need to manage their spending better. And if they do need to collect more tax, why not increase consumption tax (GST) instead?

Dick
February 26, 2023

The Cap will achieve the Long term Canberra Treasury Goal/Policy , to mean that senior ACT/Federal mandarins have the largest pension pots with the smallest contributions and effort . This has been planned for twenty years . The whole Public Service superannuation and contribution levels , particularly Senior appointments , should be reviewed in detail.

Victor L
February 27, 2023

In 5 years, with inflation averaging 4% pa, a couple will be allowed to have a combined $5m not only in super, but also in pension form - tax free. What is the Government going to do then?

Envy politics is certainly alive and well

Aro
February 25, 2023

Super rules change over time, no matter what the pollies say at election time. Both sides have broken promises they made during elections. the current system is unsustainable if left unchanged. So changes will come, it is the rate of change and the breath of change that is to be determined. All the protesting is only going to slow change but it will be more drastic when it does happen.

Billy
February 23, 2023

This "large super balanced discussion" affects less than 1% of Australians. The wealthiest 1%. The proposal means they might have to pay tax up to say 30%, on some of their income, as opposed to the current rate of 15% (which is way too low).

They will still be able to keep $1.7mill per person in a ZERO tax environment - the same as everyone else.

All the noise and whingeing is self-entitled and irrelevant, and the other 99% of Australians will have no sympathy. This concept of 'changing the rules' is absurd. Rules are forever changing, that's why you have Accountants and Financial Planners to adjust your strategy over time.

Dudley
February 24, 2023

"the other 99% of Australians will have no sympathy":

Could try rapport - learning how they dunnit - and doing it for themselves.

George
February 23, 2023

So given it seems the government has made a decision about limiting super benefits, let's have a constructive debate about whether a $ cap or a % tax is the best way.

Trojan
February 21, 2023

Taxing earned income and exempting passive income from income tax is not acceptable and not sustainable. The tax burden needs to be equitably shared. The 11,000 $5m super cohort represents .042% of the population. Do not expect the general population to tune into the self-interest whining. What is the total value of funds held by the 11,000 group and the total of income tax paid on that value?

Dudley
February 21, 2023

Whose super funds are they anyway? https://www.afr.com/policy/tax-and-super/whose-super-funds-are-they-anyway-20230219-p5clq1 Tim Wilson and Jason Falinski Feb 20, 2023 – 4.47pm

Kerry
February 21, 2023

In my 60s, have around $5 million in super, three young children, one disabled, I am not sure if $5 million is enough, unless I accept the second rate low aspirational existence that the government seems to be offering.

Super is taxed, albeit at a lower rate, I didn't create the system, government did. As for their assumptions regarding the foregone tax revenue, I am not interested in paying more punitive income taxes than I have to. I'll just take it out and get back into geared investments - hint that's how I got to $5 million without having to deprive myself too much. Never realised I was such a minority. Have a few ageing relatives, we might have a chat about testamentary trusts. A lot of family in NZ, could go there.

Kerry
February 24, 2023

Already looking at property to mop up any excess I might have over the cap. I can't believe all these people who think $3 million is a vast amount of money, try looking for a house.

The government will never get the theoretical taxes to be raised by introducing these caps. They are ignoring the behavioural changes that punitive tax rates create. In fact they will lose the 15% tax windfall from these invested funds.

For anyone aspiring to be a filthy capatilist pig, investment returns are not all that high once you take into account taxes, fees, and inflation. Conservatively you might make 5%, so that's 50 grand per annum per million, so that's about 80 grand for $1.6 million which is the number Scomo came up with for the tax free element for his round of "reforms".

Mark
February 26, 2023

$3M is enough to fund retirement and if you need or want or have more than $3M there is no need for it to be in Superannuation.

There are plenty of options outside of Super.

TJ Khoury
February 21, 2023

This is purely a money grab by the current government, instead of addressing wasteful expenditure, it’s easier to target SMSF, already a heavily regulated sector, it’s easier to punish those that invest well, create wealth and sacrifice for their future within the rules by labelling these individuals as wealthy/rich to justify additional taxes, whilst the same bureaucrats get different treatment and carve outs, just look at S293. The whingers are those that make comments that another generation had it easier, that’s laughable, demonstrating a lack of knowledge and or facts. Cap limits at the end of the day have no long term meaning as value of money decreases over time, what may seem reasonable now is not in a decade. Graham’s article and comments are spot on, it’s disappointing that the current government wants to redefine what super is just because super has become a gold mine to raid to balance the budget, super should be left alone for retires as the majority will be affected not the few that may be able to afford it, constant rule changes do more harm than good.

Bryn
February 21, 2023

Well said TJ Khoury. I cannot understand self-flagellation and why are so many queuing up for it to demonstrate their guilt for being successful investors? When it comes to the comments by many in this super debate the government must be loving them! They should be careful otherwise they might be unwittingly ensnared in a raft of government changes they didn't expect.

Phill
February 25, 2023

Or hold down three jobs to get to the point where I might have a great retirement. I elected to do it this way and now they want to penalise me for it, I worked my butt off and still am in the hope of having a retirement I can enjoy through shear hard work and now I am a whinger!!!! I can remember a lot of people growing up who simply did not want to work and just have a good time whilst they were young, don't penalise me please. Penalise the ones who did not give a thought to one day they may grow old.

Dudley
February 21, 2023

$5M cap? 'Mass' withdrawal of surfeit and homes improvement. Dead cert for capital gain. Tradespeople's Xanadu. Tax rivers of gold.

Lawson
February 21, 2023

Too many people for too long have dutifully embraced the superannuation system and by complying with all the rules (and changes) have done what was asked by Governments and put their savings in super......Obviously some people have more to put in than others and a very few have accumulated so called large balances.....Rules have changed and the current caps will prevent such accumulation in the future....So what we are really talking about is 11-16 thousand people who with natural attrition will drop out of the system over the next 20 or so years......The complications for people being asked to remove excess super onerous and will be very costly to administer.......I just hope if the Government is hellbent on the $5m cap plan they do it by taxing the income above a cap at say 30% rather than dismantle in some cases complex asset structures........A 30% rate would eliminate franking refunds and still be under the top marginal rate........A lot of this envy and angst would abate if personal income tax rates were not so high in the first place......

Mark
February 21, 2023

I'm in an Industry Fund and have not put extra funds in for over 15 years. Even then it was only $200pw Salary Sacrifice. Getting a high balance is still possible if you take the time to look at how you invest your money. Too many people take zero interest in how their Superannuation is invested. What could well be the largest asset they will ever have and the just take it for granted, employer money goes in and some manager invests it. That is the sum knowledge of Superannuation for so many.

PhilG
February 20, 2023

I wonder how many of the large balances are held by individuals in their 70s - I suspect the vast majority.
I wonder if the Govt has forgotten the taxable component sitting in these large funds that is taxed at 15% to non tax dependents on the member's death (likely 95%+ of recipients) - ON THE CAPITAL!
As these large funds have grown organically the taxable component will be large.
From husband to wife there is an ejection of funds out of super but there will still be a large component left to be taxed.
Sure, you can attempt to cash it out before you die to save the tax, and some will be lucky enough to do that.
But....Tax on a large portion of capital vs higher tax on income. The Govt will probably be better off doing nothing!

Graham Hand
February 20, 2023

Great point, PhilG. Get the capital out before it is taxed. Emphasis on tax is on taxable component of super balance paid to non-dependants, not only the income. If I die before I expect to, I'll thank Mr Jones for the tax saved as my non-super passes tax free to my kids.

Mark
February 20, 2023

I am already aware of this and have already planned to give some of my Super to my kids when I reach preservation age. They can use the money now rather than in 20, 30 years after I die. I have more than enough in Superannuation to fund my retirement even after gifting to my 3 kids. There is no tax payable on gifting, so they get the full benefit I was going to do this regardless of any Cap being introduced.

Adam Shultz
February 23, 2023

Hi GH. As a way around this. Couldn't the person make a binding death benefit nomination to their Legal Personal Representative (LPR) and then their superannuation would form part of their estate? This would remove any non-dependent (15% + 2% medicare levy = 17%) tax rate being imposed on a potential beneficiary. Their super would then form part of the estate and the non-dependent tax avoided?

Wildcat
February 23, 2023

Re Adam Shultz below

This is not how it works. If the executor pays the death benefits to a non tax AND super beneficiary the executor is personally liable for the 15 to 30% death benefits tax liability on the taxable or untaxed elements of the benefit

Paying to the estate does save tax, only Medicare compared to a direct payment but it also exposes super to an estate challenge whereas it is better protected via a BDBN to a non tax dependent but a super dependent. Eg an adult child.

