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Changes are coming to superannuation

There are few more important issues facing retirees than potential changes to superannuation policies. They affect whether it is worthwhile putting more money into super, and even whether to take money out to avoid adverse consequences. Unfortunately, when the Prime Minister contradicts the Treasurer and Assistant Treasurer, it’s difficult to know what to expect and when.

Cuffelinks has no political agenda, but despite repeated comments from Tony Abbott that there would be no adverse changes to superannuation in this term or the next (if re-elected), there is no doubt such amendments are on the minds of the Treasurer and Assistant Treasurer. For example:

  • Joe Hockey told the ABC’s Q&A programme on 25 May 2015 that he does not say ‘never ever’ to anything in politics, and “At some point, and now is not the time, and it won’t be for a while, but at some point we have to look at the future of the entire retirement income system.’’ Plus when he released the Tax White Paper on 30 March 2015, he noted the Paper queried “the appropriateness of superannuation concessions”.
  • As we noted here, the Assistant Treasurer, Josh Frydenberg, told the Sustainable Retirement Incomes Forum last week: “The Government will, of course, consider good ideas put forward as part of the Tax White Paper process and any changes recommended by that process will be taken to the Australian people at the next election.”

Change is coming. In selecting from the claims and counter-claims, those which are written down and considered in painstakingly-prepared speeches must be the most credible, rather than door stops or off-the-cuff responses in the heat of Parliament or a television programme. For these, we go to Frydenberg’s speech and the content of the Tax White Paper, especially Section 4 on Savings. These suggest a tightening of super concessions will come, at the latest by the next election. Consider the evidence:

The ‘good ideas’ in the Tax White Paper

Here are some of the good ideas in the Tax White Paper (the bolding is my emphasis):

“The flat rate of tax on superannuation contributions means that most high income people receive a larger tax concession, relative to their marginal tax rate, than low income people. The same is true during the accumulation phase and even more so during the retirement phase when there is no tax on earnings.”

"The different rates of tax on earnings in the pre- and post-retirement phases add costs to the operation of the superannuation system. They also give rise to tax planning opportunities that are usually more accessible to high income earners."

"With Australia’s ageing population, more individuals will enter the retirement phase where no tax is paid on earnings in superannuation funds. This will put pressure on the long-term sustainability of the superannuation tax arrangements, particularly given other long-term budgetary pressures as the population ages, such as calls for higher spending on health and aged care, and relatively lower revenue from personal income taxes."

"Individuals and entities willing to engage with complexity in the tax system can structure their affairs so as to minimise their tax liability. This can involve using different legal forms or structures to take advantage of opportunities presented by concessions or gaps in the structure of the law."

"Confidence in the tax system can be eroded when people think others are not paying their fair share of tax. This can be due to concerns over concessions, aggressive tax avoidance or tax evasion activities."

“Higher-income earners tend to be more capable of taking advantage of more favourable tax treatments (like superannuation), while those with the lowest ability to pay tend to save more in the more heavily taxed vehicles (such as bank accounts)."

These are the pointers that suggest a response to the White Paper will include addressing concessions for high income earners.

The 'White Paper process' is not only the White Paper itself, but the responses, many of which criticise the concessions to high income earners. This question is asked in the White Paper:

“How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved?"

Notable among submissions already made public is from ASFA, the Association of Superannuation Funds of Australia, the industry body representing major funds, which states:

“ASFA is recommending that a limit of $2.5 million be placed on the superannuation funds an individual can rollover to commence an income stream in retirement. Amounts above this ceiling must remain in the accumulation phase and continue to attract the nominal earnings tax of 15 per cent or be removed from superannuation. Non-concessional contributions should also be capped at $1 million over a lifetime to prevent very large balances from accruing in the future as an integrity measure to complement the $2.5 million capital cap.”

Superannuation is an income system, not a savings system

There has been a distinct change in the messages around superannuation since the publication of the Financial System Inquiry Final Report, driven by David Murray’s incredibly simple idea that superannuation should have an objective. And what is the most likely objective? As Murray told the same Forum last week,

We felt the system could only progress based on an income in retirement. Some people say it should be a retirement savings system. They’re not the same thing.”

