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How Canberra explained super changes to me

If we can believe the rumours, Federal Cabinet is busy working on ways to make its proposed superannuation policies more palatable. It may be a challenging task: at first glance, the Budget 2016 policies seem inconsistent and lacking in logic.

On 16 February 2016, Treasurer Scott Morrison told the SMSF Association National Conference:

“I have great sympathy with the view put forward by the Murray Review that the main purpose of superannuation is to ensure that people are not reliant on a welfare payment in retirement in part or in whole.” He added: “One of our key drivers when contemplating superannuation reforms is stability and certainty, especially in retirement. That is why I fear taxing superannuation in the retirement phase penalises Australians who have put money into superannuation under the current rules … it may not be technical retrospectivity but it certainly feels that way.”

It would be reasonable to read those words as meaning the Government saw the primary purpose of superannuation as getting people off the age pension, while at the same time avoiding retrospective legislation.

Just 10 weeks later in the 2016 Budget, he announced a cap of $1.6 million per member for tax-free money to be held in pension phase, as well as a $500,000 lifetime cap for non-concessional contributions, with the calculation backdated to 2007. The Treasurer claims he has not gone back on his word, as money in pension phase will remain untaxed, just limited.

The Government’s justification of the amounts chosen

The conundrum has been to figure out where these figures came from, so recently I bit the bullet and went direct to the Government for some insight. The rationale for the changes, it was explained, was to produce a fair system, while not advantaging older generations over younger generations.

The thinking in Canberra is that superannuation should be set at an amount that is considerably above the age pension cut-off point but not excessively so. You may have noticed that $1.6 million is slightly less than double the proposed asset test cut-off point of $823,000 which will come into force in January 2017. As the pension asset test will be indexed to CPI, the Government believes that the $1.6 million tax free limit should also be CPI indexed. It will rise in $100,000 increments. Current modelling indicates that the $1.6 million limit may rise to $1.7 million in the financial year ending June 2021.

Note that $1.6 million if invested at retirement, at a rate of earning inflation plus 3%, would pay an income equivalent to four times the single age pension for 25 years. The numbers are realistic, and in line with the Government's stated purpose to stop superannuation being used as a tool for squirrelling away large sums of money in a zero tax area for the benefit of one's beneficiaries. For a couple aged 65, this represents an indexed income of $176,000 a year until age 90 if the fund earns 5% and inflation is 2% (Editor note: based on $3.2 million or $1.6 million for each person in the couple).

Backdating of non-concessional most controversial

The backdating of the $500,000 non-concessional lifetime cap, which is the most controversial of the proposed measures, also makes some sense once the logic behind it is explained. The Government has taken the view that wealthier superannuation contributors have already made after-tax contributions averaging $700,000 per person, which should be adequate to get them to the notional target of $1.6 million. They believe that allowing a lifetime cap of $500,000 for everybody from 1 July 2016 would give an unfair advantage to older wealthy people over the young accumulators.

The super changes may not be welcome to many, but at least now you understand the logic behind them.

More belt-tightening to come

The big difficulty for this Government, and future ones, is that Australia, like most developed nations, has serious ongoing budget problems. The Social Services budget, which has ballooned to $159 billion a year, now represents more than a third of the Commonwealth’s total annual budget of $451 billion. The terrifying news is that the Social Services budget is growing at 8% a year while total Commonwealth revenue is growing at less than 3% per annum. Given we still borrow $1 billion every month to pay our way, more cuts to welfare are inevitable.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Peter Knight
September 06, 2016

Superannuation is a Trust with specific tax criteria applicable to them, just like all other Trusts which have different tax criteria specific to them. The reason that a superannuation trust has more beneficial tax treatment is because of two reasons; 1) It is a mandated savings vehicle and by law every worker must have superannuation unless they are self- employed. 2) The money is LOCKED UP until one reaches one's Preservation Age and retires from the workforce. This second criteria is the crucial one. The money can't be accessed until late in life! Why then, would anyone want to contribute voluntarily to a Trust which locks up your money for 40 years plus, when the government of the day can change the rates of taxation applicable to that Trust whenever it feels like it? There would be no logical reason to make voluntary contributions to Superannuation with all the uncertainty about rule changes and lack of access to the funds; one might as well form a Family Trust and buy assets through that vehicle. You can be sure those rules won't change because unlike superannuation, the same rules apply to everyone, including the politicians! What the Government and the Opposition are proposing to do is simply just WRONG!

