Superannuation: too important to withstand any more government speculation

Paul Howes, Partner, Head of Wealth Management
Paul Howes, Partner, Head of Wealth Management
Damian Ryan, KPMG Tax Advisory Partner Financial Services, Superannuation and Funds Management
Damian Ryan, KPMG Tax Advisory Partner Financial Services,
Superannuation and Funds Management

Having strongly supported the government’s initial superannuation legislative measures last week we think yesterday’s follow-up effort on the more contentious issues was a reasonable outcome in a difficult position.

The most important thing to say at the outset is that – given the ongoing furore over the super tax measures announced in May’s Budget – it is a relief there has in fact been a resolution to this issue, and a bi-partisan position agreed. It seems a workable compromise, and one which still improves the tax equity and sustainability of the system.

For the last five months, there has been considerable uncertainty in the industry, which has damaged public confidence. The Australian superannuation system is too important to withstand any more of this sort of speculation. Policymakers need to consider the potential effects on public confidence when they are putting forward future proposals.

While the government has had to scale back its plans, the revised package will still save the budget $3bn and is a significant step towards a reversing of the generous tax concessions given out in a previous time, which no longer appear justifiable in a more financially-constrained era.

Whilst the concept of a lifetime non-concessional cap was well founded in principle, it proved to be too significant a change politically from the current policy setting. The reduction in the current annual non-concessional cap from $180,000 to $100,000 – a compromise between competing views – does still improve the integrity of the superannuation system from a tax equity perspective.

Importantly, the introduction of a provision to limit the ability to make further non-concessional contributions once a member’s balance has reached $1.6M achieves what the lifetime cap was attempting to achieve – albeit via an alternative mechanism. Such a provision is consistent with the proposed objective of superannuation.

It could be argued that the most contentious aspect of the $500,000 lifetime non-concessional contributions cap measure was not the counting of contributions since 2007 – but the fact that, together with the $25,000 concessional cap, an older member with limited super to date was impeded to too great an extent from building his or her balance, even if he or she had the financial resources to do so.

Tax measures should always be viewed through the lens of the objective of superannuation, which is intended to enable reasonable supplements to the amount necessary to merely replace the age pension. Viewed through this lens, the Treasurer’s announcement today shows the government has been listening to industry concerns, and appears to provide an appropriate equilibrium between enabling the accumulation of balances that can provide this reasonable supplement, and limiting accumulations that would appear directed only at wealth creation or estate planning.

In relation to the other tax measure proposed, the deferral in the ability to catch up on concessional contribution, whilst disappointing, was another political reality within the current budgetary constraints.

So where does this leave the individual super fund member? Some initial observations:

  1. If their super balance is already greater than $1.6 million, no action is possible regarding after-tax contributions.
  2. If their balance is under this (particularly if a lot under) and they have limited years remaining to intended retirement date, that person will need to consider what combination of $25,000 concessional and up to $300,000 every 3 years will bridge the gap between the member’s present balance and their desired balance.
  3. If they had intended to contribute a ‘lumpy’ asset to their super that was worth more than $300,000 (for an individual) or more than $600,000 (for a couple), they need to revise these plans to either contribute a smaller asset or a different structure (e.g., contribute just part of the asset to their Super Fund)

Individuals have much to ponder. As for parliamentarians, they now have a few weeks off. We hope they use that time to reflect on whether the furore of the past five months could have been avoided.

@howespaul

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