Graham Hand
February 20, 2023

More on 'devil in the detail'. On implementation, what happens if someone has super spread across an SMSF and several public funds? Will there need to be a separate lodgement consolidating all super with advice on implications for taxing of income or need to remove an amount over $5 million from one of the funds? I hope they allow for the extra staff needed in ATO to manage all of this.

Graham Hand
February 20, 2023

Treasury has released a Consultation Paper on the objectives of super: “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”
https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/consultation-begins-legislating-objective-super

James
February 20, 2023

Interesting from the Consultation Paper just released: "The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way".

They define "deliver income" as: "captures the purpose of the superannuation system – to provide universal savings that are then drawn down in retirement to deliver income that support retirees’ standards of living. The focus on delivering income makes clear that the purpose of superannuation is not for minimising tax on wealth accumulation or enabling retirees to leave tax-effective bequests."

David
February 21, 2023

And therein lies the problem.

"dignified"; "equitable" and "sustainable" - all of which could mean anything.

God knows all governments are prone to waffly statements, but Labor are generally worse, and that is just next level interpretable. And by putting such a thing in legislation, it just opens up the field for extensive legal challenge on what was actually meant in the first place. I know it's meant to be a conversation starter, but "dignified?" Really?

I hope the final prose ends up a hell of a lot more granular that that statement. There are so many bigger problems to solve right now that outrank an endless discussion on "the purpose of super".

Fair share
February 20, 2023

The ultra wealthy need to lose some of their tax-free handouts, to ensure the government can fund the society we all want to live in. Next we should consider annual land tax and CGT for "home owners" living in property worth over $5m ... People need to pay their fair share

James
February 20, 2023

Define ultra wealthy! "People need to pay their fair share". Define fair share! Pandora's Box?

David
February 21, 2023

"Fair share" is right up there with "Mr Speaker" in terms of things politicians say that make me, and I daresay, many, many others, reach for their proverbial, metaphorical baseball bats.

Easy to say, impossible to define.

David C
February 23, 2023

Yes and imagine the massive "whining and winging" from all those whose house value has increased dramatically as a result of their diligent financial management to pay off their mortgages - perhaps the same money others have regularly contributed to super

George B
February 28, 2023

Having accumulated a little more than $5m in our SMSF over a lifetime of saving mostly through non concessional contributions from after tax earnings on which I paid about $6m in income taxes, I would not consider that my savings were earned from tax free handouts. Those taxes were used to fund health, education and age pensions among other things. However since I also subsidized the public health system by paying private health insurance, subsidized the public education system by paying private school fees and in retirement have been locked out of the public pension system by virtue of my savings, I like to think that it’s a bit rich to suggest that I haven’t paid my fair share.

Jack
February 20, 2023

We have a Sole Purpose test, do we? How come I can withdraw money from super after 60 or 65 (a Condition of Release) in any amount and spend it on anything I like? It's more accurate to characterise it as a savings vehicle that I draw on to spend on a great car, an overseas trip, a piece of art ... anything I want to. Quite a Sole Purpose.

Mark
February 20, 2023

If born on or after 1st July 1964 you can start a Transition to Retirement at 60 or you can retire at 60 to meet a condition of release.

So yes by retiring at 60 and using your Superannuation you are funding your retirement. You are free to decide you want to go back to work but you will have to start a new Superannuation Account.

Youngster SMSF
February 20, 2023

Thanks, Mark, but can I clarify. I resigned from a job after turning 60, which meant I could start a pension in my SMSF, and then I started working again. I continued to draw the pension and new SG is paid to my SMSF by my employer. But why do I need to "start a new Superannuation Account"? It's the same SMSF as always.

Mark
February 20, 2023

Just poor wording on my part, new contributions are preserved until you retire again.

Martin
February 19, 2023

While I agree some level of cap (or step up in tax rate to the same effect) is reasonable, I don’t know how Minister Jones gets away with justifying a $5m cap by saying people with $100m or even $50m are clearly not investing for retirement income. $50m is a lot more than $5m. I wonder how many politicians, whose retirement incomes are funded by tax payers not their own savings, would be happy retiring on an pension generated from $5m?

Mark
February 19, 2023

4% drawdown on $5M is $200k a year. This is more than enough to retire on.

5% is $250k a year. Nobody needs more than this to retire on. They may want more, but certainly don't need it.

A Cap doesn't stop you having more to retire on, you'd just lose the generous taxation benefits of Superannuation on earnings gained on the amounts above.

As stated by P Keating about Superannuation was that it was meant to part fund or fund people's retirement and create a pool of national savings.

Never was it mentioned that it was a means for wealth creation beyond the purpose.

Contribution limits have now made it harder for people to accrue such large balances but not impossible. I haven't contributed to my Industry Superannuation for 15 years at least and I will likely exceed a $5M balance by the time I have reached preservation age.

I actually think $2.5M is enough to fund retirement. That would be $100k a year, mostly tax free. This is still significantly more than aged pension and I will still have the amount of money over a Cap of $2.5M to have invested outside Super to support my lifestyle

Graham Hand
February 20, 2023

Well, Mark need to watch what you claim when we have been discussing superannuation for 30 years. You say: "As stated by P Keating about Superannuation was that it was meant to part fund or fund people's retirement and create a pool of national savings. Never was it mentioned that it was a means for wealth creation beyond the purpose."


Never? How about this from Keating in 2015: "I designed the system. I used to say to the caucus of the Labor Party, what superannuation is about is personal empowerment. That is you can cut the shape of your life, particularly at the end of your life, without reference to a government agency. I think people in retirement think in family terms."


So you can cut the shape of your life in family terms. Sounds like a bequest to me.


And this from the government agency that was charged with adjudicating on superannuation disputes, the Superannuation Complaints Tribunal (SCT). In its Annual Report 2014-2015: “The most common misconception, arguably, relates to the purpose of superannuation. Broadly speaking, the purpose of superannuation is to provide income in retirement to members and their dependants; it does not form part of a person’s estate. Accordingly, a superannuation death benefit should be paid to dependants and those who had a legal or moral right to look to the deceased member for financial support had they not died.”


Does that sound like super is only to fund retirement?

Mark
February 20, 2023

@Graham Hand. Further to the initial statement by P Keating we have the sole purpose test of Superannuation

The sole purpose of Superannuation is to provide retirement benefits to the member or their dependants in the case of a member dying prior to retirement.

Key word in the statement is dependants. If your children are no longer dependant on you it would become inheritance and subject to different taxation unless you had say a terminal illness and knew you were going to die and took all your Superannuation out. You could gift it tax free.

Just because people can and choose not to use their Superannuation for retirement purposes and intend to bequeath it to friends or family does not make it a purpose of Superannuation. It is taking advantage of a loophole that allows it.

I have a dog in this race too and will likely have an 8 figure Superannuation figure by preservation age, that figure could potentially double again if I were to wait until 67 to access Super. The earnings from this are way more than I need to retire. A Cap does not impact my Asset base. It just puts a limit on how much concessional tax treatment my Super was to get. When, not if, a Cap comes in I would look for other alternative ways to invest in a tax effective way, if they allow me to move my money prior to preservation age.

Which is my only concern about the Cap being implemented.

Graham Hand
February 20, 2023

Whatever way we argue this and whatever we see as right, the majority of retirees do not consider their superannuation as only for funding their retirement. As I have written before:

"At the 2015 CSIRO and Monash University Superannuation Research Cluster, a study reported that 90% of the amount an average retiree enters retirement with (including family home and non-super) remains unspent upon their death. On 23 May 2015, The Australian Financial Review quoted Treasury work which found that most people still have around half of their superannuation balances at the time of average life expectancy."

Mark
February 20, 2023

Expanding on the Sole Purpose Test it is expanded to say we receive generous tax treatment in our Superannuation so we can use it to part fund or fund our retirement.

There is no compulsory retirement age so as long as you keep working all is good.

By definition of the sole purpose test, once you do stop working you should be using Super to help pay for that. If you choose not to, then you should lose the generous tax benefits.

It is logical that most die with Super still left as we don't know, generally, when we are going to die.

Most people also don't have $1M in Superannuation to begin with so have been unable or unwilling to use Superannuation as a wealth creation tool.

Only wealthy got to take advantage of the contribute Millions to your Super rules of the Howard/Costello years.

Only the wealthy gained from the removal of the Reasonable Benefits Limit.

Only around 100000 people have more than $2.5M in Superannuation. Clearly rules were made to benefit the wealthy, including myself, that shouldn't have been.

The introduction of a Cap doesn't stop you being wealthy, it removes generous tax concessions on amounts that should never have been allowed to happen.

There have been a few changes to Superannuation rules over the years that I have not agreed with. There are some current rules I don't agree with.

