Why superannuation change is necessary
Maybe it’s the necessary evil, but superannuation change is not only necessary, it’s also inevitable. Bryan Ashenden states the case.
1. The 2013 Election outcome
With the 2013 Federal Election result now known, we know with certainty that there are superannuation changes afoot. You may recall that in their pre-election stance, the Coalition released their ‘Real Solutions’ booklet in January 2013, which contained the following statement:
“We will ensure that no more negative unexpected changes occur to the superannuation system so that those planning for their retirement can face the future with a higher degree of predictability.”
Whilst we can all have our own view on political speak, this statement itself highlights two main points.
- There is nothing preventing positive change to the system when needed; and
- Negative changes can be made. Provided there is enough notice (and hopefully consultation), they would not be unexpected.
On the first point, this was a considerable point of difference between the major political parties leading up to the election.
The Labor party was committing to a five-year moratorium on superannuation change, with any changes to have been considered and recommended by a Superannuation Council. The Coalition was opposed to this as it also prevented the ability to make positive changes earlier.
Regarding the second point, there are already changes to be made that we know about. The Coalition committed early on to the removal of the Low Income Superannuation Contribution, which if enacted will remove the contribution (essentially a refund of contributions tax) for those earning less than $37,000.
Indeed, with this measure only having commenced from 1 July 2012 and no contributions yet having been paid under this measure, it is potentially one of the first changes the Coalition Government will need to make, so that the mechanism for payment is removed from the law before such payments become due under existing law.
The second negative change to super that we expect to come through is the introduction of legislation to tax earnings within a superannuation pension that exceed $100,000 in a given financial year.
This measure was originally announced by the previous Labor Government on 5 April 2013, and was included within the 2013 Budget measures, to which the Coalition gave its commitment to support.
On the basis that it was part of the Budget measures, was not opposed at the time, and has essentially been included with the Budget revenue forecasts, it is expected that the Coalition Government will proceed with this measure and introduce legislation within the next nine months to give effect to it.
This particular piece of legislation will be complex, and extremely difficult to implement.
Whilst the enforcement of it may be relatively straight-forward, with existing arrangements around excess contributions being used to facilitate the payment of any tax arising, it is the tracking and reporting of information (particularly around capital gains tax events) at a member level that will create the greatest angst for the industry.
This is where the need for consultation is extremely important. Where change is to occur, whether positive or negative, it’s vitally important to have the change working correctly from the outset.
This is a key requirement to a sustainable superannuation system that people will have faith in.
Knowing the rules, understanding the change, and having faith that it will be properly implemented is vital.
2. Today’s rules are confusing
Simplus. Melius. Fortius. If it all sounds like Latin, and a dead language to you, just think how the superannuation system feels to your clients.
Back in the 2006 Federal Budget, the then Treasurer Peter Costello released the “Simple Super” package of reforms.
And yes, it did sound like it would be simpler – with no Reasonable Benefit Limit (RBL) rules and no tax (generally) on super payments to those 60 and over.
Of course, imposing limits on the level of contributions and changing the terms to be used for contributions (undeducted to non-concessional, and deductible to concessional) wasn’t quite as simple as people once thought, and the level of excess contribution notices that still arise today is testament to the complexity that still exists.
Not surprisingly, it only took a few months for the Simpler Super system to become known as “Better Super”.
Since then, we have had the more comprehensive review of super, commonly referred to as the Cooper Review, which then led to the previous Government’s package of reforms known as “Stronger Super”, which are yet to be fully implemented.
Indeed, there has been much confusion around exactly what will or won’t happen in this space.
For example, we had recommendations from the Productivity Commission around opening up the criteria for nomination of default fund arrangements under Awards – but these recommendations have ultimately been largely ignored.
In the area of self-managed super funds (SMSFs), we had recommendations for new rules to be introduced around the transfer of assets between an SMSF and its related parties, whether in-specie, by way of contribution, by way of benefit payment, or via a purchase or sale.
Originally due to commence from 1 July 2012, a Bill to give effect to this change was finally introduced to Parliament in the first half of 2013, but the relevant schedule regarding these amendments was ultimately pulled from the bill to allow its passage. So at this point, we have:
- A measure that was originally due to commence 1 July 2012;
- With a revised commencement date of 1 July 2013;
- Potentially impacting transactions that have already occurred (although one would expect a deferral to the start date now likely); and
- No legislation to give effect to the intent of the change.
And if the case for confusion is not clear enough already, think of the number of Rulings and Determinations that are constantly issued by the Australian Taxation Office (ATO).
