SUMMARY: Pressure is building for major change on retirement incomes. Which bitter pill will we be asked to swallow?
We must be in Budget kite-flying season again. That time when ideas are run up flagpoles to gauge public reaction.
The public purse, we are told, is empty. It needs restocking. And one area judged a huge drain is social security – specifically the government age pension.
Another is superannuation. If you believe the various figures bandied about, superannuation concessions cost billions more each year than is reasonable. And a disproportionate amount flows to higher-income earners.
The cost of providing the age pension is rising at 6.2% a year. In last year’s Federal Budget, the Abbott Government moved to reduce the growth, by changing the peg that pension growth was tied to.
But it’s not enough. So, what’s next? Could your home suddenly become assessable as an asset for the age pension? Could super taxes by super-sized to strip benefits from the wealthy?
In one article this week, it was stated that Social Services Minister Scott Morrison was canvassing the home idea with lobby groups, while Kelly O’Dwyer, the parliamentary secretary to Treasurer Joe Hockey said the idea would need to be debated when the intergenerational report was released, which is due soon.
This was followed by an emphatic denials yesterday from Mr Morrison and Mr Hockey.
But it’s out there.
The problem is that under the current rules, Australians could own, outright, a $10 million mansion in the glitziest suburb. And if that was their only asset, they would receive the full government age pension.
While someone who didn’t own their home, but had built up a few hundred thousand dollars in super, would have their pension reduced under the asset or income tests.
One of the arguments is that the exemption creates a distortion. In trying to grow wealth and access the age pension, people are almost encouraged to overcapitalise on their home. The more equity you have in your home and the fewer investment assets you have elsewhere, the more you can potentially achieve in a government pension.
For some who want access to the age pension, but have a home loan and some other assets, they might consider selling those assets to pay down their home loan, to achieve a greater government pension. Perfectly legal. Almost encouraged. In fact, if your financial adviser didn’t raise it with you, you should question their skill/knowledge.
(The Financial Systems Inquiry also claimed that the 50% capital gains discount on assets also created a distortion towards property and shares as investments.)
Ms O’Dwyer said that it might need to be a long-term policy consideration. That is, it wouldn’t affect those currently on the pension, or who are within cooee of being pension age.
But if you were, say, 10 or 15 years or more away from pension age, then a government would argue that you have enough time to change strategies and not build up so much wealth in your home’s value, if the Centrelink rules had changed and the home became an assessable asset.
So, how could it be done?
One feasible option would be for the government to determine what it believes a reasonably home was worth by, say, taking the national average home price. It wouldn’t want to catch the bottom two thirds of the population, so it might pick something like, say, double (or triple) the value of the average home. Home values over and above that could become part of the means test.
This will be a bit simplistic, but follow me for a second.
If the average home in a capital city was $600,000. Any home up to $1.2 million would still be exempt.
Anyone with a home valued at more than that could have a portion of their home counted towards the assets test.
Who knows? That’s just an option. With many problems. Whose valuation would they use? Local council’s rates notices? Would a whole new industry be created for valuers who promised the minimum legally possible valuation for your property?
Would it be added to your other assets?
One of the arguments that would be used to back a plan like this would be the existence of reverse mortgages (see this column, 26/11/14). A reverse mortgage allows you to draw down from a loan to fund your lifestyle in retirement, from the equity built up in your home.
Under the fairness test, should a couple who own a $5 million-plus home be able to draw a full government age pension? (It is unlikely that someone with a home of that value would have no other assessable assets, but it’s possible.)
Probably not. The “reasonable person” would probably not argue if they were forced to use something like a reverse mortgage – if they had no other form of income – to fund their retirement, rather than be a drain on the public purse.
They would be able to fund what many would consider a pretty incredible lifestyle for many years via a reverse mortgage before they would have reduced their equity down to a point where they would then qualify for the aged pension.
A second likely attack on wealthier Australians and their retirement income is, actually, probably a little more obvious. And if it weren’t for a major pre-election promise, this would certainly be on the table sooner rather than later.
And that would be lifting the taxes on superannuation benefits for wealthier Australians.
The incoming Abbott Government promised no negative changes to superannuation in its first term of office. But, given how badly the budget is going, how little they have been able to do to fix it because of a hostile Senate and how rapidly the Budget deficit is growing, we couldn’t be completely surprised if this promise gets ditched.
It would, you would think, have the support of some other parties, who would like to see wealthier Australians contribute more to repairing the public purse, to get it through parliament.
What a government’s definition of “wealthy” might be is not something I’m going to have a stab at today. But it has been raised in the past that the tax paid on concessional contributions could be raised to a marginal tax rate, less 15%. That is, if you earned $120,000 a year and you’re in the 39% MTR, then you would pay 24% income tax on your contributions (39% MTR less 15% super concessional rate tax).
Currently, those who earn in excess of $300,000 pay a 30% contribution rate on their super contributions. The income figure at which that cuts in could be lowered with the stroke of a pen.
The family home has always been sacrosanct when it comes to the aged pension. But will this, can this, continue? Even if ministers claim the idea that the government is considering this as an option to be a “complete furphy” (according to Scott Morrison), it seems an attack on superannuation and retirement income streams is imminent.
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 managing director of Bruce Brammall Financial. E: firstname.lastname@example.org . Bruce’s new book, Mortgages Made Easy, which includes a section on SMSF geared property investments, is available now.