Hands off our super

Superannuation critics are rallying round a report that seeks to undermine the system but the assumptions made are deeply flawed.

PORTFOLIO POINT: Research just released by The Australia Institute on the superannuation system is wide of the mark.

Sometimes research adds to debate, inequalities in a system may be exposed, and opportunities to right wrongs may get highlighted. At best new research can compel a new interpretation of the facts when new figures are put before us.

But a widely quoted research paper on superannuation released last week from think tank The Australia Institute (TAI) is devoid of many key facts and, therefore, I believe its findings should be ignored. I would have left it alone, but it got so much airplay and its key assumptions must be challenged.

TAI’s paper titled “Can the taxpayer afford self-funded retirement?” has virtually nothing positive to say about the current superannuation system. But, further, it seems to suggest that anyone earning anything more than a little above the “average” income should be stripped of any superannuation tax benefits.

It doesn’t quite say it, but the idea it seems to be promoting is that if you are likely to get a cent of government age pension benefits, you should not receive any of the tax benefits that are afforded to superannuation in the form of the 15% contributions tax, the 15% earnings tax, or the tax-free income streams available to those taking a super pension over the age of 60 on your way to becoming “wealthy”. And how are you going to predict that?

TAI’s “policy brief” was put together by its executive director Richard Dennis and colleague David Richardson. It makes much of the fact that the cost on the current government accounts for superannuation is around the $30 billion mark. It seems to suggest that virtually all of that goes to high-income earners and wealthy Australians. Undisputed, a significant percentage does go to higher earners.

To put it bluntly the report is clearly trying to undermine our successful super system which offers tax incentives to everyone, including anyone who aspires to make more than average wages (currently $69000 pa).

But in doing so the report focusses on selective and inaccurate ‘facts’ about the superannuation industry.

I want to set the record straight because reports such as this get used by the government to trim back further our superannuation entitlements.

My main beef with the report surrounds the six dot points it highlights to suggest that there is irrefutable evidence that superannuation is, actually, not about saving the public purse, down the road, by providing private retirement incomes to the masses.

I’ll list their six points in italics and my comments to follow.

“If the Howard and Costello Government were worried about the impact of baby boomers on the cost of providing the age pension, why did they substantially loosen the age pension means and asset tests in 2007?”

Sure, they loosened them, but they didn’t blow them open to everyone. At the top end of the scale, people might have started to receive an extra $50 a fortnight, plus associated benefits including health care cards, etc.

But the same government also dramatically tightened how much you can get into super. Concessional and non-concessional limits were introduced by the Howard/Costello Government. Then, with the following governments, those limits were halved – more than halved if you take into account the lack of indexation since. Limits, specifically, penalise those who could most afford to put money into superannuation.

“If the objective of the subsidies for superannuation is to reduce the cost of the age pension, why can people access their super at 55 when they cannot access the age pension until they are 65?”

This point was taken as a given inequity/stupidity and addressed many, many, many moons ago. Anyone born after 1 July, 1964, will not be able to access their super until they are 60. And, as I raised last week, there is a growing push to raise the preservation age, from 60 to potentially 62. But the already built-in increase from 55 to 60 is not mentioned anywhere in the research – it is simply suggested that people can access their super from age 55.

“If the objective of the subsidies for superannuation is to reduce the cost of the age pension, why can people take their super in the form of a lump sum, spend it all and still be eligible for the age pension?”

The people most likely to do this are those who only have small benefit amounts in super and are, generally, using it to pay off their non-deductible home loan, which still exists for many at retirement age. It is unlikely that someone with $500,000 or more in super is going to withdraw their entire money as a lump sum, put it on black at the casino, lose it, and start receiving a government age pension the following day. I’ve never heard a serious objection raised to people withdrawing their super as a lump sum to pay down their non-deductible home loan, which then allows them to access the government age pension.

Those with small benefit amounts in super are unlikely to be affected by the assets test in any case. Those who fiddle with their finances at the top end ... well, whatever rules are set, that’s always going to happen. And this government has the right to fiddle with those numbers also.

“If the objective of the subsidies for superannuation is to reduce the cost of the age pension, why can people who already hold more assets than the amount prescribed in the assets test continue to make concessional contributions?”

Is TAI suggesting that someone who is 50 (potentially 45 or 40) should be means-tested against the government age pension limits to see whether or not they should be allowed to put money into superannuation? Oh my goodness! Yes they are! And that thud was the sound of my jaw hitting the floor. And, if those same people then go backwards for a few years, do we then allow them to start recontributing to super again?

