Federal Budget: Can super tax concessions be saved?

We must be in Budget kite-flying season again. That time when ideas are run up flagpoles to gauge public reaction.

The public purse, we are told, is empty. It needs restocking. And one area judged a huge drain is social security – specifically the government age pension.

Another is superannuation. If you believe the various figures bandied about, superannuation concessions cost billions more each year than is reasonable. And a disproportionate amount flows to higher-income earners.

The cost of providing the age pension is rising at 6.2% a year. In last year's Federal Budget, the Abbott Government moved to reduce the growth, by changing the peg that pension growth was tied to.

But it's not enough. So, what's next? Could your home suddenly become assessable as an asset for the age pension? Could super taxes be super-sized to strip benefits from the wealthy?

One article this week stated that Social Services Minister Scott Morrison was canvassing the home idea with lobby groups, while Kelly O'Dwyer, the parliamentary secretary to Treasurer Joe Hockey said the idea would need to be debated when the intergenerational report was released, which is due soon.

This was followed by emphatic denials from Mr Morrison and Mr Hockey.

But it's out there.

The problem is that under the current rules, Australians could own, outright, a $10 million mansion in the glitziest suburb. And if that was their only asset, they would receive the full government age pension.

Meanwhile, someone who didn't own their home, but had built up a few hundred thousand dollars in super, would have their pension reduced under the asset or income tests.

One of the arguments is that the exemption creates a distortion. In trying to grow wealth and access the age pension, people are almost encouraged to overcapitalise on their home. The more equity you have in your home and the fewer investment assets you have elsewhere, the more you can potentially achieve in a government pension.

For some who want access to the age pension, but have a home loan and some other assets, they might consider selling those assets to pay down their home loan, to achieve a greater government pension. Perfectly legal. Almost encouraged. In fact, if your financial adviser didn't raise it with you, you should question their skill/knowledge.

(The Financial System Inquiry claimed that the 50% capital gains discount on assets also created a distortion towards property and shares as investments.)

O'Dwyer said that it might need to be a long-term policy consideration. That is, it wouldn't affect those who are currently on the pension, or within cooee of being pension age.

But if you were, say, 10 or 15 years or more away from pension age, then a government would argue that you have enough time to change strategies and not build up so much wealth in your home's value, if the Centrelink rules had changed and the home became an assessable asset.

So, how could it be done?

One feasible option would be for the government to determine what it believes a reasonable home was worth by, say, taking the national average home price. It wouldn't want to catch the bottom two thirds of the population, so it might pick something like, say, double (or triple) the value of the average home. Home values over and above that could become part of the means test.

This will be a bit simplistic, but follow me for a second.

If the average home value in a capital city was $600,000, any home worth up to $1.2 million would still be exempt.

Anyone with a home valued at more than that could have a portion of their home counted towards the assets test.

Who knows? That's just an option. With many problems. Whose valuation would they use? Local council's rates notices? Would a whole new industry be created for valuers who promised the minimum legally possible valuation for your property?

Would it be added to your other assets?

One of the arguments that would be used to back a plan like this would be the existence of reverse mortgages (see An income stream in the family home, 26/11/14). A reverse mortgage allows you to draw down from a loan to fund your lifestyle in retirement, from the equity built up in your home.

Under the fairness test, should a couple who own a $5 million-plus home be able to draw a full government age pension? (It is unlikely that someone with a home of that value would have no other assessable assets, but it's possible.)

Probably not. The “reasonable person” would probably not argue if they were forced to use something like a reverse mortgage – if they had no other form of income – to fund their retirement, rather than be a drain on the public purse.

They would be able to fund what many would consider a pretty incredible lifestyle for many years via a reverse mortgage before they would have reduced their equity down to a point where they would then qualify for the age pension.

Considering super taxes

A second likely attack on wealthier Australians and their retirement income is, actually, probably a little more obvious. And if it weren't for a major pre-election promise, this would certainly be on the table sooner rather than later.

And that would be lifting the taxes on superannuation benefits for wealthier Australians.

The incoming Abbott Government promised no negative changes to superannuation in its first term of office. But, given how badly the budget is going, how little they have been able to do to fix it because of a hostile Senate and how rapidly the Budget deficit is growing, we couldn't be completely surprised if this promise gets ditched.

It would, you would think, have the support of some other parties, who would like to see wealthier Australians contribute more to repairing the public purse, to get it through parliament.

What a government's definition of “wealthy” might be is not something I'm going to have a stab at today. But it has been raised in the past that the tax paid on concessional contributions could be raised to a marginal tax rate, less 15%. That is, if you earned $120,000 a year and you're in the 39% MTR, then you would pay 24% income tax on your contributions (39% MTR less 15% super concessional rate tax).

Currently, those who earn in excess of $300,000 pay a 30% contribution rate on their super contributions. The income figure at which that cuts in could be lowered with the stroke of a pen.

The family home has always been sacrosanct when it comes to the age pension. But will this, can this, continue? Even if ministers claim the idea that the government is considering this as an option to be a “complete furphy” (according to Scott Morrison), it seems an attack on superannuation and retirement income streams is imminent.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au. Bruce's new book, Mortgages Made Easy, which includes a section on SMSF geared property investments, is available now.

• There is a need to get more value out of the superannuation system given high fees “trash” retirement income, Financial System Inquiry chair David Murray told a Melbourne breakfast.

More focus on pooling risk, the provision of better information during superannuants' working lives about income that could be earned from super savings, and a requirement to offer income products, could increase retirement incomes for average earners by 25 to 40 per cent, he said.

“We [in the FSI] focused on the issue of costs in the system and they appeared to us to be very high,” he said at a function hosted by the SMSF Association.

“The compounding effect of higher fees in superannuation absolutely trashes income in retirement. We felt that the system was not efficient enough and that should be fixed.

“In retirement it seemed to us that the system was not benefiting from any pooling of risk as one might get in a defined benefit system.”

Murray also added that the inquiry panel “didn't want the financial system to be politicised”.

• It's time to consider a two-tiered superannuation system to protect against longevity risk and assist with finding savings in the Federal Budget, according to one of the architects of compulsory superannuation, Don Russell.

“This notion that we provide income support from mid-60s until people finally depart from this world – is that the right way of looking at it?” he said at an SMSF Association function. “Should we be thinking of a superannuation system that provides extra support, extra remuneration for a fixed time?”

Russell, now the chief executive of the Department of State Development in South Australia, suggested a system where retirees' living expenses were self-funded from their 60s until their mid-80s, after which the government would provide support.

Such a system would provide scope for the government to offer a two-tier pension, he said. “You have a lower pension, conceivably, from 65 to 85 and then the government provides a higher pension,” he said.

“The reality is the balances in superannuation accounts are not big enough under any conceivable form of financial engineering – you cannot avoid longevity risk. When people find themselves alive at 103 there's no way for the vast majority of people that they're still going to be funding themselves. If we change the view about super as really covering that first 20 years there is scope to do that in a way that actually provides significant savings to the Budget.”

Russell also said that for the compulsory superannuation system to continue to operate, workers need to believe it's a good deal.

“What people have realised is that in that process of locking that money away for 35 years it's going to run the gauntlet of a minimum of five treasurers and a minimum of 10 probably superannuation ministers,” he said. “That money's going to have to run the gauntlet of all the bright ideas of a range of public administrators stretching out the rest of their lives, with no particular guarantee of whether it will come back to them or the form in which it'll come back to them at that time.”