David Roberts
September 06, 2016

The whole issue arose because of the classification of the pension as NANE (Non assessable Non exempt) without any limits. I know at least 8 retirees with > $5million pulling down $250000 pension, payine no tax, paying no Medicare (NANE income is not taxable income and Medicare is based on taxable income), all get the Seniors Health card due to grandfathering by Joe Hockey, all are able to earn another $18200 from investments outside of super. The solution is to scrap NANE definition and give a tax offset equivalent to tax paid at 30%. This would mean around $70,000 would be tax free and the rest taxed at marginal rates, Medicare would be paid on the total pension and the Seniors Health card would be lost if the pension was > $50,000. Then there is the issue of borrowing by superfunds which has seen the rise of SMSFs > $25 Million and wouldn't pay tax! Alan Kohler, on the ABC's Drum in 2012, pointed out that Peter Costello's tax free pension super was nothing more estate planning for the mega rich.

Ray Coves
September 05, 2016

Well surprise surprise. You mean to say that Mr Morrison didn't understand all the implications. He promised no changes to super. With the budget in such dire need of repair its makes one wonder why negative gearing was brushed under the table? Something to do with politicians and their multiple investment properties? Never!

Ross Purser
September 05, 2016

Not acceptable! Poor effort, why would people go into Super. if the rules can change retrospectively!!

September 02, 2016

Thanks for the insights Noel. Unfortunately the govt did a very poor job of explaining any of the superannuation changes at the time. Particularly those govt representatives outside the Morrison/Cormann/Turnbull circle. Julie Bishop and co just need to completely shut up about super and refer all questions back to someone who understands it.

Labor for its part has long been advocating changes similar to those announced by the govt. Yet in the election campaign they did a monumentally hypocritical backflip. I bet their comrades in the union super movement were none too pleased with the damage the parliamentary wing inflicted on public confidence.

September 02, 2016

The writing about tax free investments and income in retirement has been on the wall for many budgets now. Finally the Government has made proposals to address the perceived inequity of the wealthy benefitting more from super tax concessions than the poor. Or should I say, they have announced a way to increase the tax on super to help balance the budget. In the end that's what we pay them to do help Australia live within its means.

I just hope that the final implementation is resolved quickly to remove uncertainty.

My only real beef with the Government Strategy is the way in which the non-concessional cap is being changed. It is retrospective because:
It applies to contributions since 2007
People have made long term plans about future divestment of non-super investments and contributing the proceeds to super, and have based their retirement planning around that.

Another difficulty is that it is not straightforward to implement because the ATO does not have up to date records of previous contributions at the time people are making decisions about making contributions.

I think it would be better to retain the current non-concessional system with bring forward rules. If deemed necessary to increase tax revenue, the Government could reduce the cap from $180k to something lower, effective 1st July 2018.

As far as the Pension limit - as one of my clients explained to me, he will still only have tax at up to 15% to pay on the super fund, so whilst he is not too happy about it, it is still better to use the power tax environment of the super system, at least for now.

Jim Parker
September 02, 2016

Without a trace of irony, Noel Whittaker at once decries our ballooning welfare costs while defending tens of billions of dollars of continuing tax expenditures through superannuation to people who don't need them. Socialism for the rich and capitalism for the rest of us.