This puts everyone accumulating their millions into superannuation on notice that super is not meant to be a wealth accumulation vehicle for passing money to the next generation. Does Frydenberg support this? You bet:

“What it is really getting at is that the tax concessions provided for superannuation are intended to encourage and support an individual’s retirement income – not to accumulate savings that can be passed on to future generations. Capital is supposed to be depleted over one’s retirement rather than being preserved as a bequest.”

Expect to hear much more of this to justify changes, encouraging retirees to spend their money rather than leave it in their will. Said Frydenberg:

“Being too conservative in how they draw on their super account balances can lead to retirees living frugally and settling for a lower living standard in retirement. It can also mean that for some, much of the money they worked hard to earn and save is left as a bequest, rather than supporting their retirement, as intended.”

A new Capital Depletion rule to address longevity

At the Forum, Frydenberg came close to announcing a new policy to encourage retirement products without immediate income but which might kick in at say the age of 80 to cover longevity risk. He said:

“For example, rather than complying with a minimum withdrawal rule, could products instead be allowed to comply with a capital depletion rule? … (to) better cater for longevity risk products that have more flexible payment structures, including deferral periods. We have also been consulting on ways to make it easier for people to purchase longevity insurance incrementally, which could be more attractive to some retirees compared to parting with a lump payment ... But a rule that allowed for flexibility on drawdowns so long as there is a depletion of the capital over time would be able to cater for such products.”

While it would be premature of me to announce the outcome of this review today, I am hopeful that we will be able to deliver a package of changes that facilitates the emergence of new and innovative retirement income stream products.”

The basic intention is to give people more confidence to spend their superannuation in the earlier years of retirement, say from the ages of 65 to 80, knowing they have an income stream that then kicks in. Only time will tell if this product will be popular but clearly, annuity providers are excited by the possibility, including new entrants in the life insurance sector. Would retirees then enjoy a higher standard of living?

There’s no ‘never ever’ in politics

When the Government responds to the Tax White Paper and the Financial System Inquiry, some of these issues may be clearer. But we’ll see important changes to superannuation over the next couple of years which will be adverse for some people, especially those with large SMSFs. Joe Hockey was right: never rule out anything in politics.


Graham Hand is Editor of Cuffelinks and was a guest at the Committee for Sustainable Retirement Incomes Forum. This article is general information and does not provide specific advice to anyone.


Peter Knight
June 17, 2015

There is an argument doing the rounds at the present time which simplistically states that the higher income earners receive the biggest tax concessions in super. That is true and is only true because the high income earners are paying a lot more tax in the first place! The reason the lower income people don’t get a tax concession is because they are not paying much if any tax at all. It’s pretty hard to get a tax concession if you’re not paying any tax!

Peter Knight
June 14, 2015

How much should an individual be allowed to hold in Super? I would prefer that no cap exists at all, but if that is not politically acceptable, then the following should be considered as an absolute minimum. An equivalent amount that would generate 67% of that individual’s pre-retirement income. As an example; a person retires at age 55 and let’s say was earning $300K at retirement, therefore, 67% of $300K would be $201,000 annual pension. Based on this pension amount and the minimum legislated drawdown of 4% of the fund’s total balance, this would calculate a maximum pension account balance figure of $5,025,000. Any amount in excess of this calculated 67% (calculated at the time the fund enters pension phase) amount, could stay in the funds separate accumulation account which would continue to be taxed at 15%, whilst leaving the pension account paying a tax free pension to the recipient. This figure should be indexed yearly to cater for the effects of inflation and to maintain the real purchasing power of the pension. Rules would have to be in place to decide when and if the accumulation account could eventually be allowed to be converted to a pension account at some time in the future. As an example the accumulation account could be used to guard against longevity risk or legislated to remain in cash to mitigate market risk or sequencing risk. The other point to consider is; how can the account based pension payments keep up with inflation? If inflation is only 4% per annum, then the purchasing power of the dollar reduces by 50% after only 18 years (rule of 72). That’s why I don’t believe maximum caps are a good idea because in a relatively short period of time, a large balance can reduce significantly due to adverse events. This is of course, precisely what happened to me! The focus really should be on the income stream that the fund is producing, NOT the balance of the fund. That’s why defined benefit (DB) funds are so much more valuable than defined contribution (DC) funds; more on DB later. In DC funds the recipient bears all the risk, whilst in DB funds, the employer bears all the risk!

