SMSF property on the block in super reforms

superchopshop

From the AFR this morning:

…former Labor superannuation minister Nick Sherry has listed the generous compulsory contributions for federal public servants as one of three areas of superannuation he says are no longer sustainable.

Mr Sherry, who stepped down as minister in December 2011 and is now a consultant and corporate adviser on retirement incomes, listed superannuation splitting, capital gains tax treatment of property ­purchased for self-managed super funds, and the transition-to-retirement arrangements as ripe for curtailing. It is understood the government, which is yet to make a final policy decision, is considering the latter two measures. It is also considering increasing the taxes on earnings of those on high incomes.

Mr Sherry said the three areas he nominated would not be acceptable in any other country and were “beyond what is reasonable’’.

…Mr Sherry said transfer-to-retirement provisions – which enable people from age 55 onwards to start drawing from their super while simultaneously contributing to it – were a “revolving door for tax minimisation”.

The tax-free treatment of properties bought using self-managed funds and then transferred to the trustee upon retirement should no longer be tolerated, Mr Sherry said.

My own view was influenced yesterday by Peter Martin’s take:

Superannuation is designed backwards. It gives the biggest subsidies to those who need them least. For Australians on truly enormous incomes those subsidies are obscene.

The notion the super-rich wouldn’t save for their old age is laughable. The idea that without government support they would fall back on the pension and be a ”drain on the public purse” is not only wrong but, in the context of what’s handed to them, almost sick.

Think about an executive on $1 million a year. Not quite one of Joel Fitzgibbon’s ”battlers”, but someone several rungs above.

His or her firm pays a legislated maximum of $17,190 per year into a super fund of his or her choice, perhaps a self-managed one. Instead of being taxed at his or her marginal rate (45 per cent plus the 1.5 per cent Medicare levy) the payment has until now been taxed at just 15 per cent. So instead of paying $7993 the executive pays just $2578. The gift from the tax system is $5415.

In the last budget the government promised to boost the tax rate for very high earners to 30 per cent, cutting the size of the gift to a still substantial $2836. That it took Labor so long to at least recognise the need to more properly tax millionaires is an outrage. That it didn’t go further is a disgrace.

Here’s a tip, from someone who can only begin to imagine the spending and saving habits of millionaires: They don’t need incentive payments in order to save, they’ll do it anyway.

But if you’re harbouring doubts, remember that millionaires are compelled to save. As for all of us, super contributions are compulsory. The government is handing millionaires a gift of $2836 a year in return for something they’ll do anyway.

A middle earner on the average male wage gets $1293. Low earners get nothing, even after the new Low Income Super Contribution that the Coalition has implausibly threatened to revoke re-imposing a tax penalty for low-income contributions.

Imagine the outcry if instead of tax dollars, the government openly paid cash into the accounts of high earners to help them with their savings. Imagine if the government suggested paying more into the accounts of high earners than low earners.

…Knowing that this budget will be his last, Swan will attempt to fix Labor’s greatest creation next month. If he doesn’t, it might collapse under its own weight. The cost of the concessions is set to climb 9 per cent next year, then 14 per cent, then 13 per cent. It’s why the Coalition will back him, at least to the extent of not removing the measures he puts in place. No government can afford such a massive and growing leakage of funds to Australia’s highest earners.

The Henry tax review wanted Swan to limit the tax gift to super contributions of $25,000. High earners would pay full tax on the rest. Swan might move closer to that by taxing the contributions of all Australians on the top marginal rate at 30 per cent. The top rate cuts in at $180,000.

He’ll need to attack the flat 15 per cent tax on super-fund earnings. So generous is it to high earners that they make extra contributions right up to the concessional maximum and then beyond to get it.

The funds say they can’t easily charge one rate of tax on the earnings of millionaires and another on the earnings of others. But already they manage to charge one rate on the earnings of retirees (zero) and another on the earnings of everyone else. They could probably find a way.

