Planning for a mega super attack

SUMMARY: A new report reopens the debate about super tax concessions for the wealthy, but recommends global contributions limits.

Some form of limit on what’s considered a “reasonable” amount to have in super is likely to be reintroduced by a future government.

Reasonable Benefit Limits (RBLs) were ditched, to wild applause, when Peter Costello with the “Simpler Super” changes that arrived in 2007.

But there are growing concerns about the equity of those 2007 rules. The ability for wealthy individuals to use superannuation to build tax-free mega-balances ($10m or $20m-plus), plus use it more for wealth-accumulation, estate-planning and asset-protection purposes than to create retirement income streams, has fanned the flames that it is more just another tool for the wealthy to dodge paying tax.

The previous Labor Government tried to put an end to it by introducing a tax on pension funds that earned more than $100,000. They suggested it would only hit funds with a balance above about $2 million. (This was rubbish and I refuted it in this column, 10/4/2013.)

As became apparent, the tax was near impossible to implement. Labor couldn’t figure out a way of doing it. The Coalition abandoned it completely.

However, prior to this year’s Budget, Treasurer Joe Hockey opened the doors to major changes to super in the Government’s second term. That would come after the nation had a conversation about retirement incomes, he said.

It might be the next big set of reforms or the one after that, but I will be surprised if there isn’t some further curtailing of the ability to grow super mega-balances. There will eventually be a reintroduction of a limit of a super benefit that is deemed reasonable (I hesitate to use RBL).

To that end, the Association of Superannuation Funds of Australia (ASFA) has issued some research that gives a different view on where the tax concession dollars go.

ASFA’s report, “The equity and sustainability of government assistance for retirement income in Australia”, adds further dimensions to who gets the tax benefits from superannuation.

We’re familiar with the fact that higher income earners get the biggest advantage from swapping their marginal tax rates on income for the 15% contribution tax for superannuation for concessional contributions.

The following table shows the tax concessions earned, by marginal tax rate, during the three stages of superannuation – contributions, investment earnings and pension phase. (The figures are from FY12.)

Table 1: Tax concessions at contribution, earnings and pension stages

It shows that the share of tax concessions for the “wealthy” (or those earning in excess of $180,000 a year) is actually more pronounced when investment earnings in super are considered.

But when it comes to the tax concessions during pension phase, the overwhelming majority (70%) of tax breaks go to those indiviudals earning less than $80,000 a year. Only 7.7% of the benefits flow through to those earning more than $180,000 a year.

ASFA’s report contends superannuation is hitting its state intentions. Those three goals were to provide dignity in retirement, to increase incomes nationally and to eventually reduce the cost of the government age pension.

Against those three, superannuation has been a success, the paper claims. With regard to reducing reliance on the age pension for retirement income, from 1992 to 2011, the proportion of retirement incomes made up of superannuation has increased from around one-tenth to around one-quarter. It is expected to make up about 50% by 2021.

Between 2000 and 2013, the number of people who are “self-funded” and not reliant on a government age pension has increased from 22% to 32%, while those on a full government age pension has dropped from 44% to 25%.

And ASFA argues that more recent changes are having the desired impact. The reduction in the concessional contribution limits to $25,000 and the higher contributions tax for high-income earners are reducing benefits for higher income earners. Concessions given to the top tax bracket for contributions dropped from 15% to 13% from FY10 to FY12.

In surmising, ASFA made three recommendations. 

1. That limits for concessional contributions should continue
2. That a lifetime limit for non-concessional contributions should be introduced.
3. That tax concessions on earnings for very high balances should be wound back.

Recommendation one is no surprise.

The second would attack the ability of the wealthy to tip in $180,000 a year of after-tax money to really create mega-balances. If the full NCC limit was used each year between 35 and 65, it would get $5.4 million into super – before any concessional contributions or decades of compounding were added. Small business people can take that beyond 65, if they continue working.

The third is, essentially, the reintroduction of some form of reasonable benefit limit (though the old RBLs were around pulling money out of super). ASFA has suggested $2.5 million. Above that, the tax that would be paid by the super fund would be higher than the current levels (of between 0% and 15%).

“The implementation of such thresholds is not simple and has the potential to deliver unintended consequences, so ASFA will explore the options available in a later paper,” ASFA said.

Which is exactly why the former Labor government’s plans to tax pension funds earning more than $100,000 never got off the ground. They couldn’t find a way to implement, partly because SMSFs don’t have to report until about 11 months after the end of a financial year.

Combat strategies

Attacks on large super balances – which is predominantly SMSFs – are never going to go away. The killing off of Labor’s planned tax on larger balances was likely just the first attack of many.

Under the former Labor Government’s policy, if one member of a couple’s super balance had been built up to $2 million, while the other’s was low (say $300,000), they would have been penalised with a higher tax on super earnings.

Couples need to keep their super balances relatively even, where possible. Using “super splitting” between couples (see my column of 25/1/12).

There will be further attempts in the future. Using now to plan is sensible, because they will be attacks per member (not per fund).

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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 director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au