2019 Budget introduces new super grey gouge

By Leith van Onselen

In 2005, former Treasurer Peter Costello implemented the mother of baby boomer bribes in the form of the “transition-to-retirement” (TTR) rules, which allowed those aged over 55 to legally minimise their tax by salary sacrificing up to $35,000 into a superannuation account and then simultaneously withdrawing the funds as income. In turn, TTR effectively allowed high income earners to reduce their marginal tax rate from 45% to 15% on the last $35,000 of their income.

Super Guide explains TTR rort as follows:

I have often described transition-to-retirement pensions (TRIPs) as the super saver’s version of ‘having your cake and eating it’.

A transition-to-retirement pension enables Australians who have reached their preservation age (at least the age 55 and increasing to age 56 and older, depending on date of birth) to access their super in the form of a pension without retiring or satisfying an additional condition of release…

Although some individuals use TRIPs for a gradual transition into retirement, the majority of TRIPpers appear to have used the strategy for boosting super savings and tax minimisation…

One of the more popular TRIP strategies is to salary sacrifice into your super fund up to your concessional (before-tax) contributions cap, and replace that income with tax-free (if over 60) pension payments, or concessionally taxed pension payments (if under 60).

Tuesday’s Federal Budget included another measure that mirrors the TTR rort, allowing wealthy older-Australians to make voluntary superannuation contributions without having to pass the work test, thereby opening further pathways for tax minimisation:

The Grattan Institute’s Brendan Coates has done a great analysis dissecting this policy:

…most 65- and 66-year-olds still working to top up their superannuation are already eligible to make voluntary super contributions, because they satisfy the Work Test. Working 40 hours over a 30-day period – or little more than one day each week – is hardly onerous.

For every dollar contributed to super that genuinely helps Australians save more for their retirement as a result of these changes, there will be many more dollars funnelled into super to make extra use of superannuation tax concessions.

The biggest winners will be wealthier retired 65- and 66-year-olds with other sources of income, such as from shares or property, which they will now be able to recycle through superannuation.

They will be able to put up to $25,000 into super from their pre-tax income and then – because super withdrawals are tax-free – take the money back out immediately. Their contributions to super are taxed at only 15%, whereas ordinary dividends or bank interest is taxed at their marginal tax rate. The tax savings can be as high as $5,000 a year.

Such strategies aren’t costless: other taxpayers must pay more, or accept fewer services, to make up the difference.

It will mean larger inheritances

The government is also allowing 65- and 66-year-olds to make three years’ worth of post-tax super contributions, or up to $300,000, in a single year.

These changes will mainly boost inheritances.

Most people who make after-tax contributions already have large super balances and typically contribute from existing pools of savings to minimise their tax.

Grattan Institute’s 2016 report, A Better Super System, found that only about 1% of taxpayers have total super account balances of more than $1 million, yet this tiny cohort makes almost one-third of all post-tax contributions.

These changes will turbo-charge so-called “recontribution strategies” that minimise the tax paid on superannuation fund balances passed on as inheritances…

It fails the government’s own test

In 2016, the government tried – but failed – to define the purpose of superannuation as providing “income in retirement to supplement or substitute the Age Pension”.

The proposed objective rightly implied that super should not aim to provide limitless support for savings that increase retirement incomes.

The benefits of super changes should always be balanced against the costs of achieving them. The government’s latest changes fail that test.

Exactly. The initial purpose of superannuation was to sponsor saving for retirement, not to encourage wealth accumulation and estate planning at the expense of the Budget.

Instead, the Coalition has introduced another inequitable policy that will enable richer older people to avoid paying tax and shift the tax burden to the younger generations.

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