The introduction of a high balance cap, even though it affects me is the right way to go.

Superannuation is meant for retirement and I have enough in Superannuation but I am not allowed to because I am under preservation age.

I could have started a Transition to Retirement last year, however prior to me getting to 55, they changed the TTR rules and I have to be 60.

More rules I see coming in time are raising of preservation age. Limiting lump sum withdrawals and making us take up Superannuation Pensions or Annuities.

Dauf
February 20, 2023

Mark, agree completely. Self delusion over what is advantageous to oneself.

Yes we have all been effected by rule changes. Rules have and will continue to change.

We can cry ‘not fair’ but seriously, why should all Australians ultimately pay (yes by national funds) for people to have tax free incomes that are way beyond what is needed for an exceedingly good life. A spoon of concrete to those that may have to take out funds over $5,00,000 out of a tax haven and pay what will be 30% tax on the rest. If you can’t be comfortable, physically and mentally, on the income from $5m (+ perhaps another $5 with a spouse) then people need a serious self assessment of what they expect from the wider nation.

Do the same for houses and assess anything above $2.5 million and move on. Not fair on the house i raised a family in? Then use a reverse mortgage if you love it that much to free up funds (Government run scheme).

If your kids feel cheated out of the investment, let them contribute buy some of the house off you so you have some cash flow. Again, Mr & Mrs average paying tax (if indeed they do pay any) to help pay a pension for people with millionaire assets? Seriously hard to defend apart for the politics of upsetting many people

Martin
February 20, 2023

My point was that many politicians and civil servants on index linked final salary schemes (tax payer funded) could never fund their sort of retirement income from $5m. So will they be required to give some up, or pay tax on their pensions above a “reasonable level”? You may say the number on these dream deals is small. So are the number of people with superfund balances over $5m. I just think fairness requires retrospective adjustments for everyone, irrespective of whether you worked in the private sector and funded your own retirement, or lived off the tax payer all your life.

Pfft
February 19, 2023

Do a story on how super-funds, by law, had to get products ready by 2024 that offer negative rates. This is a move to make the wealthy get their house in order before hand rather than the past 20yrs of just passive set and forget. The next generation are about to be burned. Lets see how many can actually make money in a difficult environment or indeed keep it.

Mike
February 19, 2023

Totally disagree with the thrust of this article! I worked as an IT professional on a fairly decent salary, and started accumulating Super from the mid 80's until when I retired in 2015. In the last few years of my working life I was making extra contributions to try to build my Super balance knowing retirement was not far away. I finished work with what I considered a satisfactory amount of Super, but short of a $1 million target. However I am satisfied with what I have. I suspect the majority of people who have Super balances approaching or exceeding $5 million are very wealty individuals who are using Super as a tax haven, and who have significant other assets. For God's sake, how much does a person need to be content in retirement???

Manoj Kumar
February 19, 2023

Great article Graham

Some of us in > $5M bracket are tax artists who have carefully followed the law. We were told by Costello that at 60 all your super withdrawals will be tax free - as I was older than my wife, I took all her contributions via spouse splitting rules. This also meant she has no balance and I got all the earnings.

Roll forward 25 years and the result is that she cannot contribute anymore as her balance is TBC amount and mine is above $5M - say fund has $10 M

If Govt. Changes the rule, they should also allow an internal rollover where people like me are able to balance our super to $5M each - as the money is originally hers.

Our strategy will be to take out all the income and capital growth (realised and in-realised) and bring kids and grandkids in the SMSF - resulting in a fund 2 x $5M + 4 x $1.9M at all times

Being an artist - I cannot comprehend how tax rate of 30% will apply on income of funds over $5 M as a lot of the current artists struggle to even understand how actuaries work out unsegregated funds.

Another way to tax pension funds will be on marginal tax basis, e.g.
First &100K tax free
Next $50 K say 15% and so on

How politicians can tax a capital amount without realising the gain breaks all rules - as many wealthy people own shares - but earn no income - how can you tax them.

Same way, how can you tax a $20 M SMSF with $19 M of gold bullion - Stephan should talk to the artists first - as his plan has lots of holes

Mark
February 19, 2023

No tax is payable on the $19M in gold until the gold is sold and profit realised.

Dudley
February 19, 2023

The Australia Institute:
Assume someone on the 45 per cent marginal tax rate puts away $10,000 in real
terms every year for 40 years into a fund earning 7.5 per cent nominal or 5.0 per cent
after inflation of 2.5 per cent. With the tax of 15 per cent on contributions and
earnings that person would have a sum of $784,310 at the end of 40 years.
However, if the contributor had to pay the actual applicable marginal tax rate of 45
per cent then the balance at the end of 40 years would fall to $306,496.8. The
difference, $477,813.20 is due to the tax concessions on both the contributions and
the income in the fund. Hence the taxpayer contribution accounts for 61 per cent of
the 'self-funded retirement' in this example.

Their arithmetic is wonky.
15% tax: $836,153
45% tax: $386,131

Shows reason for 15% tax.
45% tax results in negligible retirement capital.
Better off stuffing retirement savings in home improvement.
Then at Age Pension age collect:
. Age Pension ($40,000),
. returns on Asset Test threshold ($30,000),
. ongoing home capital gains ($48,000)
total $118,000 / y tax free, sitting at home.

Superannuation Guarantee can be avoided legitimately by self employed.

Ron
February 19, 2023

Well we all knew what Labours agenda would be if we put them in power. Franking credits are next.

Trojan
February 19, 2023

Too many self-obsessed whingers! Taxation and superannuation need to be in balance. Superannuation is as much about tax avoidance as saving for retirement. Baby boomers can't see past the end of their nose. Baby boomers have had the best of times. Working life, family and housing are more important than retirement. Why should working families subsidise the excessive wealth of baby boomers when working families struggle with cost of living, mortgage payments and rent? Many young people will never own a home. Superannuation needs to be equitable and sustainable. Wealthy retirees don't even pay the medicare levy! They don't suffer from increasing interest rates - they carry on regardless.
An equitable superannuation/tax scenario is to limit superannuation to the transfer balance cap; halve dividend imputation credits for all superannuation funds (the dividend imputation system was designed to prevent double taxation rather than eliminate taxation). Superannuation pensions should be included in individual tax returns. The superannuation pension remains tax-free but other income is then taxed at the correct marginal tax rate and dividend imputation credits for individuals are sensibly applied. All income is subject to the medicare levy.
Whinging about the mechanics about withdrawing excess savings from superannuation? Get some perspective!
Once upon a time people paid into a funeral fund to avoid others having to chip in!

June
February 20, 2023

Gee, we are self funded retirees, but how come I see a Medicare Levy on the Tax Returns we are still submitting? And by the way, 50 years ago we often had a choice of groceries, or putting fuel in our one car, so my husband rode the small motorbike we owned to work in sub-zero temps. Sometime after that, the interest rate on our mortgage was 17%....yes, houses were cheaper and how much do you think wages were? As to "many young people will never own a home".....that comes back to sacrifice and dedication don't you think? We have two children who have never had "gap years" or many of the items currently considered essentials of life, not luxuries. Both have worked since 15 and the one with the University Degrees worked at two jobs to also pay her HECS up front and then save very hard for a property deposit. You are so right, there are generational differences, and we have grandchildren who are saving for house deposits, but they have also had a number of overseas holidays, consider HECS to be something they'll get round to eventually and have a different view on what is a necessity. We are more than happy to not be a burden on the pension system and get nothing at all, nor did we during all the COVID handouts and would not expect any. Just to be treated fairly when we have spent years working hard to contribute to our own care in our later years, already having looked after our own parents until their passing.

Trojan
February 20, 2023

June. You do not pay the medicare levy on your superannuation pension. In addition you and your husband each receive (income splitting) the tax-free threshold and medicare levy exemption relating to non-superannuation income. We all worked hard during our lifetime and lived in a terrific time period. Most baby boomers avoided wars and higher education fees. Working hard and adversity in younger life (character building) does not entitle ludicrous tax concessions in retirement. The Government has high debt and a budget to balance. Baby boomers are milking the system. User-pays needs to apply in retirement. The biggest users of the medical system do not contribute. It is ludicrous that a working family on $120,000 per annum pay income tax, the medicare levy, education debt repayments, mortgage or rent payments, superannuation guarantee levy, child and cost of living expenses (no chance of getting ahead) whereas home-owning and debt-free retirees receive $200,000 per annum income tax-free and medicare levy-free.. Thinking that self-funded retirees are not a burden because they do not receive a Government pension is delusional.
My wife and I have four children (well educated, in good jobs and paid off HECS debts) and all have houses for which my wife and I made significant deposit contributions. We also have seven grandchildren. The fact is having a higher superannuation balance than the transfer balance cap is tax avoidance and gross intergenerational inequity. I am happy to pay income tax and receive a lower level of superannuation tax concessions. Not all children have the bank of mum and dad. Look at the big picture!

