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Meg on SMSFs: Would a limit on fund size make sense?

In a monthly column to assist trustees, specialist Meg Heffron explores major issues relating to managing your SMSF.

Nothing bad happened to super in the October 2022 Federal Budget despite many predictions about possible changes to tax laws, limiting funds to $5 million and the like.

But the fact that those things didn’t change in October doesn’t mean they won’t be on the agenda in May 2023. It seems to me that most new governments treat their first budget as an opportunity to exclaim with horror that the cupboard is bare so “tough decisions will need to be made” and lock in some funding for their top election commitments. Everything else gets left for the next budget so they can enjoy their honeymoon period.

That means we should be thinking ahead to May 2023 – what’s likely then?

Might that be the time when we see something designed to break up very large SMSFs gain some traction? What could that look like?

Who would be impacted?

There are certainly some enormous SMSFs. For example, in August 2022, the AFR quoted values for Australia’s three largest SMSFs as $401 million, $371.4 million and $273.2 million. And 32 SMSFs had more than $100 million. That’s some very large funds.

Using the latest ATO statistics (which are based on returns for the 2019-20 financial year), there are very roughly 600 funds that have more than $20 million. Since most SMSFs have two members, that’s $10 million each. Again, a lot of money.

And all the investment income earned by those funds is being taxed at 15% (at most). Presumably the people who belong to these very large funds would pay much more tax if they had to take their money out of super. So not surprisingly, there are loud calls for us (as a community) to spend less money on providing generous tax concessions to people in this position.

But is the answer a hard limit on size? I’m not sure that’s a great plan.

For a start, if there is a limit at all it should be at a member level – not a fund level. So a fund with twice as many people should be allowed to be twice as large. And obviously it should apply to all super funds, not just SMSFs. Even with those adjustments, is a hard limit on member balances the way to go?

There are a couple of reasons I favour an alternative – and I’ll explain one shortly.

Eventual demise of extremely large funds

Let’s remember that this isn’t necessarily a long-term problem in any case. A few factors will drive these very large funds to dissolve of their own accord in time.

The one thing that forces all of us to take money out of super eventually is death. For the majority of people who die, the only amount of their super that can stay in their fund is whatever their spouse is able to take as a pension. If he / she can’t take it all as a pension it has to come out of the fund as a lump sum. And this is where the $1.7 million transfer balance cap plays a role – it limits the amount that can be taken as a pension, indirectly forcing money out of super whenever someone with a large balance dies.

These days, there is a limit on virtually every type of super contribution that can be made (personal injury settlements are the one exception – and I expect no-one would begrudge someone creating a $10 million SMSF if they received $10 million in a compensation payment for a terrible injury). In short, these days it’s virtually impossible to put enough money into super to grow a balance to the current dizzying heights of these very large funds. That means most of these very large funds have probably been around for a long time and perhaps have members who are getting older.

So here’s my first hypothesis – I bet a lot of these large funds have two members and both are in their 70s – 80s. As soon as one of them dies, the fund value will fall dramatically. And that’s without any change in the law.

And my second hypothesis – the rest of us stand no chance of getting there because we won’t be able to put enough into super to make it happen. I wouldn’t be at all surprised if we see the number of funds with balances in excess of $20 million fall dramatically in the next 10 years but the number with $1 million - $5 million increase as those in their 40s and 50s approach retirement. We’ve had the benefit of compulsory super for most of our working lifetimes but by the time we were able to really focus on our retirement savings, contributions were very tightly controlled.

Is change really needed?

So, is this a problem worth compromising the current simplicity for or will it go away on its own?

If your view is still firmly in the 'reign in tax concessions for the wealthy', I wonder if there are better alternatives than a hard balance cap.

There was a time (before 2007) when it was compulsory to start taking money out of super at a certain age – for most people it was 65 (a little later for people who were still working but let’s work with 65). At that point it was compulsory to turn all of one’s super balance into a pension or take it out of the fund entirely. Funnily enough, removing this rule (called “compulsory cashing”) back in 2007 is probably one of the things that has allowed these mega funds to stick around for so long – there’s simply no requirement to take the money out before death anymore.

What if we went back to some form of compulsory cashing and it became compulsory for everyone to start drawing down on super at some point?

The challenge these days would be that there’s only so much anyone can move into a pension (the transfer balance cap strikes again). And I’m not an advocate of forcing everyone with more than $1.7 million to take every other dollar of their super out as a lump sum immediately. Imagine the potential for investment chaos, fire sales of assets etc.