June 16, 2015

Very interesting idea. Thanks for sharing. At 40, and a high income earner squirrelling money away into super, I support the approach you suggest.
As the sole income earner, can you share your ideas on how this system could be adapted to cater for my wife?
In addition, I have a son with a condition that may see him be dependent on my wealth for life. Is there a way the system could account for this situation?
Glad you pointed out inflation effects on absolute balances. The vast majority of people don't fully comprehend this. It is also one of the reasons why many of them fail to plan for retirement effectively.

Dr Gideon Polya
June 13, 2015

Excellent article and excellent suggestions by the White Paper and the ASFA. However any fairer arrangements will have to be legislated by largely Lib-Lab (Coalition and Labor Rjght), snout-in-the-trough MPs – but pigs might fly. A simple argument for more transparency is outlined below:

1. The Australian reports: “”The annual average increase in an MP’s base salary over the past 10 years - including a one-off lift of 31.3 per cent in 2012 - is 6.9 per cent. Most workers can only dream of such wage increases. The base salary for MPs is $195,130 a year. MPs now earn 2.8 times the average annual wage. Not bad if you can get it. But this is only a “base” salary. They are also paid an electorate allowance of between $32,000 and $46,000 each year to reimburse them for “costs” incurred as an MP. It is treated as taxable income. MPs are also entitled to a private-plated vehicle for “official business” or $19,500 each year in additional allowances to meet transport costs. MPs have an electorate office and a minimum of four full-time staff to work at their discretion, along with separate printing, communications and publications allowances. Attorney-General George Brandis spent almost $13,000 on books, magazines and newspapers over four years. Even an MP’s personal home phone is paid for. Domestic and overseas travel for “study” is paid for. MPs earn a tax-free $268 for every night spent in Canberra or other rates for “official business” elsewhere. Whatever they don’t spend, they can pocket. Family members are given free travel. Some former MPs have a Life Gold Pass that grants them free travel anywhere in Australia for “non-commercial” business” (see “Troy Bramston, “”, The Australian, 24 February 2014 : ). Their spouses might earn circa $100,000 pa.

2. After about 30 years of work at a combined pre-tax income culminating in the last year of work in 2015 at today’s rate of about $300,000 per year any modestly living Australian MP and spouse who avoided private school fees for their children and lavish holidays might, with sensible management, have accrued about $1 million in superannuation (earnings un-taxed), $3 million in investment properties (enabled by negative gearing) and an adequate home in a reasonable suburb worth $1 million for a total of $5 million appreciating at 5% pa or $250,000 pa untaxed (assuming that capital gains taxes would be paid after their death by their lucky children) – indeed if they didn’t have this level of wealth they would have to be regarded as profligate and/or utterly incompetent.

3. In contrast, a hard-working but modestly paid couple in Sydney and unable to buy a house or apartment would end up in 2015 after 30 years' work with a second hand car and $0.4 million in superannuation appreciating at $20,000 per year.

4. A person excluded from employment by disability, illness or “social history” reasons would in 2015 have zero assets and a pension of $650 per week before rent.

The above makes a good case for complete transparency of the property and superannuation assets of all MPs and their spouses – a small price to pay for the honour of representing us.

- See more at:

Peter Knight
June 13, 2015

Any taxation of existing super pensions should not be retrospective. If the Government does foolishly decide to retrospectively tax existing pensions for people over 60, then at least realise the following. Only the taxable element (concessional contributions) of the fund’s holdings should be taxed and the non-taxable element (non-concessional contributions) should not be taxed, as is the existing case for pensions being paid to individuals less than 60 years of age. It should be noted and continually reinforced, that there must be adequate compensation (tax concessions) for people who choose to defer consumption in their younger years in order to live unencumbered to government in later years. A person MUST be compensated for foregoing consumption now in order to lock up their money in super for decades to come. This compensation largely, but not totally, comes from Concessional Contributions. There is absolutely no incentive in saving extra for retirement if the Government sets the example of changing the goal posts at the same time that financially prudent people have decided to retire.