June
February 24, 2023

Dear Trojan, thanks so much for your comment. Did I say we were paying the Medicare Levy on our Super Pension? No, I didn't because we are still taxpayers for other reasons -- and as one adviser said many years ago, if you are paying tax, you are earning, so happy to pay it when we have to. As to all of the costs you allude to paying, yep, we paid those too, including and still, private health fund cover........could never afford to go to Uni, no matter what it cost when we were young -- but there certainly seems to be a "nastiness" now around anyone who is self-funded and happy to be so. Almost as though those people have abused the system to achieve their self-funded status. Australia used to be a country where everyone was judged on their merits, and lauded for their achievements, but it seems to be only now about "haves" and "have nots" or perceptions of such. The current political environment seems to be making this worse.

peter
February 18, 2023

Why do we always need to attack those who have been successful.

The super rules have changed such that we shouldn't see large SMSF's moving forward and those people who were fortunate to take advantage of government mandated policies (at the time) allowing them to contribute funds to super were fortunate.

Rather than cut down the tall poppies - which is the easy target, why not plan to improve the situation for those who are less fortunate. Reduce the cost of living, improve social housing, improve education standards and the ability for people to find work. All of these are much harder tasks than simply taking "something" away because subjective opinion suggests that that "something" is too much.

How can we pay to improve the lives of Australians - stop government waste, increase the GST, tax companies on their earnings including earnings that are sent overseas and cancel cash ending the cash economy.

Does this affect me - NO. I will never have over $5 million in super, but I don't see why we should punish those who have worked and led successful lives.

Jack
February 17, 2023

There is no need to cap the amount in super or for compulsory cashing out. All that is needed is to raise the tax on accumulation funds in retirement to 30% Then the size of the fund becomes irrelevant because money in excess of the TBC would be taxed the same as if it was held outside super. The decision to remove this money from super would then be left to individual discretion.

This higher tax on accumulation funds in retirement would only apply to balances in excess of the TBC which not required for a comfortable retirement and would only apply after retirement.??

Tax concessions to super in retirement would then be strictly limited to a tax-free pension fund which is not only limited in size but has mandatory withdrawals that increase with age, which is a compulsory cashing out. That would remove the angst about tax concessions flowing to super in retirement.??

There is already a precedent for this. We have progressive tax on income and contributions tax is higher for high earners than for ordinary workers.

gh
February 17, 2023

very wise and common sense thought Jack.

Dudley
February 17, 2023

Age Pension for all age eligible, abolish superannuation and adjust income taxes.

Principal reason for superannuation is more expendable cash in retirement - whether the individual wants to save for that or not.

Mark
February 17, 2023

Once you have reached preservation age you have options on how you can act on any such cap introduced.

At age 65 you're free to access your Super whenever you wish.

The people under preservation age that have high balances are the ones that will be subjected to higher tax rates, higher than they might be if they invested that excess amount outside Super.

If you're under preservation age with a high balance, you should have the option to withdraw excess amounts of any new limit imposed.

Then the SG if you're still working, can you take that as salary/wages?

Does it continue to be paid into your fund at the now higher tax rate

Jack
February 17, 2023

Mark
According to my suggestion the higher tax would only apply after you reach retirement at age 67 and then only on the amount in excess of the TBC. Then you have a choice whether you leave the money not needed for a comfortable retirement, in an accumulation fund paying 30% tax on its income, or you remove it and invest elsewhere.

Note that you can access all of your super tax-free at your preservation age of 60, so you’d have a few years to decide what to do.

Mark
February 17, 2023

You only can access all your Super at 60 if you meet a condition of release, that is retire from the workforce.

Yes I know you can go back to work again.

If it is about having too much Super and also cost to the budget, why would they leave the age so high?

We haven't seen anything about how such a Cap would be implemented though it seems silly to have a 50 year old with $10M still getting generous tax rates on the whole $10M and someone at say 60, 65 or 67 with $10M now having to pay higher rates above $X amount.

My guess, it will be lower than $5M and will affected at that amount regardless of age.

I'm hoping one will have the choice at least to remove excess amounts, even if under preservation age.

Mark
February 26, 2023

Well it does look like it will be a lower amount, $3M not $5M.

We just have to wait and see what information they drip feed to us to gauge public perception on.


I'm keen to see how High Balances of people who are under preservation age.

Hoping I can take excess out and retire early.

asdf
February 18, 2023

Too simple for the Govt.
An elegant and simple solution Jack. Well done.

Make it even simpler by raising tax on any super fund amounts above the arbitrary $5 million regardless of age and phase( accumulation or pension stage).
Tax can be whatever to match a selected marginal tax rate eg. 30 - 47%
Then it is up to each individual to decide whether to keep it in super or withdraw.

George
February 19, 2023

All this will do is cause real estate prices to rise even further, as people will invest more funds into a tax free home.
I am in the process of doing just that and I can tell you that higher end real estate prices are already showing strength as people are anticipating the super changes which in my opinion will occur.

Mark
February 19, 2023

It would only be up to the individual if they add a new condition of release of Superannuation and that is if your Super reached the imposed new High Balance Cap, whatever it turns out to be, you can take out that excess amount even if under preservation age. If they don't make this amendment to the condition of release then if you're under preservation age you cop the higher tax rate with no ability to invest elsewhere if you wanted to.

Richard
February 17, 2023

The capital sum required to fund the current Federal MPs' entitlements in retirement far exceeds $5 million if calculated by an unbiased actuary. Just my thoughts. George Orwell must be turning in his grave.

David
February 17, 2023

According to ATO stats, only 5% of SMSFs currently have total assets above $5m and the median asset amount of all SMSFs is only $835,000............so really the proposed $5m rule seems reasonable.

Richard Colebatch
February 20, 2023

They have to grandfather any new rules. Unwinding what some (few) may have achieved would only feed the non productive members of our society, namely accountants and lawyers. JMT

Alex
April 21, 2023

Judging the reasonableness of a rule solely based on how many individuals will be affected by it doesn't seem reasonable.

Ramani
February 17, 2023

An alien reading the interesting arguments about the Aussie unfortunates punishing themselves for their luck and prowess in playing by the rules will wonder:
Isn’t all money fungible?
How come folk in charge of setting policy on long term savings are confused between ‘stock’ and ‘flow’ functions?
Forget financial literacy for the punters, why not mandate it for the pundits?
While funding for the future is sensible if stable conditions prevail, spare a thought for the present day worker providing for essentials for self, partner and the proverbial 2.23 kids while debating the injustice to the well-heeled?

Moral: Stephen Jones like any other treasurer cannot keep his hands off the conscripted cookie jar that is super. Deal with it, fellas!

More devil in detail
February 17, 2023

Another complication. I have over $5m in super but my employer is obliged to pay Super Guarantee to my fund. There's no point in them paying it in if I must take it out. So what happens to my SG? Will my employer keep it? Can I claim it back in a higher salary? Then I need to pay marginal tax on the higher amount so I am hit again by this cap. So now will every employee be required to inform their employer about their super balance so the employer knows how to treat the payment? Sounds like a privacy issue, I don't want people I work with knowing how much super I have. I also have an SMSF and money in a public fund, and in my SMSF, listed commercial property has lost value but my public fund is not marking it down. Their doubtful valuation policy is contributing to my excess. Give me a few minutes and I will think of many more problems with this proposal.

Mark
February 17, 2023

I have raised this point, today and on other forums the Cap has been discussed.

How the mechanics of such a Cap on Superannuation is going to work is an unknown.

Ideally it should come down to choice, to a point, you can take it as wages or salary if you choose or continue to have it paid into Super and withdraw it each year tax free if still over Cap. As there is likely going to be a higher tax rate on amounts in Super over a Cap, people's personal situation might be better taking wages over paying more while it is in Super. Others the reverse might be true.

Rob
February 17, 2023

The practical problem of a $5m limit is what happens each year.

SMSF "A" pulls out any excess and sits right on $5m at as June 30th 2023. The Trustees are aggressive, 20% of the fund in low cap tech stocks that quadruple [and it can happen!] so by June 30th 2024, the Fund is now $8m but the gains are unrealised. Is that ok or do they now need to pull $3m out? Taxed or not? At what rate?

The practicalities are why I think they will deal with this by raising tax rates over a threshold rather than another version of a "transfer balance cap".

Penny
February 17, 2023

It's also worth noting that anyone affected by the new rule is already not allowed to make non-concessional contributions, limiting the ability to grow the fund further beyond their investment returns (and they must draw some out each year from the pension component).