Rather, what if we had a second class of pension that didn’t get all the same great tax perks as a modern day “retirement phase pension” but with no limit on size? Perhaps the investment earnings on the money in these pensions could still be taxed as if the money was in accumulation phase – whereas no tax is paid when money is in a retirement phase pension? In fact, we already have a pension that works this way – transition to retirement pensions for people who are under 65 and haven’t yet retired.

Or perhaps the earnings on money in these pensions could be taxed at an even higher rate than 15%? Or perhaps the drawdown rates could be higher, so the balance is forced out of super faster than a traditional pension. I’m sure we could be imaginative here.

The key is that something along these lines would force all who hit the magic age to start drawing down on their super in some way. But they could do so steadily over time rather than all at once.

It would also mean we’re not imposing arbitrary limits on balance sizes – any government that does this can expect immediate challenges. There will be calls for leniency in times when markets are volatile (… all the time), protests of unfairness for those who cashed out large super balances only to see their assets plummet in falling markets. There would no doubt be calls for the change to be phased in over time or for some members to be specifically excluded from it (known as ‘grandfathering’). And these requests would be reasonable – those with large super funds have grown them legally, they’ve made long-term decisions about investments and tax. It would be unreasonable for them to be told to change everything ‘tomorrow’.

There will be (perhaps rightfully) cries that the ASX and our property markets will be decimated by large SMSFs offloading millions of dollars as they cash out their members’ benefits. Over the long term, will there be an incentive to invest more conservatively? And there are no doubt many others I haven’t thought of.

None of that sounds like a great result even in the interests of spending less on tax concessions for people who clearly don’t need them.

One final point – both this government and the previous one have wittered about formally documenting a purpose for superannuation. In all my thinking about what our future state should look like, I’ve assumed that when someone eventually does that, the purpose will be in line with my particular paradigm (super is for saving for retirement but should result in money coming back out again during the member’s lifetime). No matter what the purpose ends up being, our next steps should be guided by it rather than just a knee jerk desire to take something from wealthy people.

 

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.

To view Heffron's latest SMSF Trustee webinar, 'Super contributions unpacked', click here (requires name and email address to view). For more articles and papers from Heffron, please click here.

 

49 Comments
Barry
January 04, 2023

This policy would be very hypocritical of the Labor party. Paul Keating said that early-access of super before preservation age is breaking the social contract of superannuation and Labor was complaining that the Liberal Party allowed people to pull money out of super before preservation age during the COVID-19 pandemic.

And yet now, Labor are thinking about a policy where they let people take money out of super before they reach preservation age if their balance hits some arbitrary number.

That just goes against everything Labor said about letting people get money out of super early while they were in opposition. It is a total backflip now that they are in power.

Mark
January 05, 2023

No it doesn't. P Keating's stated at the inception of Superannuation was that it was meant to A: Fund or or Part Fund retirement and B: Provide a Pool of National Savings, nowhere was it ever envisaged to be a wealth creation tool.

Even a cap limit of $2.5M per fund gives a couple $5M in Super to fund their retirement. On a 5% Drawdown rate that is $250k per year. That is more than enough to be funding retirement. If your lifestyle needs exceed that and you have investments exceeding that, you can still have them.. Just not in the Superannuation System gaining the tax advantages of that system when you don't need them.