Corrected: The original version of this article said $90,000 of the million-dollar earner’s salary could be paid in super. The maximum super contribution base means the maxium an employer can contribute is $17,190 a year. The calculations have been adjusted to reflect this.

I admit that on the run changes to superannuation are a bad idea vis certainty. But that appears to be the only argument against the changes and could be addressed through limiting retrospectivity.

The argument being put by the opposition and its MSM backers, that these changes are a brand of “class warfare”, is pretty ironic. The existing provisions are already class warfare: on the less fortunate who really do need the extra saving incentives, and the young who have the right to expect to be able to buy a reasonably priced home.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. The problem is not the ‘generous’ compulsory super for public servants. The 15 percent rate is for new starters who don’t earn as much as Fitzgibbon’s miners. Savings would come from targeting the old defined benefit schemes of the mandarins and pollies. 15 percent of f-all is still f-all.

    • “super needs reform, but don’t you dare mess with my super, mess with someone elses super!”

      Right?

      Anyway, if the Govt is going to fiddle with super it seems pointless to fiddle with a system that hasn’t been available to new starters since 2004.

      Personally I believe if any fiddling with super should be done, its the salary sacrifice arrangements that see income earners, from the very poorest to richest all paying 15% tax on contributions. That is completely out of whack.

  2. Serious problems with super! The generational inequity of allowing contribution/withdrawal rort for over 55s, and the pure unmitigated lunacy of allowing such a massive pool of funds to chase after established residential housing.

    The point above is great too – all public defined benefit schemes should be rolled over and put at risk like the rest of the community. We sold Telstra just to make sure Peter Costello’s super was safe – maybe the future fund should be returned to public hands!

  3. the pure unmitigated lunacy of allowing such a massive pool of funds to chase after established residential housing

    Unmitigated lunacy indeed.

  4. The existing provisions are already class warfare

    Exactly, and the Coalition is proposing ramping up the class warfare on low-income earners by scrapping the super tax offset for low-income earners.

  5. The ‘subsidy’ argument used by the class warriors is utterly ridiculous.

    There should be no tax on super contributions period. It should and must be taxed on the way out.

    The compounding detrimental effect of taxing contributions over a working lifetime is huge.

    The so called ‘poor’ are net beneficiaries when social welfare transfer payments etc are taken into account.

    The notion that it’s a ‘subsidy’ is just more of the usual thinly disguised justification for state sanctioned theft, which Gordon Brown, Balls et al used in the UK to wreck the private pension system there.

  6. GunnamattaMEMBER

    This is interesting for me insofar for the politics of it. Remembering that TestosterTone has said he cant promise he will overturn whatever comes in in may.

    The ALParatchiks would know that if they play with the CSS or PSS super schemes which older (and more senior) Public Servants are likely to be on, then they would certainly be alienating one group which would have reservations about an incoming Torynuff government. That said, the old defined benefit schemes do need to go, although my understanding is that they have been blocked to new entrants for some time. I actually know of people inside the APS who have had to decide at the age of 54 if they are going to ‘retire’ or if they will work on for about 7 years before their super benefit regains that they reach at 54 11 months (old CSS scheme). The other thing to remember is that most people inside the APS arent earning mega bucks, and that as far as I am aware very few still remain on CSS (I dont know though).

    Then on the other side the curtailing of SMSF’s from taking investment properties is another plausible idea. It along with foreign buyers certainly has an impact at the margins of affordability in some locations. But then again the ALParatchiks would know that those specufestors negative gearing through an SMSF are not likely to vote for them.

    Could the boys and girls of the ALP be thinking that they are certainly going down? – common sense would suggest as much.

    If so, are they thinking that at long last they can do something serious about a major funding issue in the super arrangements and a major cause of a negative impact for less wealthy and housing affordability less than 4 months before their government ostensibly comes to an end?

    Is it a case of striking a blow for a decent cause with the final real act?

    • Let’s hope so – funny that it might take the prospect of absolute electoral oblivion to get a party to actually make some good decisions in the face of the lobbyists.