September 02, 2016

As a SMSF in pension mode trustee I find these limits are taxing the very people they had tried to encourage with the income going to the people who should be discouraged. To obtain the incomes stated on the proposed limits, people are required to take a certain amount of risk to maintain the required income for another 20 to 30 years. During this time there will no doubt be recessions,GFCs personal health requirements etc to play havoc with super balances with little chance to recover at this period in their life. I suspect many will just give up, have a good spend and move on to the pension. This may provide a short term stimulus to the economy with a long term hit to the aged care, health and social security budgets. Those with larger balances may look to other asset classes and jurisdictions. This government has taken the soft option, a retrospective change to limits, which would be acceptable if they were not so restrictive and the government had demonstrated that the increased income would be used wisely and not just used as a short term boost to an ever increasing social security budget in this age of entitlement. Successive governments have bought votes and not provided fiscal leadership. There is a spending problem. To suggest that if the proposed limits were in place ten years ago I would not have changed how and where I would have invested is wrong. To suggest that if the proposed limits get through parliament won't change how and where I invest is wrong. To think that it won't influence the way I vote is wrong

September 02, 2016

I don't quite understand the common complaint that goes along the lines of: "I planned things under certain rules - how dare they change the rules". For the relatively small number of people affected (and sadly, I'm nowhere near being one of them, despite a lifetime of super contributions) all that's really happened, in the end, is a tax increase. That's it. I'm not aware of any social contract we have with government that stipulates "thou shalt never increase tax rates".

I might plan my affairs based on assumed income, capital gains and superannuation tax rates & regulations but these are variables and the government isn't obligated to fall into line with my assumptions about the future values of these variables. Any decent plan includes scenarios where the variables change.

September 02, 2016

If a clever merchant banker could offer age pension as a financial product and require underwriters to cover any IPO shortfall, will all the people who oppose the belated pruning of unsustainable super tax concessions step into that role?

No, me neither.

Most criticism of budget measures derive from people forgetting that super concessions dating over two decades are recent given the six or seven decades of retirement savings accumulation and withdrawal. When the changes suited our hip pockets, we forgave the political tinkering generously. Now that they are being pared back, the consumers and their rent-seeking advisers demand 'justice'.

In the interest of national solvency, we must stir out of our Rip Van Winkle stupor.

September 02, 2016

Noel, thank you for doing what the government front benchers were apparently unable to do - explain the theoretical basis behind their proposals.
I cannot see any useful conclusion that can be drawn by comparing the proposed asset test cut off point of $823,000 for a couple with the proposed $1.6M maximum pension phase balance per person.
The 15 year government (risk free) bond rate currently sits at 1.84% and this is the earnings rate that should be used in comparisons if we are to use the age pension as a benchmark as it is also risk free. Self funded retirees no longer have any confidence that governments and their central bank cohorts can manage economies in a manner that is conducive to a consistent earnings rate of 5%. An age pension recipient is also receives concessions on pharmaceuticals and a host of other expenditures so a person with $1.6M in retirement savings is not 4 times better off than the age pension recipient.
Self funded retirees rightly demand to receive the benefit of what has been good law – they have structured their 30 year savings plan accordingly. If a successful law abiding person has accumulated $2.0M in their pension phase account on 30/06/2017, they should also have $2.0M in their pension phase account on 1/07/2017 – it they do not it is likely because of retrospective legislative change.
Baby-boomers expect to get the benefit of their retirement savings accumulated over 30 years as enshrined in legislation – this is their entitlement. This is to be contrasted from any entitlement derived under welfare payment legislation which of course is funded from general revenue and this has fallen from resources boom period levels.
Self funded retirees have suffered from a policy of financial repression propagated by the Reserve Bank and tacitly approved by the Federal Government. Artificially low interest rates have transferred funds from the earnings rates of self funded retirees to those prepared to speculate in assets that have artificially high purchase prices (including real estate). Many of the beneficiaries have been from Generation X and Y.
Is it any wonder that self funded retirees deeply resent this nonsense.
Scott Morrison is in danger of being assigned new ministerial duties – that of Minister for Denials and Weasel words. Kelly O’Dwyer is in line for Minister for Dunno duties.