Lyn
January 08, 2023

Mark,It doesn't go against what Keating said, especially creating national savings pool when at time Australians had few savings & way down list of countries of savings/capita as I recall. Why is it obscene as many anti-super comments suggest, to save as much as one can whilst one is able?
That is what he wanted the population to do and many have under whatever regulation. Many haven't or don't but you rarely see deep resentment from those who did save object to those who haven't as circumstances are different for many--- illness,death of partner, parenthood, single parenthood etc. Rather than arguing retiree's $ to live on,again all different, for me $40,000 is OK but others need $140,000 and if they have saved why not, we should not be seeking lower caps or we may return to pre-1991 savings pattern witth no pool of national savings. I was astonished when $1.7m regs introduced, my first thought was, there goes saving instinct, I even thought I should advise my 30yr old not to bother to save too much for next 40yrs. How daft when I know those who save do far better? We get a roof over head, eat healthily, drink less,get educated, educate our kids & independent. I know saving from National Savings Uk (est 1861- now) as child---go to Post Office, buy pretty pink 10 shilling stamp for my savings book & entry end of year re interest, little did I know at 7 it was loan to Govt but I do know now it was safe & had I left 10 bob then I would be far better off now. Your estimate of $2.5m p.p. is way off mark to buy nursing home place in Sydney & maybe 5 -15yrs fees---none knows & private health ins., physio, taxis to medical appts, full price drugs, buying food like strawberries raspberries and peaches not supplied, Netflix, occupational therapists, cards & gifts for birthdays & request taxi to post same, lunch out albeit maybe in a wheelchair--another taxi, the odd glass of wine etc and if one can ever live at home again after illness, the cost of labour to live there again---cleaners, gardeners etc. But you & people like you think we should either sell home or never have saved in the first place according to the regulations at time. Life is hope & where there is life there is hope. Not too hard to understand, but one needs savings to enable. My figures are based on reality of relative I helped sort things & the surviving 86yr old partner after all the years of expenditure still has a home, not much capital, but healthy & active with still a home and no drain on Government purse. Think about that Mark if you advocate a cap. It is not a crime to save but it will be if you put a cap on saving. Keating got what he wanted, perhaps it's time for an Australian national savings scheme as I knew instead of tinkering with Super, so people learn how to save.

Mark
January 09, 2023

@Lyn The $2.5M figure I used is one of the other figures touted when capping Superannuation balances. I used the lower figure that it would still be possible to get a decent retirement income from that. $5M would be double, a couple maxed out would be double again.

Don't confuse needs with wants, nobody needs $140k a year from their Super. There is no need for anyone to accumulate more than that in their Superannuation. Personally I think $2.5M is enough but if a cap of $5M was brought in I wouldn't be commenting on media platforms that it is too much.

I am in favour of a limit. For the record, my Super could well be over $20M by the time I reach preservation age. Wealthier individuals can still invest outside of Superannuation, so no one is having their ability to accumulate wealth stopped.

There is no justification for allowing really high balances in Super to accrue for the simple means of wealth creation due to the generous taxation of Super. If you have means to have more, have it outside of Superannuation and use any other tax minimisation tools you can.

What I think is likely to occur is they will put a higher tax rate on earnings from higher balanced funds above X amount.

A bit like the way they introduced a higher tax rate on high earners contributing to Super.

If they do introduce a higher tax rate I think it only fair that if you wish to withdraw any Superannuation above X amount if you wish too regardless of being at preservation age.

Last time I checked there were about 100k Superannuation Accounts with more than $2.5M of those about 11k are above $5M

Mark
January 09, 2023

I forgot to ask why you would be astonished about the $1.7M BTC for starting a tax free pension from your Superannuation?

It's more than fair. It is likely to be raised soon due to inflation. A 5% draw down from $1.8M is $90000 tax free. That is around 50% higher than the gross median wage and around 75% of average household income. A couple maxed out would be getting $180k a year tax free.

Meg Heffron
January 04, 2023

Wow - remind me never to take a holiday just after publishing a Firstlinks article, this group is so engaged in super it's just fantastic to see and be a part of it. There are a lot of really good points in all the comments above. Rather than address them individually, just a few comments of my own:
1. I too am anxious about anything that looks like a sudden tax grab, politics of envy, penalising people for doing well. Even if we completely ignore "fairness" (which is always in the eye of the beholder), it makes people feel like the sands of super shift constantly under their feet and it's a dangerous place to save for the long term. And you can see that many people feel that way already from the comments - with good reason. But I do think that legislation needs to change over time to reflect changes in circumstances and if I'm truly honest I believe that the pendulum was swung a little too far in 2007 and some pulling back of the tax concessions is inevitable and sensible. We've seen some already in recent years but I suspect there's more to come. So how to reconcile those incompatible views? One is grandfathering - but it definitely introduces complexity and inevitably creates the "have nots" who just miss out. It also sometimes creates traps for the unwary that are bad policy in my view (I know I use the Commonwealth Seniors Health Card a lot to illustrate points like this but it's a good one - those eligible for grandfathering when it comes to the treatment of their super pensions will lose it if they wind up their SMSF and move their super to a public fund and vice versa. That's crazy. But that's how grandfathering often works). A second method is to make change slowly and only fight the battles that are going to be long term problems - hence my thoughts here on making people with ultra large balances take their money out of super but in a steady fashion rather than all of a sudden.
2. There are a number of comments about how very large balances will still be mathematically possible in the future. I agree - I would suggest they will be few and far between, super might not be the preferred spot for some of that money anyway, and my approach will at least mean even those retirees have to start taking it out at some point. In other words, it's something we as taxpayers could perhaps live with. I don't know - would be interesting to see some Treasury modelling on this.
3. There are a number of other suggestions in the comments which are quite possibly better than mine. Fantastic! Let's hope Treasury and the pollies who have to work this out are keeping abreast of thinking outside their own box by readings things like this. It could mean we end up in a better place.
Thanks everyone for reading my articles in 2022 and I look forward to writing more in 2023.

