A consumer advocate group and industry fund association have welcomed the passage of a bill that will introduce tax changes for high-balance super accounts through the lower house, saying it is a step towards creating a fairer retirement system.
The Superannuation (Better Targeted Superannuation Concessions) Imposition Bill proposed a new Division 296 in the Income Tax Assessment Act which would apply an additional tax to super balance exceeding $3 million.
Super Consumers Australia (SCA) director Xavier O’Halloran tells Investment Magazine that the changes will “start to redress the imbalance that has seen some struggle to get by in retirement while others, with the assistance of generous tax concessions, have been able to save much more than needed to have a dignified retirement”.
“The independent Retirement Income Review found that superannuation tax concessions increase inequity in the retirement income system and that higher-income earners receive more of a leg-up from the Government than other income groups over their lifetime,” O’Halloran says.
“This inequity is indefensible, especially when you consider the insufficiency of financial support available to retirees who are renting, or those forced to retire early due to ill-health or caring responsibilities.”
Super Members Council (SMC) general manager of strategy Matt Linden says the tax changes is “a good step towards ensuring tax concessions in super are fair and well-targeted”. SMC represents profit-for-member funds with, collectively, 11 million members and assets under management of $1.5 trillion.
According to Treasury estimates, the tax changes will impact fewer than 80,000 or 0.5 per cent of all Australians with higher super balances, and future earnings for balances above $3 million will be taxed at 30 per cent. The retirement savings under $3 million will continue to receive the favourable 15 per cent tax rate.
More debates ahead
A proposal to index the $3 million cap – driven by the SMSF Association – was defeated in the lower house.
The association represents advisers to the almost $1 trillion self-managed super fund sector and has not given up its campaign. It says it will now work with independent Senate crossbenchers, since Labor and the Greens do not have the numbers to pass the legislation.
Chief executive Peter Burgess says the SMSF Association has been working to ensure the independents understand the consequences of the bill should it pass without amendments.
“We are optimistic that we will see some amendments made to this bill to reduce the severity for those who are going to be impacted,” Burgess says.
Burgess says the SMSF Association has put forward three amendments: to remove a tax on unrealised capital gains; to index the $3 million cap; and fix an anomaly in the drafting of the legislation regarding taxation on the year of a member’s death.
However, Burgess says the amendment around removing taxation of unrealised gains is the most important as it is “a significant departure from existing tax principles in this country”.
“One of the big problems with the way they’ve designed this tax is that it’s going to be linked to movements in capital markets. So, if prices are going up, you’re going to have to pay a lot of tax. It’s very volatile, very erratic.”
“If you have a tax like this that is linked to movements in capital markets, it’s very difficult to manage your liquidity, because you just will not know what tax you want for the next year.”
However, SCA pushed back on SMSF Association’s suggestion, as O’Halloran says criticisms of the tax changes “appear to be more rooted in the financial self-interest, rather than a desire to create an equitable and sustainable superannuation system”.
“Everybody agrees that the objective of the super system is fundamentally about delivering retirement incomes, and that an equitable and sustainable system is what we need. To get there, steps are needed like tax reform.”
SMC’s Linden says “some tax caps in super are indexed, others are not – that’s a matter for Government or the Parliament”.
“But Government should periodically review all tax caps inside super and their relationships to each other to ensure their policy objectives are being met,” he says.
Meanwhile, the Association of Superannuation Funds of Australia (ASFA) wants to see revenue raised from the new tax used to make the superannuation system fairer to low-income earners.
Chief executive Mary Delahunty said in a media release in August that “Division 296 and Division 293 aren’t just measures aimed removing tax concessions for those with high super balances – [they are] an opportunity to make society fairer and provide low-income workers with a more dignified and secure retirement”.
In relation to LUMP SUM superannuation I agree with SCA that:
“The independent Retirement Income Review found that superannuation tax concessions increase inequity in the retirement income system and that higher-income earners receive more of a leg-up from the Government than other income groups over their lifetime,”
However, the above does not apply to UNFUNDED PENSIONS such as those received by many ex-public servants. They do not enjoy “superannuation tax concessions”. They are already taxed at marginal income tax rates. Hence, they should be excluded from the scope of the new Division 296.
A similar problem exists for FUNDED PENSIONS over $118,750 per annum. SCA and ASFA and other should be voicing concerns that the new Division 296 will, in effect, be taxing a component of these pensions at marginal tax rates plus 15%. That is NOT fair or equitable. It is unjust and probably unintended.
Colin Grenfell FIA FIAA FASFA