The recent Financial System Inquiry (FSI) Report recommended that the Government seek broad agreement of the primary objective of superannuation, namely, “to provide income in retirement to substitute or supplement the Age Pension”.
This agreed objective would provide a standard to which future policy proposals could be assessed. I believe this would be a sensible step, and overdue, given the compulsory super system is now nearly a quarter-century old.
The corollary of this proposition is that superannuation should not be used as a wealth accumulation or inter-generational wealth transfer vehicle.
The FSI Report went on to observe that the current tax concessions in the superannuation system were not well targeted to achieve this objective of the provision of retirement incomes.
There is general consensus that the tax concessions on superannuation, brought in by the Howard government in 2006 are no longer sustainable, and that some restrictions are now inevitable. But there is growing debate on how that should be done, with the current exemption from tax for income in pension phase receiving much attention.
As our population ages, the number of members in pension phase and the average balance of these members will continue to grow, meaning the size of the current tax concession will increase (unless there is legislative change).
A number of responses have been suggested to address the perceived inequity of this concession; including taxing income in pension phase; taxing income in pension phase above an agreed limit (like the recent ALP policy announcement) or reducing the non-concessional contribution cap (and thereby limiting the ability of members to grow very large balances).
Whilst all of these responses have been actively debated (and some are easier to implement than others), I would point to an older suggestion, previously suggested by ASFA and other commentators, but which arguably has not received the same level of attention in the current debate
This is to introduce an overall cap on member balances.
Under this proposal, once a member’s total balance reaches an agreed maximum balance (say $3M, although this would no doubt be the subject of vigorous debate) members would be required to withdraw this excess out of the superannuation system. Income on future earnings would then be subject to normal investment tax rules outside of the superannuation system.
In this way, the integrity of the superannuation system with a primary objective of providing income in retirement could be maintained.
I would hope that this option will be considered as part of the ongoing Tax White Paper process.
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