Jon Kalkman
January 04, 2023

I personally don’t have a problem with these large super balances. It’s a bit like being envious of people who bought property in Bondi or Surfers Paradise in the 60’s. That’s life.
My objection is that uninformed commentators look at aggregate tax concessions going to super, which include the distorting effects of these very large funds, and use that as a basis for arguing for increased taxes on super in pension mode. Those taxes would impact the very people who are using super as designed, by reducing or eliminating their dependence on the age pension

Lyn
January 08, 2023

Dear Meg, love your articles as they are illuminating & you write in language all can understand & rarely use acronyms none of us know. How can we know that Pollies as you suggest in point 3, might actually read your articles?---which they should including Comments which allude to what people feel. Have you been invited to sit on Govt panels/committees for input to Super and if not, why not as I feel you should have? I'd like to know there is an 'ordinary person' like you sitting on a panel telling the Govt how ordinary people feel. I'd like a side by side to Super, govt.National Savings scheme similar to UK where good interest is paid on very nominal amounts to encourage kids to save from early age so we'd have no need of unrealistically low super cap. Best wishes & keep writing for the masses to get our country to a better state.

aengus
December 29, 2022

The few who get to make decisions on caps or limits or increased taxes on super accounts will likely not be affected by them.
To demonstrate good-will and sincerity, It would be good to see what (non-grandfathered) plan they could propose to reduce the ongoing retirement payouts ( sometimes made while still employed and under retirement age, I believe) made to politicians and public sector workers.
I would personally like to see a life-time limit, a set number of years of payment based on number of years of service, deductions for abuse and wastage of public funds when at their disposal, deductions for travel, office and secretarial staff post retirement. Happy to be placed on a 'think-thank' (on public teat and with pension to follow, of course) to gather and refine further conditions.
After some levelling of the playing field, i will, perhaps be more willing to listen to the envy-tainted arguments for further super policy meddling

John De Ravin
December 29, 2022

Great article, Meg!
The two highlights for me were:
(1) making the point that the issue of very large super balances will largely rectify itself in due course; and
(2) suggesting worthwhile alternatives to introducing simplistic balance limits to apply from a particular point in time.
Well done!

Tony
December 25, 2022

A very biased article. No one should have SMSFs of that size. As for saying any limit should apply to all funds, good luck with putting a limit on Australian Super, how silly!
We need tax reform, and giving tax and giving tax benefits of super to people with massive balances is simply not equitable.
Put a limit of $5m on personal balances, problem fixed,

Joanne
December 25, 2022

"Put a limit of $5m on personal balances, problem fixed" Where does this arbitrary $5M come from? Why not $4M or $8M or $1.875M ? This sort of thinking, without a bottom up analysis and legislated definition of what the actual intent of superannuation is, is simply inane!

Rob
December 27, 2022

Yep - the concept of a limit is bureaucratically stupid thought bubble:

Is it per family or individual?
Does it apply in Pension Mode or only Accumulation Mode?
What if you are over? Forced withdrawal?
How do you value illiquid assets like Private Equity or Property?
What if illiquid assets cannot be liquidated by "cut off" date?

Just what we need is another bunch of rule changes when we have planned retirement "according to the rules of the day"!!!

Mark
January 05, 2023

The architect of the Superannuation System, Mr Paul Keating said of Superannuation was that it A: Would help part fund or Fully Fund peoples retirement and B: Create a pool of national savings. Nowhere was it envisioned that it would be to be used as a wealth creation tool.

The $5M figure quoted is not arbitrary, figures of $2.5M have also been used as a SUGGESTED limit that could be imposed.