      (mind you they haven’t done it yet)

    • CSS was closed in 1990 and the PSS in 2005. The sale of telstra was meant to cover these liabilties and there is not a lot left. The DFRDB was closed in 92.

      The SMSF and property lurk is the next Storm Financial disaster/margin lending drama in my opinion.
      There could be a couple of simple changes that they could make with out actually increasing taxes such as getting rid of the Age 60 preservation rule which allows the cessastion of a workplace agreement to trigger a condition of release.

      • CSS and PSS were closed to new entrants. They still exist for anyone who joined before 1990 and 2005 respectively.

        Some parts of Defence etc still have defined benefit schemes.

        That’s a significant future liability for the Australian taxpayer and surely cannot be justified.

        Can 15% of a modest public servant salary be justified? Yes. The alternative is having public servants receive a pension from the government later in life. Either way, the government pays. Makes sense to set aside a contingency now rather than kick the can down the road.

        • That’s right – we can and probably should just end all defined benefits and roll them over to risk.

          Also spare a thought for joe private worker not in the public service. Super is not an add-on!! it’s taken out of your package, so any increase in super is just less money to take home. Add that to almost zero job security and you get a sense of why there isn’t too much sympathy in the real economy for the tail that wags the dog.

          • Agree aj about the average worker who is not in the public service. The average worker, public or private sector, earns a lot less than $100k. 9, 12 or 15% of $100k is not especially generous. The generosity comes in the treatment given to the superannuation and concessions for high income earners. It also comes in the superannuation schemes of yesteryear which old public servants and politicians have.

        • Why did the DB funds become such a problem? Because Govt’s of all stripes refused to contribute to the funds over decades and instead simply paid out the pensions and lump sums from consolidated revenue.

          DB members do make contributions to the funds – for PSS up to 10% in after tax salary.

          The CSS is a rort with its 54/11 option that encouraged peole to retire early. But back in the day it was seen as a way of clearing out dead wood onto a cheaper pension then having them mark time for another 10 years on a more expensive salary (in the days of guaranteed tenure).

          A properly structured, funded and monitored DB fund is the key. But lets look at the PSS and CSS under that criteria:

          Structured – well I’ve already pointed out the problems with the CSS and the ability to take a lump sum and piss it up against the wall is still a problem not exclusive to DB funds though.

          Funded – Govt when on one of the longest contributions holiday in the history of DB funds

          Monitored – whilst on that contribution holiday were excempt from most prudential regulation oversight. ie) could safely ignore the multitude of actuarial reports from Treasury that this was going to be a ticking time bomb waiting to happen.

          Disclosure: I am a member of two! Fed Govt DB funds – PSS and Military Super – which I can’t amalgamate btw.

      • “The sale of telstra was meant to cover these liabilties and there is not a lot left.”

        Where do you get that idea from? From the Future Fund home page (http://www.futurefund.gov.au/):

        FACTS AT A GLANCE

        $82.39 billion
        Future Fund assets at 31 December 2012

    • “as far as I am aware very few still remain on CSS (I dont know though).”

      There were 15,916 contributing members of the CSS at 30 June 2011. Also 9,110 members with preserved benefits and 114,999 pensioners. (https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CF8QFjAH&url=http%3A%2F%2Fwww.finance.gov.au%2Fsuperannuation%2Fdocs%2FPSS_CSS_Long_Term_Cost_Report.doc&ei=ieVcUarfHImgiQfx5ICYAg&usg=AFQjCNFjWDyTV76NltO3c0O1wawKCg5o0A&bvm=bv.44770516,d.aGc) NB Word document.

      The number of contributing members would have dropped quite a bit since then.

  7. I’ve never understood the ‘certainty’ argument, whether it relates to corporate taxes, the carbon tax, or super.

    Imagine for a second that there is a logical reform that can be made to your corner of the economy by the federal government.

    They can pass it today, and you will know that it will take place.

    They can wait to pass it. You will be *uncertain* as to whether, when or how it will take place. It may hang over you like the Sword of Damocles until it becomes redundant.

