The superannuation changes and what they mean for you

Wayne Swan and Bill Shorten have decided to end the speculation about what the upcoming Federal Budget brings for the superannuation industry. Money Management spotlights the announced changes and the industry’s response.

The Federal Government has finally decided to end speculation around what it might do to its current superannuation policy in the upcoming May Budget, announcing a number of changes on 5 April. 

Federal Treasurer Wayne Swan and Minister for Financial Services Bill Shorten outlined the new approach at a joint press conference, saying the changes would impact approximately 20,000 upper income earners and save around $900 million in the next couple of years. 

The announcement which caught the industry’s eye was the taxation of earnings that exceed $100,000 in pension phase. 

Under current tax rules, all income received by a super fund from assets supporting an income stream, such as an account-based pension, is completely tax free.  

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The Government has also announced that the proposed $100,000 threshold will be indexed to the Consumer Price Index, and will be increased in increments of $10,000. 

Other main points of the newly announced superannuation reforms include: 

• The recognition of deferred annuities for earnings tax concession purposes;  
• The increase of the concessional contributions cap to $35,000 for those aged over 60 (which will be extended from 1 July next year to people aged 50 and over;  
• The increase of the ability to refund excess contributions;  
• The deeming of the account-based pensions under the social security income test;  
• The increase of the balance threshold below which lost super must be transferred to the ATO; and  
• The establishment of a Council of Superannuation Custodians.  

Minister Shorten reinforced that the policy changes would not be retrospective and would impact those with balances over $2 million. 

Mixed industry response 

The Government created the Council of Superannuation Guardians to depoliticise superannuation, to guide policy and ensure sustainability and adequacy – a proposal widely welcomed by the industry.  

The Industry Super Network (ISN) urged the Government to establish this body as soon as possible, calling on the Coalition to support the proposal. 

“For the sake of members’ confidence in the system we need to draw a line under the tax settings in super,” ISN stated.

“This can only realistically be achieved if there is broad bipartisan agreement on the settings.”  

While the financial services industry has welcomed the newly announced changes, many raised concerns about complexity, calling for industry consultation and a bipartisan approach.  

The Financial Services Council has welcomed the changes, with chief executive John Brogden saying the package reflected many of the initiatives the council raised with the Government over the last few years.  

“However, the higher tax for pensions over $100,000 a year in retirement is complex and designed without industry consultation,” Brogden said.

“It would require major changes to how super funds are managed to target only 16,000 individuals. So the Government must consult on the measure.”  

Both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) agreed the changes were a step in the right direction, but have raised concerns about the complexity of these new measures.  

“Any increase in tax and any further complexity of our superannuation system will inevitably result in Australians losing faith in super,” said AFA CEO Brad Fox.  

“If this happens, Australians may well look to alternative avenues when saving for retirement.”  

Similarly, FPA chief Mark Rantall called on the Government to put a stop to future changes.  

“We further call for both sides of politics to commit to refrain from future changes to the super system so that Australians can once again obtain confidence and trust in their retirement nest egg.”  

The SMSF Professionals’ Association of Australia (SPAA) has also responded to the announcement, particularly supporting the increase in the concessional cap for the over-60s this year and the over-50s next year.  

“[This] will assist Australians close to retirement, particularly women and those with broken work patterns, through the ability to contribute and build a more dignified and self-sufficient retirement,” said SPAA CEO Andrea Slattery. 

Treasury approach flawed, says Mercer 

Mercer’s latest superannuation tax report concluded the Treasury’s approach to super tax is flawed and revenue gains will be much lower than those quoted. 

Mercer senior partner and author of the report, Dr David Knox, said the focus on super tax concessions did not take a holistic view of the country’s retirement savings strategy and would skew long-term policy settings.   

“Firstly, it ignores future age pension costs which will inevitably increase if super benefits were reduced due to higher tax on contributions, earnings or benefits,” said Knox.    

“Secondly, it ignores any redirection of contributions to other tax-effective investments that would occur if the super rules became less favourable.”   

Mercer’s report found that the cost of super tax concessions to the Government increased by 187 per cent from an average wage earner compared to someone who earned double the average wage; however, age pension savings for the Government increased by 310 per cent between the two.   

Mercer said as income rose, the net cost to Government reduced as a percentage of tax concessions, revealing a direct link between tax concessions and age pension costs.

The net cost to Government, accounting for future age pension savings, for an average wage earner was 63 per cent of tax concessions, reducing to 45 per cent for an individual on double the average wage.   

“Therefore, increasing the taxation of superannuation would reduce future superannuation benefits and thereby increase future age pension payments,” the report said.   

Knox said continuous tinkering would drive Australians to seek alternative tax-effective vehicles for voluntary super contributions, if tax expenditure figures continued to be used to shape superannuation policy but failed to provide long-term objectives and certainty.   

“The tax expenditure debate will not go away if the tax expenditure figures are relied upon as the proof point for future reforms,” said Mercer.    

Mercer managing director and market leader for the Pacific, David Anderson, said a better long-term solution was increased integration between the age pension and superannuation. 

Opposition says it is not over 

The Federal Opposition has claimed there may be more changes to superannuation in the May Federal Budget going beyond the changes announced by Treasurer Swan and Minister Shorten. 