$5M per person is $10M for a couple which is more than enough to provide for retirement. If you have more or will likely have more there is no reason for it to be allowed to stay/be in the Superannuation system when reaching that sort of level meets the purpose of Super. Invest the rest outside of the Superannuation system

I am 55 and will likely exceed the $5M proposed limit before I get to 60 (My preservation age) I'd like nothing more than to be able to take some of that excess out prior to preservation age if this proposal comes about.

A $2.5M limit would be even better as I could take that excess out straight away and retire.

Laurie
December 25, 2022

I have more than the 1.7m cap and have benefited hugely from low/no tax incentives on the way in since the 90s and while accumulating. I worked hard - we all did - but have also benefited hugely from tax foregone by the Govt. Our balances now are not solely due to our own efforts.

If we want better education, healthcare, aged care, childcare, Defence etc perhaps we could accept some trimming of our ongoing privileged treatment and agree that trimming the various concessions we enjoy would in fact be fair and reasonable.

In my view there is plenty of scope for discussion of how to make changes but arguments for no change seem impoverished.

Martin
December 29, 2022

Well said Laurie, but may I suggest a modification?
Those who think like you can opt for the new system and those of us who think the Government should not change the rules under which we contributed and invested can opt to keep the current system.
Everyone would then be happy except those who like to spent the money of others.

Rob
December 24, 2022

At the end of the day the prospect of "caps" to deal with massive balances is a tax "forgone" issue. Nobody with $100m in Super is going to have it there the day they die, unless they get hit by a truck - it will be long gone to avoid Australia's "death tax". The ability to pull 100% of your Super out on your death bed was a "Costello gift" - one that could easily be reversed.

Not so long ago we had minimum AND MAXIMUM withdrawal limits - reinstate the Maximum and big balances are at least partially locked in and will pay tax sometime.

Preferred ALP policy pre Libs introduction of Caps in 2017 was to tax earnings in Pension mode over a threshold- in reality a whole lot simpler than what we have now and certainly vastly simpler than some arbitrary $5m Cap

Point being is that there are many levers that can raise tax on Super under the guise of "fairness" - something will happen in May but worth remembering that those with $100m in Super did not get there by being dills!

Angus
December 24, 2022

You cannot arbitrarily change the rules after the event. All changes to Super should be grandfathered. People have spent 40+ years abiding by the rules, contributing to their Super, foregoing near term consumption for a more comfortable retirement. That is a choice and they have done it legally with their money. They have "paid now to play later". You can't now change the rules on them.

And those that have built up big Super balances have paid a lot of tax over the years whilst others spend what they earn and expect taxpayers to pay for their retirement with an upwards adjusted Pension for life. No risk, no effort, no stress, no investment mistakes. The Pension money just rolls in with regular increases.

A much more equitable and fair target for taxpayer angst should be reining in the huge growth in Public sector Defined Benefits Pensions outlays. There are literally hundreds of thousands of Federal and State politicians and public servants who receive risk free CPI adjusted Defined Benefits Pensions each year for life. These required NO or LIMITED contributions by the recipient and increase as the lucky recipient gets older. They require no time spent on investment and administration, no risk and no ongoing investment stress. Many of these pensions run into the hundreds of thousands of dollars already per person per year! This is a massively growing problem amounting to hundreds of billions of dollars and unlike Superannuation which is self funded, taxpayers have to actually outlay the funds and those outlays get bigger as recipients age and more politicians and public servants retire!! Some individuals will literally be on a taxpayer funded income of over $1 million per year and rising as they age!!! And some of these future Defined Benefits Pensions recipients are still only 33 years old so the problem will go on for 70 years or so. THAT IS A MASSIVE ISSUE.

James
December 24, 2022

"You cannot arbitrarily change the rules after the event."

Sadly, they can and do all the time! Howard's unfair Superannuation Surcharge was suddenly introduced and then levied for years, constant changes to contributions caps (both concessional and NCC), extra 15% contributions tax for higher income earners, the cap to tax free pension accounts.........the list goes on.

As for public service defined benefit schemes with indexed CPI increases, I believe they have no longer been available for new entrants for some time. So this will run its course as existing members and their spouses depart their mortal coils. The future Fund too goes some way to covering commonwealth liabilities.

Former Treasury policy maker
December 24, 2022

It's not sad, it's wise! If policies never changed with changing economic, financial and social circumstances then where would we be? Every policy ever introduced by any government has always been - and should always be - open for review and change.

