Industry bodies have made public the key positions of their submissions to the Government’s Tax White Paper; commons themes include a lifetime cap on tax concessions, not change to the dividend imputation system, taking the whole system into account (alongside the Age Pension) and the cessation of tinkering as it is destroying confidence.
The Treasurer released the discussion paper, entitled Re:think, on March 30 which posed a total of 66 questions to the country on issues of taxation, and gave interested parties until June 1 to enter their submissions in response.
Question 22 most directly addressed superannuation asking: “How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved?”
The following is an overview of the key points various bodies sought to highlight in their submissions.
Australian Institute of Superannuation Trustees (AIST)
AIST recommended that super tax concessions be reviewed alongside the costs and benefits of the Age Pension.
Chief executive Tom Garcia said that government financial support to retirement incomes was heavily weighted to high income earners and needed to be reviewed to improve fairness, sustainability and public confidence in our retirement incomes system.
“The tax review is the ideal forum to level the playing field of government support for retirement incomes and ensure that the superannuation tax concessions are fairly distributed,” he said.
Other recommendations included:
The development of transparent objectives for the superannuation system with agreed key performance indicators and a governance methodology for reviewing outcomes
A nationally accepted benchmark of what is an adequate retirement – stated in terms of income, rather than lump sums
Bundling of superannuation taxation changes rather than ad hoc measures to aide greater certainty and consumer confidence
A review of minor super tax measures to improve simplicity
No changes to the tax arrangements for bank accounts that would provide incentives for retirees to remove their money from the super system as this would impose longevity risk, credit and inflation risk, whilst also crystalizing reinvestment risk
No changes to the dividend imputation system
Association of Superannuation Funds of Australia (ASFA)
ASFA identified a risk of losing community confidence in the system. This is due to an emerging concern that the system is being gamed by those using it for estate planning, instead of the intended purpose of providing a high enough level of income so that the majority of retirees can live comfortably.
This loss of confidence may happen if changes are not made in the future to ensure the equity of tax concessions and the adequacy of retirement incomes, believes ASFA.
It also recommended a limit of $2.5 million be placed on the superannuation funds an individual can rollover to commence an income stream in retirement. This could be implemented by requiring that amounts above this ceiling remain in the accumulation phase and continue to attract the nominal earnings tax of 15 per cent or be removed from the superannuation system.
In its view 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.
To better deliver on adequacy, ASFA also recommended that concessional contribution caps be changed in such a way that individuals with broken work patterns are able to make sufficient contributions.
Industry Super Australia (ISA)
ISA believes that comfortable retirement will be out of reach for 50 per cent of Australians without policy change in superannuation.
Modelling by actuaries Rice Warner for ISA’s submission to the Tax Review paints a stark picture. On average, 63 per cent of single women will fall below the comfortable retirement standard, as will 50 per cent of single men and 45 per cent of couples. This takes into account their super, the pension and other savings combined, in a fully mature super system.
“We know that 63 per cent of single women will not have enough to retire comfortably under existing policies,” David Whiteley, chief executive of Industry Super Australia, said. “However this rises to an alarming 80 per cent when the proposed tightening of the pension asset test is added to the equation,”
To start closing the gap, Industry Super Australia believes the following measures should be adopted as soon as possible:
Re-calibrating superannuation tax breaks
Raising the Super Guarantee to 12 per cent
Re-instating the Low Income Superannuation Contribution
“For a fair and efficient outcome, this would be a starting point. More will need to be done to restructure the retirement system to make sure as many Australians as possible can enjoy a comfortable standard of living after a lifetime of work,” Whiteley said.
Now is the time to act and fix the superannuation and pension systems, which are in fact two sides of the same policy coin, Estelle Pearson, president of the Actuaries Institute, said. The two primary recommendations from the Actuaries Institute were:
Superannuation and retirement incomes policy discrepancies must be fixed
Expert panel should advise government on long term, equitable goals
To encourage equity and sustainability the institute recommended individuals earning more than $180,000 should be subject to the 30 per cent concessional tax rate which already applies to those with incomes above $300,000. The change would include an allowance for superannuation contributions and provide a tax concession on superannuation contributions of between 15 per cent and 22 per cent for most people.
Also, in this vein, it was recommend a lifetime cap to be gradually phased in for both concessional and non-concessional contributions.
Another suggestion was to limit tax concessions provided on investment earnings on assets supporting a superannuation income stream, which now attract no tax, by imposing a lifetime cap of $2.5 million. Any excess amount could remain in a superannuation account and 15 per cent tax on investment earnings would continue to apply.
To encourage innovation tax treatment of investment earnings on deferred lifetime annuities and deferred group self-annuitisation products should be tax free after age 60 when superannuation income streams become tax-free, the institute said.
To help ensure retiree savings last longer and help relieve longevity risk consideration should be given to reintroducing maximum withdrawal factors, which could be set at double the minimum withdrawal factors, to provide a corridor within which payments would be considered to be an income stream.
The PortfolioConstruction Forum said the White Paper believes Australia would be better off if its corporate tax rates were lowered and the imputation tax system was removed in order to finance the revenue loss.
This idea was floated on the basis that:
High corporate tax rate discourages investment – particularly foreign investors upon whom Australia relies for capital
The imputation system introduces distortions and no longer serves Australia well
The imputation system encourages excessive investment in Australian companies by Australian investors
A cut in the tax rate to 20 per cent could be offset by repealing the imputation system
Tim Farrelly, principal of Farrelly’s Research & Management and a member of the core faculty of PortfolioConstruction Forum, argues in the submission that any proposal to scrap imputation and lower corporate tax rates is “an unambiguously bad idea” for all Australians. He goes on to say that “while the proposal has superficial merit, however on closer examination”:
It is likely to permanently reduce share prices by around 10 per cent
It will facilitate the transfer of some $6.2billion per year from Australian investors to international investors
The brunt of that transfer will be borne by superannuation funds, charities and low marginal tax payers. High marginal tax payers will be better off
It is unlikely to increase the amount of investment in Australia
It could harm the efficiency of Australian business investment
It will be a boon for senior corporate executives
There will be second order costs such as such as reduced capital gains tax receipts and higher social security payments
The Financial Services Council has not published its submission at this time and does not yet have a timetable to do so, and the Australian Council of Superannuation Investors could not be reached for comment.