Andrew Boal
February 17, 2023

So why is the person who decided to forego the extravagant home, Ferrari and lifestyle spending for 30 years and invest in a government-sponsored retirement system now forced to take out an excess? Not sure about the 30 years and retrospectivity, given we had Reasonable Benefit Limits in place for a long time up until 15 years ago.

Reasonable benefit limits (RBLs) were applied to limit the amount of retirement and termination of employment benefits that individuals may receive over their lifetime at concessional tax rates. There were two types of RBLs - a lump sum RBL and a higher pension RBL. For the financial year ending 30 June 2005, the lump sum RBL was $619,223 and the pension RBL was $1,238,440. RBLs were indexed each year in line with movements in Average Weekly Ordinary Time Earnings published by the Australian Bureau of Statistics. The lump sum RBL applied to most people. Generally, the higher pension RBL applied to people who took 50% or more of their benefits in the form of pensions or annuities that met certain conditions (for example, restrictions on the ability to convert the pension back into a lump sum). RBLs were abolished from 1 July 2007.

Rob
February 17, 2023

Yes Andrew and just wait for the mess to "be blamed" on Costello! As I recall it was a time when we had an unusual concept - a Budget in surplus!

Mark
February 17, 2023

Costello is partly to blame and what does a budget surplus have to do with this discussion?

Mark
February 17, 2023

The why has been stated, the purpose of Super is to find or part fund ones retirement, not to be a wealth creation tool. Expect another change in time, compulsory annuities or Super Pensions to .ake you run down your balance and in theory not leave it for inheritance purposes. This will be for the same reason, it is meant to be used for retirement purposes. Of course, just because we will in time be made to run down Super, does not mean we have to spend it. Though many would. I have a high balance, likely to be 8 figures when I hit preservation age and am all for a Cap to be brought in. It is the mechanics of how it works that concerns me.

Alex
February 16, 2023

Imagine if the government said to company owner: "You know that business that you established 30 years ago, that you continued to invest in every year, using a range of tax incentives such as depreciation, and your company is now worth more than $5 million, but because you took advantage of the rules and you are now wealthy, you need to reduce the value of your business to $5 million and put the money elsewhere, not in the same system."

Tony
February 16, 2023

No one is proposing that, so “Whataboutery” is irrelevant!

Lyn
February 17, 2023

Tony, it is relevant. Longstanding small- business owners who are ordinary, eg mechanics, flyscreeners, blindmakers---people not perceived to be wealthy, may have started working lives 40yrs ago & saved their after-tax dollars as employee for 10 yrs to buy industrial unit to set up business & used tax rules for next 30yrs incl superannuation rules, and paid tax on profit or salary drawn. How is it fair to keep changing rules for those who planned within rules for 30 yrs & soon will wish to retire based upon those rules, no matter how much they are worth?
Angus below, said about young people being discouraged from saving when see frequent changes to system, they just won't bother as people in above example did 30yrs ago. What will that do to the bottom line of the country in next 30yrs? No vested interest but fed up with changes & feel the young won't bother as hear what mine say.

Angus
February 16, 2023

It is completely UNFAIR to retrospectively cap the size of a person's funds in Superannuation or force drawdowns on them when people have foregone consumption, saved, taken risks and worked hard at their investments, all the time abiding by the rules of the day including having their Super money locked up for decades until they can access it.
Any changes to Superannuation should be grandfathered at the very least.
And there is a need to stop constantly changing the Superannuation rules - it is undermining confidence in the Superannuation system, particularly for people getting, or contemplating getting, old and infirm in years to come. It's hard enough to keep across things now without age intervening!
And what happens when a Superannuant makes a bad investment decision or negative macro economic or geo-politics events affect their investments negatively? This happens often over the long term of their Superannuation. Do they get to put the money back in?? Do they get any costs involved in doing this paid back with interest???
And how do you re-emburse the Superannuant who has contributed to their Super by selling assets in their own name and paid Capital Gains Tax, transaction costs etc. on those assets to then contribute the remaining funds to their Superannuation? Do they get the tax and other outgoings that they have paid refunded with interest??
And how do you deal with inflation which will ultimately eat the Superannuant's fund balance reducing it's value as the superannuant ages and inflation compounds year after year over time? It is hard to find income paying investments whose capital value keeps up with inflation year after year.
And do you really think these enforced changes will raise more money? People will simply stop working and paying tax to Government, put more money in their tax free principal place of residence and negatively gear property and other investments to avoid paying tax.
And they'll encourage their kids to avoid Superannuation, live it up, retire early and collect a Pension in later life. Why bother working hard and being self sufficient?? Better to spend and enjoy life free of the hassles of saving (ie. foregoing consumption), investing, risk taking and spending thousands of hours and endless worry and concern trying to adapt to constantly changing Superannuation rules.

The real target of all this should be the hundreds of thousands of Federal and State politicians, public servants and those who worked in big corporations, who receive risk free CPI adjusted pensions each year for life. These required NO or LIMITED contributions by the recipient and increase as the lucky recipient gets older, require no time spent on investment and administration, no risk and no ongoing investment stress. Some of these pensions already exceed $1 million per year and often exceed $150,000 per year! And they grow risklessly by CPI each year!!
Reining in the huge growth in Defined Benefits Pensions outlays in the Public Sector is where the Government should be concentrating its' taxation resources if there is to be any material impact on the Budget. That would be a much more equitable, fair and prospective target than individuals' Superannuation. There are simply hundred of billions of dollars involved and many of these Public Sector Defined Benefits Schemes are unfunded or underfunded and require payment from Government each year to fund the Government largesse to those retired Politicians and Public Servants who receive them.

Tony
February 16, 2023

Face facts, no one needs over $5m in tax advantaged superannuation.
All this nonsense about “changing will discourage investments in superannuation”, “not fair to change the rules, should be grandfathered”, etc, all self serving rubbish by the well heeled.
A straight off limit of $5m, effective from 1July 2024, is the way to go.
As for all those “professionals” who work from premises “owned by their SMSF”, they can simply go back to where they came from, owning their premises directly! Most of the “ contribution” in the first place was simply switching ownership from personal to SMSF, a pure tax dodge.
As for the SMSFs in general, anything to tackle the blatant misuse of superannuation is to be welcomed!
And he can stop franking credit refunds at the same time!

Greg Hutchison
February 17, 2023

I agree with Tony. However I think $5m is still too high. Also David Knox of Mercer has the real answer as he favours a limit of double the current $1.7 million transfer balance cap, soon to be $1.9M i.e. a cap of $3.8M
Super was designed to keep people in retirement in the situation they were used to, not in some artificial ramped up $5m, $10M or $100M. Anyone with more than $3M etc can still invest their cash in any investments they like. Yes they may have to pay some tax even more than 15%

Bill
February 19, 2023

Tony, you lost me when you said "stop franking credit refunds at the same time!" There is nothing wrong with franking credit refunds.

Simon Taylor
February 16, 2023

Yes! Great points about Defined Benefits rort too.

Old but Sane
February 16, 2023

What a lot of rot. Public servants have always contributed to super. In the CSS it was a minimum of 5%. Yes, the pensions are indexed to CPI, but the age pension is also indexed (often better than CPI as they use a different index). If a DFB is enough, there are already clawbacks on pension rebates and they count towards the $1.7m cap on pensions. DBF pensions are also almost always fully taxable (some have a maximum 10% eg CSS or 15% rebate). $5m is well and truly heaps to have in super and above that should not have any tax concessions. If you have that much in super you can afford to pay the tax. Grandfathering would be pointless as you can’t easily get more than $5m into super now anyway.

There are far too many concessions around to the better off and they could fund a decent increase in rent assistance to those who are REALLY struggling. Some examples of unnecessary handouts, include childcare rebates to families earning more than median wage (can get it up to $530k!), similarly parenting payment (up to about $350k), Comm Seniors Health Care Care now up to $144k per couple (this one is absolutely silly) and no assets test on things like family tax benefit, etc.

Greg
February 17, 2023

There's nowhere that has offered these types of Defined Benefit Pensions for at least 20 years. It was not so much an issue when life expectancies were well down on what they are now & governments & corporations foresaw the issues they'd face with funding these schemes into the future. They payment of these benefits will see a natural reduction as the recipients die off. And yes, I know there is a reversionary component with most of these pensions, but these are 1. at a reduced amount & 2. in most cases spouses are of relatively similar age. 

Mark
February 17, 2023

Retrospective changes to Super have already been made in the past and will continue in the future. I too am annoyed with governments willing to change the rules.

On this one I actually agree, even though I have a dog in the race.

