Super wealthy in the firing line

There was a belief before the last election that an incoming Coalition government would be a reversal of fortune for superannuation – that the tide might start to come in again.

This was particularly hoped for in regards to concessional contributions limits, which had been squeezed and squeezed again under Labor.

But it’s increasingly appearing like it was more a “stay of execution”. A very temporary one.

Treasurer Joe Hockey said that he hoped his first budget would kick off a national conversation about retirement incomes in Australia. He’s getting his wish.

The Coalition’s promise was no negative surprises for super in the first term. As more time passes – though we’re not even one year into an Abbott Government yet – Hockey must be beginning to think about what he feels he will need to do in his second term to reshape superannuation, before it’s too late.

Sadly, for some, there seems to be a growing acceptance that the tax breaks afforded to superannuation are at the point of causing long-term problems for Treasury.

Firstly, the bigger the pot of money in super, the more tax revenue “leakage” will occur. Super income is taxed at a maximum of 15% (with a small amount of contributions taxed at 30% for ultra-high income earners), but as little as 0% when super is shifted to a pension. Outside of super, it’s likely to be taxed at between 34-49% as income, and half that for capital gains.

Secondly, there’s a belief that the wealthy are increasingly using their SMSFs to set up mega-funds that will pay little tax in accumulation, thanks to negative gearing, and no tax in pension.

To this end, as I’ve written in recent columns, the likelihood that further limitations will be introduced to super seems to be increasing.

Super is on the cusp of another tectonic shift – though this obviously won’t occur in the next two years. And when superannuation comes out the other side, I think what we’re going to see is superannuation having been transformed into a system that will be geared around encouraging lower and middle-income workers to build their super balance, with high-income earners facing extreme restrictions on getting money into their super fund and substantially higher tax rates if they are successful in creating a monstrous super fund.

The wealthy will be able to build quite large super funds. But once they hit a figure the government sees as “monstrous”, they’ll be taxed at, possibly, nearly the rate they would be if it was outside super.

The previous Labor government’s failed attempt to tax pension funds earning more than $100,000 a year was just the first attempt. There will be more attempts, but they will have to be smarter.

Increasingly, these big changes have been looking likely for a while. And there have been some interesting ideas floated.

Reece Agland, superannuation manager at Taxpayers Australia, has floated a six-point plan for reforming super, predominantly based on the government setting what it believes to be a reasonable amount to have in super. Over and above that, you’ll be taxed to the max, or stopped from contributing at all.

My extra comments are in brackets.

Taxpayers Australia’s six point plan is:

1. Lifetime concessional contribution limits of $600,000. (That’s just 20 years’ worth of the under-50s maximum of $30,000 a year.)
2. A non-concessional contributions lifetime limit of $1.8 million. (That’s 10 years’ worth of the current NCC limit of $180,000.)
3. Any CCs over the $600,000 to be taxed at the top marginal tax rate and transferred to the $1.8 million NCC limit.
4. NCCs in excess of $1.8 million returned to the individual.
5. If you have more than $1 million in a pension fund at the start of a financial year, income of the fund will be taxed at 15%, with a rebate on the first $15,000.
6. Accumulation accounts with more than $2.5 million to be taxed at 30% of income earned.

And those limits would be indexed with CPI in $5,000 lots.

Essentially, you would be limited to putting $2.4 million into super. Put that way, it seems like a fairly big fund, given that doesn’t include compounded growth over decades. And, the fund would still be taxed at higher rates from essentially that point anyway.

“Such proposals will ensure that people have an opportunity to grow their superannuation balance, but that the very wealthy cannot park their assets so as to have a tax-free retirement income stream,” Agland wrote.

“It will reduce the costs of the superannuation tax concessions to the very wealthy and discourage excess amounts of money being put into superannuation.

“We believe our proposals will provide billions in savings from superannuation concessions while making the system more equitable without discouraging middle-income earners from topping up their superannuation with personal contributions. This should negate the debate that superannuation concessions are too skewed to the already wealthy.”

This takes the proposal a step or two further than ASFA took it about a month ago (covered in my column Planning for a mega super attack on July 7, 2014).

And gearing won’t be caught in the crossfire

I don’t think that there could be any plan that involved the likes of Taxpayers Australia’s recommendations that didn’t also somehow restrict the use of gearing in superannuation.

Why? If you are going to tax the income of any funds bigger than $1 million in pension mode, then negatively geared property, for example, could be used to keep the income of those funds down. Currently it doesn’t make much sense to have a negatively geared property in a pension fund. But taxing pension funds could change that perception and it could make sense to have some mild gearing in your fund.

It might not be used to minimise income back to zero, but it could be used to reduce income. It might be that they decide to disallow negative gearing.

Unless they were to do that everywhere – both inside and outside super – I’m not sure it would be seen as equitable. However, gearing in super is reasonably new so banning it just seven years after it is introduced might be better than trying to ban it 20 years in.

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 director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The federal government is pondering lowering the annual minimum withdrawals pensioners have to make to lift retirees' confidence so they can cope with economic downturns. In a Treasury paper Finance Minister Mathias Cormann called for views on whether the current minimum payments, which range from 4 to 14%, are adequate and appropriate. However, the paper also noted that such a change would benefit the wealthy and give far less benefit to those who aren't as well off.
• The Australian Securities Investment Commission has clarified how the wholesale test applies to SMSFs. For an investment worth at least $500,000 trustees can be treated as wholesale clients where they have net assets of at least $2.5 million or income of $250,000 a year for the past two financial years
• The SMSF Professional’s Association of Australia has welcomed ASIC’s clarification, but the organisation believes there is still uncertainty about how the $2.5 million asset test applies to SMSF trustees. “We need clarification from ASIC whether this means only assets in the SMSF, the member’s balance in the SMSF, and also includes the trustees’ personal assets outside superannuation,” said chief executive Andrea Slattery.
• The Australian Taxation Office (ATO) says it is committed to reducing compliance costs. In a statement released earlier in the month, the ATO stated it is in the process of developing key strategies which aim to simplify interactions, reduce compliance costs and increase automation.