Honestly, the people who comment here at times need a reality check!

James
December 24, 2022

"It's not sad, it's wise! "

Contentiously very debatable looking at the last decade of government policies!

Is the refusal to consider nuclear rather than continue with idealogical climate change renewable-nirvana-dreams an example of being prepared to review and change for instance?

Perhaps when government starts spending more responsibly maybe I'll be prepared to donate more!

"Honestly, the people who comment here at times need a reality check!"

Agreed! Here's looking at you too!

Former Treasury policy maker
December 25, 2022

Hi James, I spent a decade working on economic policy and have been involved in policy advice in various ways ever since. I stand by my response to your statement that policy shouldn't change. It should definitely be open to review. It's unrealistic to believe otherwise and such an approach would leave us all worse off. Still, if you have actual experience designing policies that have stayed successfully in place for ever, I'm open to changing my view.

James
December 25, 2022

Dear Former Treasury policy maker.

A couple of things. This is a financial chat blog. In the spirit of true egalitarianism, we are all just people with names and come here hopefully politely and respectfully for some enlightening and lively debate to add to collective knowledge and learn things. I know I have! Egos and titles perhaps best left at the door, as I'm not sure who they're meant to impress (or intimidate). If I have offended in any way to anyone on this blog, then I sincerely apologise!

Secondly, my "sadly" comment was in response to Angus's, merely pointing out that the rules do frequently change and are oft not grandfathered. I'm a realist. The sadly also really refers to the fact that constant tinkering with superannuation, and the lack of a legislated intent of superannuation, undermines public confidence in the vehicle as a holding for retirement savings. People want to know, with some certainty, what they can expect at the finish line and beyond.

Perhaps a more interesting conversation is why successive governments have been so reluctant to legislate it's purpose in granular detail?

Sadly too, public trust in government, politicians and even "policy makers" is at an all time low! I wonder why?

Merry Christmas to all! (if I'm still allowed to reference a Christian celebration) or have we devolved to Happy Holidays now?

Former Treasury policy maker
December 26, 2022

James,
I didn't mean to offend.
I stand by my comment that it's not sad that policy gets reviewed, but the "reality check" remark went too far.
I now back off fairly chastised.

Mark
January 05, 2023

There has already been changes to the Rules of Superannuation along the way. If you were leaving Australia for good, you once could take all your Super with you, so someone who is going back to the motherland or say wishing to retire to a cheaper country could once have done it. Now they have to keep their Super here until preservation age. Transition to retirement was available for all at 55. now you have to wait until you are 60. (small exception for those born between 1960 and mid 1964 I think it is) Changes to Contribution limits have been implemented

Lyn
January 08, 2023

Late to this party due to 'Happy Holidays' per James' quote, but Hear, Hear to Angus re taxpayer- funded pensions for beaurocrats which do not depend on a 1.7m cap ( how is that fair to rest of population?) and also to James for lots of things he said but particularly grandfathering any change.

Andy
December 23, 2022

Super is becoming like a casino. Lure the public in and when its deemed you are ”winning” the house changes its rules or worse now kicks you entirely out of the establishment..
Joke!

Mal
December 22, 2022

In discussing self funded retirement we need to keep in mind all Australians are effectively millionaires through the Australia pension. A self funded super balance of $1M only replaces the aged pension including benefits and probably struggles to maintain capital in line with inflation. The full pension asset test for a home owner allows $280K in assets. The transfer cap of $1.7M really only allows a tax free benefit from and additional $420K in capital. In reality only a very modestly more comfortable retirement than the pension for a single retiree who has managed to save $1.7M through their working life..

Julian
December 23, 2022

"The transfer cap of $1.7M really only allows a tax free benefit from and additional $420K in capital. In reality only a very modestly more comfortable retirement than the pension for a single retiree who has managed to save $1.7M through their working life.."

"Very modestly more"?!! Except you've got $1.7M that you can spend down and then get a full pension if you so desired! The true pensioner may have little or any capital whatsoever. Big difference!

Dudley
December 23, 2022

"Except you've got $1.7M that you can spend down and then get a full pension if you so desired! The true pensioner may have little or any capital whatsoever.":

The 'true pensioner' receives $40,000 free money per year indexed. No risk or effort required.