Keating said of Superannuation was that it would be a means for people to fund or part fund their retirement and to create a pool of national savings. Nothing was said about making it a wealth creation tool for the wealthy, higher income people.

Once, if you were leaving the country permanently you could take your Super with you, now it must stay until preservation age. If you are a foreign national and wanting to go home, you can go but your Super stays here.

If you are 50 and want to retire to Thailand on a retirement visa (Super is for retirement) again your Super stays here.

Transition to retirement age was raised to 60 from 55. I could be semi retired now but have to wait until I'm 60.

One does not need more than $100k to retire on.
May want more but certainly don't need it.

4% Drawdown means $2.5M is sufficient to retire on and most years you wouldn't even be touching Capital. Earnings would be more most years.

As you age and have to take more doesn't mean you have to spend it, you can invest outside of Super.

A cap is coming, we are all just guessing what it will end up being. Indexed is a given.

Other issues that will arise are, there will likely be higher taxes for amounts over $X but my view is it should be optional to remove any excess, you can take the extra out or leave it in as pay the higher tax.

This includes those under preservation age. By introducing a Cap they are saying this is enough so if you have more you should be able to do with it as you choose.

Then there is the issue of the SG, if you have reached the Cap and still working, can you take employer contributions as wages/salary?

Makes sense to me that you should be able to.

Someone mentioned limiting lump sum withdrawals and making us take an annuity or Super Pension. This was going to come anyway.

We have around 4M people retiring over the next 10 or so years. If they start all taking lump sums to pay off mortgage, renovate, new car or holiday to run down Super to then go on pension we will have liquidity issues with Super Funds and a sharp rise in aged pensions.

James
February 20, 2023

"One does not need more than $100k to retire on.
"May want more but certainly don't need it."

I always find it a bit presumptuous to lecture people on what they need or can do with their own legally saved money, regardless of whether it's an individual or big government!

It seems in a lot of these comments that people have a lot of trust in government to wisely spend the money they will lift from your pockets!? Maybe I'm just sceptical but then on reflection, I don't think so!

Mark
February 20, 2023

@James

You're not understanding the context of my comment. There is no one stopping you having more to retire on than just a suggested comment of $100k

A fund that can provide $100k a year of income is sufficient to provide for retirement. So has met the purpose of Superannuation. Any further amounts to that are not taking off you, they would then be expected to be invested outside of the Superannuation System. So you still have more than $100k a year to live on or re invest or gift, the choices are still yours

It just means any Capital above what is required to provide a level around that is invested outside the generous tax regime of Super. There are still other means of investing outside Super that help minimise tax. Certainly if/when they implement a higher tax rate for amounts earnings derived above the cap limit.

James
February 21, 2023

@Mark: "A fund that can provide $100k a year of income is sufficient to provide for retirement"

No disrespect intended, but who made you the arbiter of this?

The government is going to stuff this up, like they always do. I don't think they need any help!

Mark
February 21, 2023

You're reading but not comprehending.

You can have a retirement income of $50m a year if you're wealthy enough to fund it.

This is not being disputed, or challenged in any form.

You don't need anymore than $100k from Superannuation a year. If you have the means and finances to provide for a higher amount, good luck to you. I have the means to provide more from my Superannuation but don't believe I should have as much as I do in there.

Superannuation is to help fund or part fund ones retirement. It is not meant as a wealth creation tool.

The figure for a High Balance Cap being implemented is $5M on a 4% drawdown gives $200k a year. That's 3 times the median wage for Australia.

When a Cap comes in to existence, I believe it will be set lower than the touted $5M for this reason.

No one is saying we can't have the money we have, it is being questioned that we have so much in a generously taxed environment of Super.

James
February 21, 2023

@ Mark: "You're reading but not comprehending."
No, I"m just disagreeing with you, and you're being more than a little supercilious!

Again, who made you the arbiter that $100k pa from your SUPERANNUATION is sufficient?

Perhaps when retired politicians and public servants, the likes of Wayne Swan, who draw in excess of $200k p.a., indexed for life, take a hit, I'll change my mind!

Mark
February 21, 2023

I'm saying Superannuation should be capped at $2.5M. (Indexed is a given)
As this provides $100k a year @4% drawdown.

Purpose of Superannuation is to fund or part fund ones retirement.

$100k does this. It is around 4 times the single aged pension rate.
A couple could have $200k

If one has more than this, I do, then that money should be invested outside of Superannuation.

Mark
February 23, 2023

The majority of retirees live on an income below $100k a year($200k per couple)

Minority retired on a greater amount doesn't dismiss that $100k is enough to retire on.

Probably could be reasonably argued that less than $100k is enough.

Anymore is really want over need.

IanA
February 16, 2023

This whole article reads as part comedy, part sad reflection on how *very* wealthy people just keep wanting more. And how they squeal when even modest and sensible changes are proposed.

Peter
February 16, 2023

Seems a group of kids and grandkids are due an early inheritance with their mortgages reduced as excess funds are withdrawn from mum and dad super funds.

Captain Obvious
February 16, 2023

So it's greedy that wealthy people want to keep what they have earned? But it's not greedy to want to take what wealthy people have earned?

That seems neither modest or sensible.

Tony
February 16, 2023

No one is “taking” anything. They can keep their money!

Adrian
February 17, 2023

I agree IanA. Personally yes i view it as greedy when you have that much money to feel entitled to pay nil tax on earnings. Quite a sad reflection i think to see some of the views regarding what is fair/unfair and a lack of giving back. Personally i will try my best and pass on to my kids an example of a kind heart, I'd say it's a more valuable inheritance than all those $$$ of tax that you can avoid paying, but good luck to those who feel otherwise.

Bert
February 17, 2023

????? sorry but forcing wealthy people to move (not take) their money over 5M out of their tax advantaged super account & put it in any other mainstream investment seems quite sensible & obvious to me Captain Obvious

Stuart
February 17, 2023

What they have earned by avoiding tax in a concessional environment like super. Gains subsidised by other tax payers. Boo hoo!

Captain obvious
February 16, 2023

Great article.

Really, the broader and simpler truth is that there is no such thing as a "fair share" of what someone else has earned or what someone has been rewarded for taking a risk with what they have earned.
If an individual takes money from someone else against their will, it generally constitutes theft, fraud or extorsion. Depending on the mechanism.

Somehow these definitions don't apply when it is the government who takes the money.

More often than not, the money is not spent as effectively in the community as it would be if people bought services for themselves as required. In many cases, government projects are all costs and no benefit.

Both sides of politics are as bad as each other. You get paid a management fee of this scheme when in government, or in opposition. Regardless of performance. Often in stark contrast to it.

So neither really cares about the real cost and immorality of being a high tax jurisdiction. Distribute some back to your mates when in power, and you maintain a political base.

Sensible people need to start saying "enough". Australia didn't become a prosporous place because of the government's ability to disincentivise hard work, calculated risk taking, entrepeneurship and short term sacrifice for long term gain; with exorbitant and unneccessary taxes.

You can't tax yourself to prosperity.

There is no "fair share" of what you have earned or been rewarded for risk, that someone can take against your will.

Any appeal for the government to stop making unfair changes to super, skirts around the heart of the issue.

Satisfied
February 17, 2023

Wake up folk, there is only talk of removing the tax benefits not your hard earned. You can hang on to your wealth! However, why should the tax payer continue to subsidize excessive balances beyond a reasonable 'Retirement' limit?

Captain Obvious
February 17, 2023

The tax payer does not subsidise self funded retirees. Not taxing something is not the same as subsidising it.

What a sense of entitlement to think that someone not being taxed, is someone else giving something up. That is greed and envy laid bair.

Tax is taking, pure an simple. In relation to invesmtents such as super, the member has taken risk for their returns, if you push someone out of super or increase the tax on super you are taking part or all of the returns. That is, taking their wealth.

This is further excaberbated when, the same government that eyes not getting a take of super returns as a cost to tax payer, is the driver of inflation through fiscal and monetary policy. The super member loses purchasing powe to inflation which is driven by government to then be taxed on returns by that same government.

The envy frame just ends up putting everything backwards from actual logic.

Brian
February 16, 2023

Would the muted $ caps on SMSF's apply to ALL superannuation savings vehicles?

What's good for the goose etc.

Rob
February 16, 2023

Step back.

At its core, it is a "tax foregone [or avoided] problem" not a Superannuation problem. I don't think anyone will be forced to withdraw assets over $5m. What I do think is likely, is that the concessional tax rates will change. Instead of 15% for income and 10% for Cap gains they might for example double for high balances or even go to personal marginal rates, eliminating "any advantage" for assets held in Super over some threshold.