When it comes to the ATO and rulings, it’s important to remember that the ATO does not make the law – it applies it.
The fact that the ATO needs to issue rulings and determinations at all is reflective of the complexity we have and the need for certainty, clarity, and perhaps one day simplicity. If everyone was of the same view as the ATO when it comes to legislative interpretation, there would be no need for rulings.
Consider the last couple of months’ worth of activity from the ATO. On 31 July 2013, we had a final ruling from the ATO (Taxation Ruling TR 2013/5) on when a superannuation income stream commences and ceases.
Shouldn’t it be pretty straight forward? Of course it should, but we all know it isn’t, and the fact that this ruling took two years to be finalised and a regulatory change intervention during that time is reflective of the complexity we have.
Within eight days of the release of this ruling, we also had a Draft Tax Determination (TD 2013/D7) regarding asset segregation within a fund and a SMSF Determination (SMSFD 2013/2) on pension commutations and minimum payment requirements.
You can certainly say that nothing stays quiet in the world of super, and any attempts to reduce or remove this complexity must be welcomed.
3. Wanted: a system for the long term
Over recent times, it would seems that Governments have seen super as a means to solve short-term economic issues, often using the wealthier as an excuse to tap the retirement pool of Australians generally.
This cannot continue. If a Government truly wants Australians to save towards their own retirement, and reduce the increasing burden on the age pension and social security system more broadly, then certainty needs to be restored.
In fact it’s more than certainty – it’s safety that Australians crave. Safety in knowing that the money they voluntarily put away today will be there in the future.
Sure, there is market risk that needs to be considered, and advised Australians are much more considered these days about how their future retirement savings are to be invested.
But when a financial plan has to be couched in terms of the high potential for legislative risk – that is, that the laws may change in the future to the detriment of what a client is planning today – then it’s no wonder that super is looking less attractive to many.
I would expect that most Australians are aware of the significant issues we face in the future with a rapidly ageing population and that there is an increasing need for people to save towards their own retirement.
Current and future Governments need to settle on a long-term economic policy framework that creates certainty in clients’ decisions today, and not a have framework where super looks like an easy way out for the Government because many won’t touch that money for years to come.
Changes to make this happen may involve a great deal of courage from a Government. There have been many suggestions in recent years. Perhaps now is the time to seriously look at these options. Some of these suggestions that have potential merit include:
The introduction of lifetime contribution caps
The initial change on 1 July 2007 from benefit capping to contribution capping was a positive start. Whilst not everyone will agree with this, what it does do is remove what was a penalty on clients being successful with underlying investment decisions.
Under the old RBL regime, earnings on investments counted towards the RBL. It was essentially only the undeducted contributions that didn’t. As a result, as members where approaching (or in breach) of their relevant RBL, some took decisions to be more cautious with underlying investments in order to manage a tax issue.
But this was at the detriment of a higher retirement saving balance and ultimately the chance of a better retirement lifestyle. Introducing lifetime contribution caps allows people to manage when and how they make contributions.
What those caps should be (and presumably they would need to be indexed in some manner) would need to be determined through solid consultation, but they would allow someone to make a contribution when funds were available, rather than only being allowed to contribute a certain amount each year.
Compulsory income streams in retirement
Whether in the form of an annuity, or reverting to the old style complying income stream, there is an argument that some portion of retirement savings in the future should only be available in the form of an income stream.
Such a move would preserve superannuation savings for a longer period of time, throughout a person’s retirement years, rather than allowing it all to be withdrawn by way of a lump sum.
Such a move is definitely a number of years away, and may require a staged introduction, but is worthy of consideration.
Much education would be needed in advance of this change, and possibly the introduction of added incentives to enhance the attractiveness of such a move.
The case for change
The case, and need, for change into the future is compelling. But change for the sake of it, or to balance a Budget, is wrong.
Australia’s superannuation and retirement system has previously been the envy of the world, but arguably the tinkering, chopping and changing over recent times has diluted its worth, and this is obviously the case in the eyes of those it is built for – the Australian population.
We need to ensure that there is a proper consultative approach to future change to ensure all views are appropriately represented, and that when change is implemented, it is done clearly, fairly and without ambiguity.
Perhaps the best argument about the future of superannuation is for all future Governments to be bound to the same broad principle as superannuation trustees and members. The purpose of superannuation is to provide for the retirement benefits of a member, or their dependents in the event of their death.
Has anyone else heard of the “sole purpose test?”
Bryan Ashenden is head of technical, BT Financial Group, Advice.
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