Both the Shadow Treasurer, Joe Hockey and the Shadow Assistant Treasurer, Senator Mathias Cormann, claimed the Treasurer had specifically failed to answer questions with respect to whether changes would be made to superannuation in the Budget. 

They claimed this meant the Government might still seek to tap superannuation to help reduce the Budget deficit in May. 

Hockey and Cormann challenged the Treasurer to commit to having the legislation based on last week’s superannuation policy changes introduced during the Budget week of Parliament, with a view to having the legislation implemented before the Federal Election scheduled for 14 September. 

“If Wayne Swan had any ticker he would immediately test his own caucus and introduce these so-called ‘reforms’ in Budget week — and commit to having them passed by the September election,” they said. 

Changes might trigger fund outflows 

On the day of the super changes announcement, Money Management’s sister publication Super Review held a roundtable on the topic, where industry experts warned the changes could result in a significant outflow of funds from the super system. 

This, they said, would occur as people with high balances sought to avoid the impact. 

State Super chief executive John Livanas told the roundtable that a genuine risk existed that implementation of the changes would result in significant outflows form superannuation funds. 

As well, Australian Institute of Superannuation Trustees (AIST) chief executive Tom Garcia agreed that a risk existed and that if such outflows occurred they could impact fund liquidity. 

“The biggest concern is the unintended consequences,” Livanas said.

“A lot of thinking has to be around the likely reaction. The moment confidence reduces [in the super], the question as to whether to commute pensions comes into question.” 

Energy Industry Super chief executive Alex Hutchison said he believed the changes would genuinely prompt some people with higher superannuation balances to consider options other than super. 

“More people will change their affairs to negatively gear and go into property,” he said. 

Livanas said he believed that when the experience of the superannuation surcharge introduced in 1996 was taken into account, there was a huge risk of outflows. 

“It’s a huge risk,” he said.

“You saw what happened in ‘96 with the surcharge. Every time you have tinkering or change [with the system] you open a set of decisions that might not otherwise have been open to consideration.” 

Deloitte partner Russell Mason said many people would regard the tax as retrospective in view of the fact they had pushed money into superannuation because they had been encouraged by Government to believe it was the right thing to do. 

“They did so legitimately. If I was one of those people I would feel aggrieved,” he said. 

Concerns about the catastrophically disabled 

Criticism of the Government’s super tax changes has extended to the law community, with the Australian Lawyers Alliance (ALA) raising concerns that a tax on super assets supporting income streams of $100,000-plus will impact the catastrophically disabled and their carers.  

The seriously disabled nearly always hold their compensation money in allocated pensions, according to ALA national president Tony Kerin.  

The Government must review the impact that its new laws will place on those with serious injuries and take measures to exempt these compensation payments from the superannuation tax if it is to proceed, the ALA said.  

“Every dollar is needed to meet their future care and other costs. This new tax will mean they will likely have to go without some of their care and support or that their money will run out before their life expectancy,” Kerin said.  

The new laws, which are designed to tax Australia’s most wealthy to help pay for the incoming National Disability Insurance scheme, would ironically tax Australia’s most disabled people, he said 

Financial advisers echo disabled concerns 

Financial advisers have echoed concerns by the ALA that super tax changes will impact those who are catastrophically disabled, calling on the FPA to lobby the Government over the matter. 

Fiducian Financial Services adviser William Johns told Money Management that the FPA should advocate that the Government exempt the severely disabled from the 15 per cent tax on income streams. 

People who become severely disabled can receive compensation payouts of several million dollars, easily generating an income stream of more than $100,000. 

Twenty-four hour care can cost more than $300,000 a year, and financial planners needed to be aware of that cost, he said. 

It was not hard to reach that 15 per cent tax mark, he added. 

Johns said he believed that the impact on the disabled was an unintended consequence. 

However, while the Government does not require superannuation caps for funds placed in super from personal injury compensation payouts, they are now going to tax the super income streams from people who use these compensation payouts, Johns said. 

The Government therefore now has two conflicting policies, he said. 

Eluvia managing director Mark O’Leary said that unless people received a very large compensation payout which was placed into an allocated pension, the disabled community would not be greatly impacted by the changes. 

Trustees would have to have about $2 million in their super account to generate income streams of $100,000, he said. 

Industry executives opposed to significant changes 

Before the changes were announced and during the speculation phase, Super Review conducted a survey of superannuation executives at the Conference of Major Superannuation Funds (CMSF). 

Nearly three-quarters of trustees and executives working in the superannuation industry were opposed to significant changes being made to the superannuation tax and policy settings. 

Asked whether changing the superannuation tax settings was advisable, 72.4 per cent of respondents to the survey answered ‘no’ with just 23.1 per cent of respondents thinking it would be appropriate. 

However, those who answered the survey were much more evenly divided about whether targeting upper income earners would be justified, with 45.6 per cent of respondents in favour while 52.8 per cent thought it would be a bad idea. 

The survey also revealed that most of those in the superannuation industry believe someone need to be earning over $200,000 a year to be counted as an upper income earner. 

Asked to define what represented an upper income earner, 36.2 per cent of respondents nominated $200,000 to $250,000 a year, while 38.4 per cent nominated over $250,000 a year.