The false pensioner (actually retirement capitalist) must pay tax on income, save capital, invest the capital, pay tax on capital gains and returns, including on imaginary (inflationary) returns, pay compliance fees and does not collect $40,000 free money per year and the returns are not indexed. Much of the after tax real returns, if there are any, must be added to capital to overcome tax and inflationary devaluation of capital to produce a real return equal to the free Age Pension. The initial amount of capital required is much larger than is commonly perceived. Infinite where inflation exceeds nominal returns as is currently the case.

Somerslea
December 22, 2022

Thanks Meg. Well reasoned article. The current rules without change will deal with large balances soon enough. It is understandable that such balances cause envy but should not cause the Government to abandon principles. Should things stay as they are we will not be having this discussion in 20 years time so agree the disruption would just not be worth it...(unfortunately my balance is well short of $100m)

Jack
December 22, 2022

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 it wouldn’t matter how much was held in super because money in excess of the TBC would be taxed the same as if it was held outside super.

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.

There is already a precedent for this. The tax on contributions is higher for high earners than for ordinary workers. This higher tax on accumulation funds in retirement would only apply to those balances in excess of the TBC which not required for a comfortable retirement.

Kym
December 22, 2022

The obvious target for a quick tax grab is the accumulation phase but you then run up against the trade-off carrot that helped to sell the super story back in the day - forego income/capital today but enjoy low tax rates. If super is aiming to support retirement quality of life, then lower-income people are the ones that need the encouragement and, 30% seems like a high tax rate for a large part of the population.
It could only work, as suggested, if the only accumulation balance taxed at higher than 15% was that belonging to a member with a fully funded retirement phase pot. This then calls into question the "fairness" of the death benefits tax charged when non dependants receive the capital. Would there need to be another stratified system?
But there we go, adding more complexity to the 'Gordian Knot' that is modern super.
Meg is right to point out the chaos that would ensue if super balances were capped with immediate effect. It would seem there would need to be at least a 10-year transition to unwind in an orderly manner and as said, it is likely the "problem" will have naturally resolved itself somewhat.
It is so disappointing that governments are so short-sighted. The 2017 changes to super will have the effect over the medium to long-term of resulting in super being capped etc. Why is this not factored into the Budget forward estimates?
For my $2's worth, if we 'need' to tax HNW individuals, it would be preferable to think about a flat tax on trust distributions. Effectively distributions are taxed at 30% due to the use of a corporate beneficiary and that is only ever a tax deferral strategy. As money is increasingly forced from super, it ends up in a trust.

James
December 22, 2022

More tax is not always the answer. The less government "decisions" the better. Anyone seriously outraged/embarrassed by their hard earned accumulated wealth can feel free to make generous targeted charitable donations rather than giving to government to spend on their pet electoral support pork barrels.

Mark
January 05, 2023

Increasing the tax rate on higher balances will be a likely outcome of any changes to come regarding Super. To be fair though if that became the case the government has be default brought us back to the old days of Reasonable Benefit Limits, RBL's. If that is the case if your Super does exceed whatever Limit is introduced, you should have the option of withdrawing those excess amounts, regardless of being under preservation age if that is the case.

Dudley
December 22, 2022

"Would a limit on fund or balance sizes make sense?":

If the home remains capital gains tax free and the objective is to shoo large super balance refugees into more expensive homes.

An alternative is Age Pension for all age eligible and abolish Super concessional tax rates (and caps). Then the home as a capital gains tax free investment would compete for capital investment against taxed 'productive' investments.

James
December 22, 2022

"An alternative is Age Pension for all age eligible..."

Never going to happen, especially with a Labor government with an inherent socialist lean!

Dudley
December 22, 2022

'In 1908 Parliament passed the Invalid and Old-Age Pensions Act and the first Old-Age Pensions were paid in 1909.[23] The scheme included income and assets tests. While Labor members and senators voted for the Bill, they continued their criticisms of the means test.[24] However, cost was a major obstacle to removing the means test in the foreseeable future.':

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp2122/NationalWelfareFund

G
December 23, 2022

"Presumably the people who belong to these very large funds would pay much more tax if they had to take their money out of super."
In fact the opposite will be true. If the members of these very large funds take their money out, it will most likely be invested in a larger Principle Place of Residence and thus not trouble the ATO at all. If not, it will be invested off shore when the Members migrate out of Australia. Like it or not capital is mobile in the hands of those that are clever enough to accumulate those sorts of balances and they will definitely not be paying 48.7% tax rate on investment income

Paul
December 22, 2022

Current individual contribution limits of $27500 (concessional) and $110000 (non concessional) would still allow a stonking amount to be accumulated in super for those wealthy enough to contribute these amounts every year from a young age. The only ones calling for huge super balances to be continue to be tax advantaged are those that have them and those that benefit indirectly.