June 16, 2015

Exactly. Thankyou for saying this. Fool around with the system too much and handicap me as a high income earner? (Remember, I most likely studied harder, worked smarter and delayed gratification for longer than those on lower incomes.)
Result if I perceive genuinely unfair treatment?
a) work harder to find avenues, not readily used by lower income earners, to keep more of my money in my pocket. If this fails;
b) take my income potential and retirement savings and move them to a more favourable nation for my circumstances. I already see wealthy people doing this and it seems to be quite attractive.

Graham Hand
June 12, 2015

Hi Rory, Thanks for the suggestion. As you know, there are three stages where 'super' could be taxed: at the contribution stage, on the earnings in the fund, or on the withdrawals. We have a 15% tax on concessional contributions (pre tax) within tight contribution limits, and then no tax on the other two if you're 60 or over. Your idea is a 10% tax on the income. It's worth putting in the mix, although low income earners would say they already paid 15% on the capital going in. Maybe it would need a minimum threshold.

Damien Erbacher
June 14, 2015

Hi Graham/Rory,

I like the idea of the 10% tax on the income.

Low income earners should have no objection to that. The 10% tax is on the income (as opposed to the 15% on the capital component that was contributed). You can't add the 10 and 15 to get to 25% rate. They're completely different things.

However, i agree, that with current balances at least, there would need to be some sort of threshold...otherwise it would make sense to retain use of the tax free threshold, and keep assets out of the super system?

Rory M
June 12, 2015

Morning Graham, I read all of your articles with great interest and appreciate the absence of bias. I've always wondered why consideration has never been given to placing a tax on income streams at a rate of say 10% to support superannuation sustainability. Such a rate continues to encourage use of the system and it reflects user pays. If I have a balance of $400k as opposed to my neighbour who might have $2m, it matters not in relative terms.

Peter Turnbull
June 12, 2015

I like National Australia Bank submission to the Tax White Paper on dividend imputation and the need to retain it. Will be interesting to see how it all pans out.

June 12, 2015

People forget that current pensioners were once hard working tax payers themselves, with a lower standard of living than today's workers and much higher income tax rates. They deserve respect not the vilification that the present Govt. seems to be encouraging. The number of pensioners sitting in multi-million dollar homes is a very small proportion. The Govt line is similar to their "dole bludgers" assertions for people out of work. Figures show 850000 unemployed with 150000 jobs advertised.

Bruce Hawkins
June 12, 2015


Good article, I enjoy the weekly newsletter.

Re the Aged Pension Assets Test proposed changes to the Taper Rate, I think it is reasonable that existing pensioners (at 1st Jan 2017) have their benefits "grandfathered" as many of them will have developed their financial plan prior to this year's Budget. If the benefits are not grandfathered, it will likely negatively impact their benefits and quality of life going forward.

And yet in all the public announcements from the Government, I have not seen this mentioned.

Do you have a view on this?



Graham Hand
June 12, 2015

Hi Bruce, my understanding is there is no 'grandfathering' of pension benefits, and therefore some people will have a material reduction in their age pension. However, there is a grandfathering of entitlement to the concessions card. Chris Cuffe said in his newsletter comments that the issue of grandfathering of any changes is an important part of the debate. I guess one saving grace may be that the implementation date is 18 months away and a lot can happen in politics and policy in that time.

June 12, 2015

Interesting that Frydenberg is making discouraging noises about super being used to fund a bequest.

But will he or anyone else have the courage to make the same noises about the retiree's principal residence? Our current system forces all taxpayers to fund the age pension for a large number of retirees who have considerable wealth embedded in their principal residence. It encourages retirees to live in homes that are much larger and more valuable than they necessarily want or need, so they can get more age pension from the taxpayers and leave a large bequest.

But when those pensioners pass on, wouldn't it be fairer for the value of the age pension payments they have received to be refunded to taxpayers from the value of the property? It seems quite unfair for the pensioner's beneficiaries to receive a large windfall gain, often into the millions, when hardworking taxpayers have been funding that pensioner's cost of living since retirement.

There already is a Centrelink program called the "Pension Loans Scheme" that operates on these principles for people who choose to use it for a "top up" of their age pension. There is no need for people to move home if they don't want to, and the maximum repayment amount is capped at the value of the property. Extending this scheme to all age pension recipients for the full amount of payments received, would provide greater social equity, reduce the budget deficit, and remove one of the drivers of excessive property prices.


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