Stuart Dalgleish
September 01, 2016

Noel, I can not follow the logic of your statement under the heading Backdating of non-concessional most controversial....They believe that allowing a lifetime cap of $500,000 for everybody from 1 July 2016 would give an unfair advantage to older wealthy people over the young accumulators.'

If the Govt. wants us to accumulate 1.6m each to become truly self-funded, why make it harder to achieve. In fact, I fail to understand the need for a non-concessional cap if the 1.6m is adopted.

September 01, 2016

John, expecting to squirrel away any amount of money and expect it to be tax-free forever is naïve at best. For something to be genuinely retrospective, it must have distorted behaviour in an unfair manner and I find it almost impossible to believe that anyone would have changed their investment behaviour had the new rules been in place given a very concessional tax rate continues to apply to balances above $1.6m.

A far more retrospective change (even though, prima facie, it may not seem so) would be the abolition of franking credits, as investors into these companies would face significant CGT consequences as such a change may have far reaching portfolio construction consequences (thus the initial investment decision may well have been quite different, particularly if made with non-super monies).

The current attitude of many baby-boomers to these changes is starting to make the assignment of Generation Y as the "Age of the Entitled" seem misplaced. Noel has laid out a very reasonable basis for the current policy stance. You are of course welcome to change your vote but I suspect the vast majority of minor parties will have limited reception for such views.

September 01, 2016

At first, I was not sure where Noel got his $176k pa number from. Sounded high. So I took out my abacus and realised this is correct if both members of the couple have $1.6m each. I'm not sure this was perfectly clear.

September 01, 2016

Very nice rationalisation (Noel Whittaker) of a classic Monstering by Treasury of Coalition Politicians and the Australian Private Sector Saving Public , over Superannuation . How does Treasury explain that senior Treasury Officials, judges, politicians , and many other public servants , are in a much more generous scheme without Risk or Effort and sometimes without contributions , indexed for life and transferable quite possibly to partners 50 years younger than them ?, and miraculously get to keep everything, no Reforms here. (not Constitutional ? ). Perhaps they are just Very Superior People ? Best Regards & Life is Fun Richard

September 01, 2016

What about pensioners who have actually saved $1,000,000 under previous superannuation rules(not bet, smoked or drank their money away) who are getting 2.5% in the bank because they are not financially literate enough to invest elsewhere, that is $25,000 p.a. (which is actually lower than the pension). To me it seems that a spending trip may be coming.

Politicians tell us that the end of entitlement is over, do not see them loosing any entitlements, do you?. they receive a golden handshake when they retire, in most cases a government pension plus their nice big super, which of course is better than any other working person. Was it not Menzies who increased the personal tax rate so that all working people would receive a pension when they retired.

September 01, 2016

Roger that logic neglects the fact that the people in that scenario havr $1m in the bank and need not live only on the interest. They could in fact consider spending some of their savings. You would also think that if you are retired and have a million dollars, you could buy a book or three and read up on investing so that they don't need to sit in cash. If all of that is too hard, there are investment advisers and financial planners that can provide advice for a fee that they are in a position to pay.

Wanting to leave a bigger inheritance for the kids and ignorance of their investment options is not a solid basis for continued taxpayer subsidies through concessions.

September 01, 2016

Dear Noel

I disagree with the Coalition's current superannuation policy. I put money away into superannuation for my wife and myself over many years on a particular basis. For the Coalition to come along and change the goalposts after the event in a way that affects current superannuants negatively after the event is outrageous, particularly when the current state of the budget is essentially the fault of the policies of both major parties whilst they were in power (John Howard for creating huge family welfare payments in a misguided attempt to get himself reelected and the Rudd/Gillard economic disaster). Superannuation is not a honeypot for politicians - it is there to give retirees a certain economic future whilst alleviating the tax drain on the taxpayer in respect of publicly funded pensions. Like many older Australians I certainly will not be giving my vote to either of these parties in the future.

September 01, 2016

Whatever their rationale, and we know many Government officials are not subject to the super rules faced by those outside the public services, and ultimately the outcome will be determined by the politics of it, not even what Turnbull and Morrison want.


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