Rob
December 22, 2022

No Paul, you clearly don't understand how the current caps work to limit anyone's ability to do just what are espousing. Under current caps, once you reach $1.7M (with the exception of a few outlier rules that don't affect the majority of people) you can't contribute any further non concessional funds. So these caps and rules will work to limit the amount most people can have in super, in time.

Manoj Abichandani
December 22, 2022

Rob

If parents were to help children with $330K non-concessional, from age 18, then by the age of 30 a member can have $1.7M in super. Thereafter with 5% return after 15% tax plus 85% only concessional contribution - $100K each year - for the next 30 years a member can still have over $10M x 6 kids - you are looking at a $100 M fund. Meg, as you say, let your imagination work this out, there are some very clever Trustees out there.

James
December 22, 2022

"If parents were to help children with $330K non-concessional, from age 18, then by the age of 30 a member can have $1.7M in super."

I'd suggest the decile in which this would actually occur would be statistically insignificant!

Paul
December 23, 2022

I agree there will be a fairly small number who can now achieve really large balances under the current rules. Is that a good reason not to have a simpler policy where you can have no more than 1.7 or soon to be 1.9 mil (indexed) in super for an individual?

Going to Manoj’s point the very wealthy will still see super as a tax efficient way to pass money to their children to have in a tax sheltered environment. I am unsure as to the minimum age for non concessional contributions but there will be people in a position to build large balances for their children by age 25, continue to make concessional contributions up to the limit and if earnings and capital gains are taxed favourably compared to other structures then they will keep doing it. The balances achieved at age 60 by doing this will be huge. That there are only hundreds (or thousands) of people only who are in a position to do this does not make it good policy.

Perhaps someone who advises the very wealthy might care to comment in general terms as to whether this is happening to any extent.

Dudley
December 24, 2022

"If parents were to help children with $330K non-concessional, from age 18, then by the age of 30 a member can have $1.7M in super. Thereafter with 5% return after 15% tax plus 85% only concessional contribution - $100K each year - for the next 30 years a member can still have over $10M x 6 kids - you are looking at a $100 M fund.":

Not quite so:

Return 0% / y, to 30 from 18, $100,000 non-concessional plus 85% of $27,500 concesssional / y, bring forward $220,000 non-concessional:
= FV(0%, (30 - 18), -100000 + (1 - 15%) * -27500, -220000)
= $1,700,500

Then Total Super Balance of $1,700,000 precludes all but Super Guarantee Contributions; 10.5% of wages.
No voluntary contributions, concessional or non-concessional.

Assuming 5% before tax return, no Super Guarantee Contributions for next 30 y:
= FV((1 - 15%) * 5%, 30, 0, -1700500)
= $5,927,322

Larger return rate required to arrive at $10,000,000:
= FV((1 - 15%) * 7.16%, 30, 0, -1700500)
= $10,007,345

Quicker is an investment paying fabulous franked dividends.

Noel Whittaker
December 22, 2022

Keep in mind that higher income earners pay 30% contribution tax and they would have to earn $220,000 to make after tax contribution of $110,000. They may well find better places for their money than Super.

Dudley
December 22, 2022

Minimum real rate of return required to attain contribution cap:
= RATE((67 - 27), (1 - 15%) * -27500, 0, 1700000)
= 2.84%

James
December 22, 2022

I suspect few individuals aged ~27 - 40 will be able/desirous of contributing $27,500 p.a. concessionally to super given the likelihood of a mortgage, family, distrust of government constant super meddling, and income level at that age (at current 10.5% super contribution ~ $262,000 p.a. for a non salary sacrifice assisted contribution of $27,500, but then 30% contributions tax would be levied too)

Dudley
December 22, 2022

"desirous of contributing $27,500":

Only rational if income exceeds $20,000 / y + $27,500 / y = 47,500 / y where marginal tax rate is >= 19%.

Leaves $20,000 / y for expenses. Eminently doable for home owners or home of mum & daders.

Minimum wage + 15% moonlighting:
= 52 * 812.60 * (1 + 15%)
= $48,593.48 / y

 

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