In theory that would deal with the tax problem, however Graham is correct - what if that $100m balance has unrealised gains of $50m - do they get taxed at 10% or some new higher rate? If it is at a new higher rate, there will be a scramble to unwind gains sooner rather than later.

If you force people to take balances out >$5m, probability is high that it would go into the sole remaining tax free zone - domestic primary residences - just what we need!

The other issue is the "Costello Death Bed" rules, whereby withdrawing all Super three days before you die, thereby avoiding "Australia's Death Tax in Drag" on the taxable portion, became possible, with removal of "maximum withdrawal limits". Reinstate maximums? Maybe.

Lastly, the question is whether any changes would apply to funds in Pension Mode which have been capped since 2017, or just funds in Accumulation Mode - I suspect Accumulation only as that is where the problem is, but we will see!

For once, the fiendish complexity of Australia's Super system, may work in our favour by making change more difficult!

Vik
February 16, 2023

"...Consider how many working-class people now own $3 million homes in the western suburbs of Sydney..."

Graham, tell me you don't know a single "working-class" person without telling me you don't know a single
"working-class" person.

Does you definition of western suburbs begin from Paddington/North Sydney? And lets forget about the "working-class" of Australia right?

Genuinely, one of the most classist and tone deaf sentences I have ever read, completely out of touch with reality.

Kien
February 16, 2023

I personally don't have a problem with retrospectively imposing a $5 million cap. However, surely there can be no grounds to argue against prospectively imposing a $5 million cap. That's what the government should have done years ago, and it's better to start now than delay further. In my view!

Graeme
February 16, 2023

"$5 million cap punishes 30 years of super saving". It does not. It merely places a limit on how much money an individual can retain in the extremely advantageous tax environment of superannuation. "Why are we introducing a new $5 million cap at the same time that other limits are rising close to the same level?". We are not. A married couple with access to $4.2 million in a tax-free super pension is not even close to $5 million per individual. The "Five reasons against introducing a $5 million cap" appear to be about why high balances exist and the consequences of introducing a limit rather than providing reasons why an individual super limit is not good idea.

Lisa
February 16, 2023

If you have $5 million in superannuation you need to pay tax.
Fair is fair, it is not meant to be a tax free wealth accumulation vehicle. No wonder inequality is growing in this country and please don't try to say that tax will be paid on death as we all know that most will be taken out of superannuation just in time.
In fact, it should be a lower limit, say $2 million.

Geoff R
February 16, 2023

"If you have $5 million in superannuation you need to pay tax."

If you have more than $5 million in superannuation then you WILL pay tax.

Any amount over the cap (currently $1.7m but perhaps soon to rise to $1.9m) cannot be transferred to the tax-free pension mode. Hence earnings from that extra money are taxed at *exactly* the same rate as everybody else's superannuation (15%).

BTW a good article based on facts.

Mark
February 17, 2023

What is likely to come about from the introduction of a Limit on Super is a higher tax rate for amounts over $X.

Using round figures for simplification,
Person has $7M in Super and is in pension mode.

$2M Balance Transfer Cap $5M in accumulation paying 15% tax on earnings in the accumulation account.

High Balance limit, $2M stays tax free, 15% on earnings next $3M and then maybe, 30% on earnings for the last $2M.

Part of the reason for the generous tax benefits of Super are because funds are locked away for decades.

If you lose some of those tax benefits, then you should have the option to take out any amounts over whatever the Cap turns out to be.

Personally, I think they will come in at a lower figure than the touted $5M.

$2.5M or $3M indexed would be my guess.

2 reasons, @4% drawdown this is $100k or $120k a year.. Higher than the average wage and certainly enough to retire on. Nothing if you're in Higher Balance situation then you still have your additional money. You don't lose Capital with the Caps introduction.

The budget would gain more revenue, yes a small number of people will buy an expensive PPoR to gain the (current) tax free status of the family home, a small number may move money Toba tax free haven overseas but the majority are going to be paying more tax.

Lisa
February 19, 2023

Paying 15% tax on super over the cap is a joke. Should be paying tax at marginal rates.
Time to increase Newstart and rent assistance and address growing inequality.
So many very entitled comments on this article.

Laurie S
February 16, 2023

I had to scroll down a long way to see Dauf's support for the concept. And am disappointed that so many of us who have plenty in SMSFs .. to be near or over the $5m (per PERSON!) can't see how privileged we are today, how favoured we have been with low taxes on our contributions and pensions and still get heaps of tax concessions on our earnings. It has not just been the result of our hard work.

Assuming some kind of federal budget discipline, I can't see that we deserve those concessions more than a range of other worthwhile government programs or benefits. Sorry, but self-interest seems pretty blinkered on this issue among many readers of this excellent newsletter

Brad
February 16, 2023

Simple solution rather than a cap is just tax each dollar over $5m at 30% rather than 15%.

Rob
February 16, 2023

Agree, with some rollover relief for large capital gains tax bills out to say FY27.

Richard
February 19, 2023

No great need to provide that relief, if the 30% rate comes with a 15% concessional CGT rate. Then you're being taxed at 15% instead of 10% of the gain. Relief is an unnecessary complication.

John
February 17, 2023

That sounds like a good and simple idea.

Rhyno
February 16, 2023

Superannuation was designed to provide an income in retirement. I think the govenment should look at stopping the withdrawal of lump sums, as to many people are funding holidays or other luxuries this way, draining their super balances and then putting their hand out for a government pension.

Mark
February 17, 2023

This will happen in the not too distant future due to the large number of Baby Boomers and GenX retiring over the next decade or so. If a large % take lump Sums to pay off mortgages, help children, renovate homes ready for a pension this is going to create a liquidity problem for Super Funds.

Also expect preservation age to be increased too in time. Transition to Retirement may stay at 60.though. Seems silly to have preservation age and TTR both at 60 for most people.

Simon Taylor
February 16, 2023

Great article. The proposal is appalling. Setting a fixed number will only require a great raft of additional calculations and adjustments with time, (just like the transfer balance cap shambles), as markets and inflation rise and cause reasonable holdings to also rise. (Remember that simple "rule of 70" - at say 8% growth a year, an investment will double in 9 years.) It will need to be indexed.
Wish I'd splashed out on a big boat or had lavish holidays, rather than making non-concessional contributions from an inheritance, to "save for my retirement".
Politics of envy and another example of Labor ideology and stupidity with poorly thought out knee-jerk proposals. I'm waiting for the bastards to propose a massive increase in taxes on super following the death of a member.

Victor L
February 27, 2023

It is the average person who gets hit most severely in super. Contributions are taxed at 15%, earnings are taxed at 15% and what's left in your super fund at death ( assuming it goes to a non dependent) is taxed at 17% (incl Medicare). So the not spent portion of your super has total tax of 32% (15% + Medicare of 2%). Coincidentally the average person's marginal tax rate is 32%, The moral : If you don't spend your super before you die, you've wasted your time putting anything into super.

Nick
February 16, 2023

If the government does impose a cap, it has an obligation to offer SMSF fund members rollover relief on the transfer of assets to members, which will obviate the immediate payment of capital gains.

Kym
February 16, 2023

A cap on super can only be achieved by restricting the contribution limits and that system was instituted from 1 July 2017. Forced reduction of a member balance is a point in time exercise so is it likely that annual cap restoration will be required?
If the government is too impatient to wait for Super 17 to do the work it was designed to do then capping via forced capital removal must be transitioned over at least a 10 year period - as we saw when the changes to in-house assets meant a significant restructuring of previously made plans.
A stratified tax system such as Div 293 is the only way larger balances can be adjusted, anything else is a significant breaking of trust.
Death benefits is the natural way that (current) large member balances will be permanently resolved.
We will however end up here again if indexation continues in $100,000 dollops so that needs a revisit also.

Bruce
February 16, 2023

The proposal assumes that if a SMSF has two members their balances would roughly be equal. Currently only $110k/year can be transferred to a spouse whose balance may only be less than $500k.
I only hope that if a cap is announced the government will allow substantial transfers between members so that both have equal balances.
The government should also allow members of defined benefit funds such as the CSS to withdraw their money as a way of reducing their total balance.

Trevor
February 16, 2023

Nobody gets to $5m in Super from compounding of SG contributions. After contributions tax and Div 293 tax, $50,000 per couple per annum becomes a $35,000 annual contribution. You would also have to opt out of Group Life Insurance cover who's premiums eat away at the annual contribution. You simply can't get enough into Super to reach $5m in a working career unless you are a baby boomer who took advantage of Costello's $1m free hit into Super in 2006/2007.

Nick
February 16, 2023

Wrong Trevor. Baby boomer - yes, took advantage of Costello's free hit - no.