“If the objective of the subsidies for superannuation is to reduce the cost of the age pension, why don’t the poorest third of the population, the third of the population most likely to rely solely on the age pension, receive any of the $45 billion contributions?”

This actually says the poor don’t receive “any” subsidies. Seriously, it says that. This ignores/makes no mention of the Gillard government’s implementation, from July 1, of the low income super contribution (LISC), which means that anyone earning up to $37,000 a year will receive their 15% super contributions tax back, up to $500. It also ignores the various levels of the “government co-contribution” over recent years, which were super tax bonuses aimed, specifically, at low-income earners. And that those earning $300,000-plus will have to pay a contributions tax rate of 30%. It’s just a nonsense.

There is no mention, at all, of those three initiatives in the report.

If you have never worked, there is often good reason for doing so. You might have chosen not to work to raise your children, while your partner is working (or you might be disadvantaged and not be able to work). S/he will receive the superannuation benefits, which will either be shared in their retirement together, or shared through a divorce (superannuation is now a splittable asset in divorce proceedings). Others choose not to work for other reasons and they might be receiving government/taxpayer benefits for their entire adult life.

“If the cost of providing tax concessions for superannuation are greater than the cost of providing the age pension, how could substituting the former for the latter save the government money?”

Let’s put superannuation in perspective, age wise. The Superannuation Guarantee is 20 years old. It’s just gone beyond a precocious teenager. It is only just “legal”. And it’s going to take another 40-50 years until superannuation is “mature” in Australia. We need to encourage people to put money into super so that there is something to relieve the pressure later on, though according to this report none of the money is going to the poorest third.

The other option, it would appear TAI is suggesting, is that the government be responsible for superannuation and only puts money into super accounts for the poorest one-third. (Okay. So, how do they fund that? With a levy on the wealthy? That’s called “marginal tax rates” and governments have not, traditionally, been good at saving that money themselves.)

I’ve got red marks all through the printed off version of the report. I won’t go through all of them, but for this last one.

“While the very wealthiest will not receive an age pension, nor will they pay tax in their retirement, even if their income is in the millions of dollars a year.”

The comment is specifically relating to super pensions being tax free for those older than 60. Seriously. That would only apply if they put everything they own into super. And, given every government’s penchant for tweaking, fiddling and redoing super, who on earth would risk that? The seriously “wealthy” will always have non-super investments on which they pay tax. If they don’t, they’re utterly foolish. Superannuation is at the whim of government.

But when you’ve written a report of incredibly broad generalisations, then why not include that in there?

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 highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.

Graph for Hands off our super

  • New lodgement requirements from the Australian Taxation Office mean self-managed super trustees are urged to check that assets and balances are being correctly reported. “From 1 July 2012, ATO system changes mean unless you are a SMSF that is winding up you will not be able to lodge a return via electronic lodgement system where the SMSF reports no assets at the end of the financial year end, or no member balances at the end of the financial year,” the ATO writes. However, there is a concession for newly-registered SMSFs. The ATO advises that SMSFs with no further returns to be filed need to consider the process of winding up.
  • Some self-managed super trustees are ignoring the rules on SMSF borrowings from related parties , according to Townsends Lawyers. “When a related party decides to lend (or on-lend) money to the trustee of the fund they must be cautious to ensure that the loan is conducted in a manner which is not only acceptable under s109 of the SIS Act but is actually a ‘loan’ rather than a ‘financial accommodation’ (SMSFR 2009/2),” says principal Peter Townsend. “It has to be a properly documented loan and actual funds have to be paid over by the lender.” Journal entries or set offs do not meet the requirements for a loan, the firm warns.
  • The bulk of bad news for super returns appears to be over, according to the latest research from super specialist Chant West. “The 2012/13 financial year is off to a solid start,” it said. “July was particularly good for Australian shares, with our market advancing 4.2%. International shares were up 1.2% in hedged terms, but due to a stronger Australian dollar (up from US$1.02 to US$1.05), this translated to a loss of 1.6% in unhedged terms.” Director Warren chant said much of the recent rally came from expectations the central banks would act, but “it will take concrete action for the optimism to be sustained”.
  • The Administrative Appeals Tribunal of Australia has found against a self-managed super fund trustee who failed to classify income from a unit trust as “special income”. Despite the fact that the AAT found there was a “fixed entitlement to the income”, and thereby discounting one part of the relevant legislation, the ATO’s original decision was affirmed because the parties – the MH Ghali Superannuation Fund and the Ghali Unit Trust – were not dealing with each other at arm’s length. The decision also found that a capital gain of just under $2 million from a property sale was required to be included in a 2006 tax return, rather than a later return at the time of settlement.

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