    Obviously it’s clear which path I think provides more ‘certainty’, and perhaps this isn’t a fair comparison, because what the Super lobby wants is a promise that no matter what appears to be out of whack, nothing will change now or in the future.

      • Risk assessment is a fair point to make when investing in the share markets/bonds/property/whatever, but how does one quantify risk of a government deciding to “Do Something”?

    • A fair while ago I was told that super rules had been fiddled 2000 times in 10 years! That sounds high, & a certainty of uncertainty. But if it’s true, whats different this particular time? except now it’s being dubbed as class warefare as well.

      Strange thing about class warfare is that when the small end of town is getting the rough end it’s all good, but when it’s time for some push back – it’s class warefare – & how dare we!

      • GunnamattaMEMBER

        ‘when the small end of town is getting the rough end it’s all good,’

        No mate, when the small end of town gets the rough end it is ‘efficient’ or ‘cost effective’ or ‘optimal’ or even a ‘win win outcome’

        Which is about where this discussion plugs back into the line from Rumplestatskin and others about the economics profession (and the interpretation of it by the media) having been sucker punched in the nads to not look at society as it is by the uber rich.

        • I wish I had your prose Gunna. & FWIW I think you’re idea of Labor finally looking past their own self interest & actually trying to do something for the good of the country might be on the money – even if it’s way too little, way too late.

  8. thomickersMEMBER

    get rid of leverage inside superannuation (and will thus reduce speculation on property).

    but don’t kill the transition to retirement strategy (optimal straegy for middle/above middle earners)

    • +1
      1. It is this ‘leverage’ that is also used (losses within the Fund on the property) to increase the cap contributions levels and save the tax on the way in by paying 15%, not the top tax rate as a wage earner….
      2. Lump sum payments needs some more scrunity…

    • Not bad – but transition to retirement option should be means tested.

      Not available if you have more than $x in super, and not available if you have personal assets more than $x. It was only to compensate for boomers that hadn’t saved their whole lives, not allow boomers with a mil dollar pad to cream the system even more.

  9. This argument has more to do with generational warfare than class warfare. The real cost lies in the tax free pensions for retirees and pre retirees.. but neither side will touch this as it only applies to baby boomers.

    By the way, does anyone have an idea of how much riskless / tax free / lifetime / indexed pension someone like Sherry would receive on an annual basis?

    UniSuper are talking about reducing their defined benefit pension payments for older accounts as the current setup is unsustainable. Wonder if the government would ever consider the same for the commonwealth super schemes?

    • Alex Heyworth

      They have delayed pension indexation in the past (briefly). I doubt if they would consider any serious reduction – assuming there was any possibility of it getting through Parliament. Not enough return compared with the negative PR. There are only about 150,000 pensioners. Many of these are not on particularly large pensions. From the report I quoted earlier: “6.5. Future outlays (for both CSS and PSS pensions) are expected to reduce as a percentage of projected GDP from 0.29% in the year ending 30 June 2012 to 0.10% in the year ending 30 June 2051.”

      • boyracerMEMBER

        Alex – I think Bubbleboy was referring to a super fund in “pension” mode whereby the earnings become tax free. He was not referring to reducing pensions paid by the govt as welfare.

        I agree with Bubbleboy – I’ve never been able to figure out the logic in making a pension phase super fund’s earnings tax free.

  10. I personally don’t like the way the rhetoric around superannuation contributions implicitly deems them to be ‘income’ i.e. all comparisons are to personal marginal income tax rates.

    Legislated super contributions are not income, they are a compulsory investment contribution with the purpose of providing income in retirement. With the aim of reducing future pressure on the public purse.

    Taxation of retirement investments is in direct conflict with the notion of maximising retirement savings. Any talk of increasing super tax rates should be seen for what it is – a revenue grab which attempts to plaster over the cracks in the Government’s inability to balance its books.

    It’s about time we stopped calling 15% super tax a “concession” and see it for what it is – a punitive tax that significantly inhibits the funding of retirement.