Peter
February 17, 2023

If my memory serves me well, financial advisers and the government were amazed and even shocked at just how many people managed to find $1,000,000 cash to tip into super at that time. Then the GFC happened and that $1.000.000 became a lot less.

gabiernacki@gmail.com
February 28, 2023

"Then the GFC happened and that $1.000.000 became a lot less". In the case of my neighbour that $1m would have become little more than $500k as he told me that he lost half his super in the aftermath of the GFC. Interesting how the system is happy to privatize your losses when your luck runs out but is quick to nationalize the gains.

Chris
May 08, 2023

At least they HAD $1m to contribute. No sympathy if it cost them 47% in tax and no one forced them to contribute it all at that time, no one forced them to not leave it there to recover either. Cry me a river.

George B
February 28, 2023

Bear in mind that that the $1m "free hit" was with tax paid money mostly at the highest marginal rate (47% or more). My average tax rate was 42% at the time so my "$1m free hit" cost $724K in tax (1.724m -42%=1m).

Aussie HIFIRE
February 16, 2023

Rather than capping the amount of money that can be held in super, why not simply tax earnings above a certain level as they would be if they were owned by an individual. Yes it would increase complexity but it would save members having to transfer assets out of super.

If you wanted to do this simply then say all earnings above a certain level at the rate they would be in an individual’s name, so say any earnings above $100,000 gets taxed as if the individual was earning that amount, or that any earnings above that get added to an individual’s taxable earnings so they don’t have less incentive to move the money out of super. You could make it more complex by saying this rule only applies if assets at June 30 are above 5 million or whatever other number was chosen. There are a variety of ways to do this depending on your goals.

Whatever the solution is, I don’t think it’s unreasonable to say that someone with 5 million dollars in retirement savings should be paying a higher rate of tax than 15%, especially if your average worker is paying 30% as their marginal rate of tax.

Edward
February 16, 2023

Here is a far simpler solution: do away with the distinction between pension and accumulation accounts. Once a member turns 65, the age based actuarial percentage must be withdrawn (no exceptions) on the whole balance. If that is more than you need, invest what you don't need outside the super environment. Also simply tax all super income at 15%. This does away with transfer balance caps and other complications. And it guarantees that super is used for income and pretty much runs out by the the time the member 'runs out'. And easy to calculate and plan.

John
February 23, 2023

If both pension and accumulation were to be taxed at 15%, I wouldn't bother with starting a pension. That way I don't have take out the minimum required pension withdrawal every year (4%+), but just what I need.

bllly
February 16, 2023

Most of the problems with high super balances can be eliminated by going back to the pre-Costello changes. ie if pension payments were taxed (at ordinary tax rates less 15% - for the refund of tax paid by the super fund - after taking into account return of undeducted contributions) then people with large super balances would be paying tax. The effect would merely be that someone could average their income over their lifetime.

There was never any logical reason for the changes Costello made, they were purely political (in order to get the headline "Government eliminates tax" - great vote catcher that had no impact on most people and cost very little). The only people that gained from the Costello changes were those who had big super balances - the problem that we now have.

Cam
February 16, 2023

Hardly anyone understood the old system. Great for me as a young adviser, but otherwise very messy. It would have been much better if we had the 2017 changes re contributions and amounts paying pensions tax free though.
Noting politics is mentioned, the original complexity was largely caused by Labor, and Labor had 6 years from 2007 to 2013 and didn't make the big changes of the Libs in 2017. You could like things more to appealing to handouts for the Boomer voting block than either side of politics.

John Forwood
February 16, 2023

Hi Graham,

I couldn't agree more with you. A simple compound calculation of an annual contribution of $27,500 (current concessional cap) per annum and a modest total return of just 6% between the ages of 20 and 65 gives a balance of $6.6 million.

This doesn't take into account the increases in the CC Cap which is linked to wages, or the potential for higher returns.

Lets hope that at the very least any cap is linked to the CC Caps, inflation (or just to be painful some other measure of growth).

John
February 16, 2023

Putting a limit on the final balance is unfair. By all means limit the contributions (those can be controlled) but limiting the balance is placing a limit on something outside the control of the member (ie return on your investment)

John
February 16, 2023

Try 40 years of SMSF and a modest house

GGRR
February 16, 2023

Why the need to move it out ?
Those with the very large balances may only be around for another 10 years?
If Govt is worried about Estate plannining issues, why not just make the entire amount held in super & pension subject to the drawdown rules ( and at the 100% rate) , then at least income would flow back out of the concessionally taxed environment to different rates.
Of course , individuals would then be free to have that income put back into super for their kids or grandkids ??
Seems like a lot of grandstanding to me - particularly for those who decided to accumulate wealth in the superannuation system versus the overly protected residential housing asset class.
If Govt is worried about Tax Revenue , then time to drag out the Henry Report and have the entire system reviewed.

Paul
February 16, 2023

I mostly agree (except for no.2) with the points raised but on balance I think there should be a cap on money in super. Will it raise the amount claimed by government? Almost certainly not. Will it be administrative embuggerance? Almost certainly yes.

I suggest point 2 is probably nonsense. I can’t imagine there are many people who have in excess of 5 mil in super living in dingy little flats or houses.

Graham Hand
February 17, 2023

C'mon Paul, such exaggeration to call point 2 "nonsense". I did not say a person with over $5 mill in super was living in a "dingy little flat". My point is that someone who chooses a lovely but not top-end luxury home and a large super balance should not now be forced to remove the money from super. If they had pumped all the money into a harbourside mansion, they would be completely protected from tax. Is that what government policy wants people to do?

Adrian
February 17, 2023

Hi Graham, I must admit i'm struggling to read if you are being serious or provocative in this article, maybe a bit of both ?

The tax treatment and exemptions around the family home are also highly inequitable, yes the harbourside mansion owner could even collect the age pension to top it all off, would this make the Super saver feel even more "punished" ?

Personally I'd say it's a nonsense point to argue something is unfair versus another alternative that is just as bad. Two wrongs don't make a right. How about the people who rent long-term and/or aren't inclined to optimise their affairs to extract as much from the system as they possibly can. Honestly, these are the people who are being punished. Yes one might argue they are responsible for their own "choices". If so, why not abandon progressive taxes, or indeed get rid of taxes and welfare altogether and let's revert to laissez faire. Make it a truly "fair", sink or swim system. The super savings might come in hand to build a tall fence around the property.

The truth is wealth inequality continues to widen so if you have an ethical compass and worry about such things, they will only change if people are willing to look past their own interests and consider what is really important in this life. When I eventually reach my death bed, I don't expect to be contemplating either my harbourside mansion or my whopping big superannuation balance (assuming I had either). Even the biggest success stories of capitalism such as Buffett and Gates are on the record to say the rich need to be taxed more, including especially themselves. They are now pre-occupied with giving their wealth away towards worthwhile causes.

G41
February 16, 2023

How is the $1.5 bn of savings from imposing a $5m cap calculated? At present those balances generate income taxed at 15% and some capital gains taxed at 10% or 15%. If the balances are moved out of superannuation, where will they go? For someone clever enough to have a built a $5m balance, it is not going into a tax environment where income tax is paid at the top marginal tax rates. Most likely it is going into upgrading or renovating the principal place of residence generating 0% income tax. Next most likely is that it will be invested offshore probably with the owners migrating out of Australia and taking any other taxable income away with them plus GST on their consumption. The article already explains how if it remains in Super, it will be split/gifted to other members with a sub $5m balance. If $1.5bn of tax revenue is the only justification, this proposal has no evidence supporting it

LifePunk
February 16, 2023

Great article. I wonder what further impact liquidated commercial and residential property from smsfs will have on an already shaky market. The $5m cap makes sense however careful steps need to be taken not to (as we always seem to do), throw the baby out with the bath water. I also think the majority (of those in top marginal tax bracket) would be happy to forgo any phase 3 tax cuts in return for minimal changes to super.

Dauf
February 16, 2023

Seriously, $5 million is heaps and moving it out seems sensible. Lots of rules change and there are losers…and this one will only be a few and so the envious will support whole-heartedly.

However, it needs to be matched with a similar limit on property being non assess and capital gains free…anything over a limit should be assessed.

Personally, $5 million per couple/household seems fair to have government supported tax free…but also for houses

John
February 17, 2023

"…but also for houses"
Yes indeed.

George B
February 28, 2023

"…but also for houses"
Seems like a good strategy to raise taxes...first reduce official tax rates to near zero...wait till house prices take off to the moon... then hit the owners with more taxes on the gains

 

Leave a Comment:

     

RELATED ARTICLES

The current super system fails the poor

Meg on SMSFs: negative earnings and the $3 million tax

Six ways the Budget Office is probing super taxes

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates

Shares

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.

Strategy

Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.

Retirement

What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.

Shares

Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.

Shares

Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.