(03) 9020 2905
SUMMARY: Proposals to limit mega-SMSFs are becoming more frequent and getting smarter.
There was a belief before the last election that an incoming Coalition government would be a reversal of fortune for superannuation – the tide might start to come in again.
This was particularly hoped for in regards to concessional contributions limits, which had been squeezed and squeezed again under Labor.
But it’s increasingly appearing like it was more a “stay of execution”. A very temporary one. Some of the murmuring has been raised in volume to whispering.
Treasurer Joe Hockey said that he hoped his first Budget would kick off a national conversation about retirement incomes in Australia. He’s getting his wish.
The Coalition’s promise was no negative surprise for super in the first term. As more time passes – though we’re not even one year into an Abbott Government yet – Hockey must be beginning to think about what he feels he will need to do in his second term to reshape superannuation, before it’s too late.
Sadly for some, there seems to be a growing acceptance that the tax breaks afforded to superannuation are at the point of causing long-term problems for Treasury.
Firstly, the bigger the pot of money in super, the more tax revenue “leakage” will occur. Super income is taxed at a maximum of 15% (with a small amount of contributions taxed at 30% for ultra-high income earners), but as little as 0% when super is shifted to pension. Outside of super, it’s likely to be taxed at between 34-49% as income, and half that for capital gains.
Secondly, out of a belief that the wealthy are increasingly using their SMSFs to set up mega-funds that will pay little tax in accumulation, thanks to negative gearing, and no tax in pension.
To this end, as I’ve written in recent columns, the likelihood that further limitations will be introduced to super seems to be increasing.
Super is on the cusp of another tectonic shift – though this obviously won’t occur in the next two years. And when superannuation comes out the other side, I think what we’re going to see is superannuation having been transformed into a system that will be geared around encouraging lower and middle-income workers to build their super balance, with high-income earners facing extreme restrictions on getting money into their super fund and substantially higher tax rates if they are successful in creating a monstrous super fund.
The wealthy will be able to build quite large super funds. But once they hit a figure the government sees as “monstrous”, they’ll be taxed at, possibly, nearly the rate they would be if it was outside super.
The previous Labor Government’s failed attempt to tax pension funds earning more than $100,000 a year was just the first attempt. There will be more attempts, but they will have to be smarter.
Increasingly, these big changes have been looking likely for a while. And there have been some interesting ideas floated. That includes from Taxpayers Australia in recent days.
Reece Agland, superannuation manager at Taxpayers Australia, has floated a six-point plan for reforming super, predominantly based on the government setting what it believes to be a reasonable amount to have in super. Over and above that and you’ll be taxed to the max, or stopped from contributing at all.
My extra comments are in brackets.
TA’s six point plan is:
- Lifetime concessional contribution limits of $600,000. (That’s just 20 years’ worth of the under-50s maximum of $30,000 a year.)
- A non-concessional contributions lifetime limit of $1.8 million. (That’s 10 years’ worth of the current NCC limit of $180,000.)
- Any CCs over the $600,000 to be taxed at the top marginal tax rate and transferred to $1.8m NCC limit.
- NCCs in excess of $1.8 million returned to the individual.
- If you have more than $1 million in a pension fund at the start of a financial year, income of the fund will be taxed at 15%, with a rebate on the first $15,000.
- Accumulation accounts with more than $2.5 million to be taxed at 30% of income earned.
And those limits to be indexed with CPI in $5000 lots.
Essentially, you would be limited to putting in $2.4 million into super. Put that way, it seems like a fairly big fund, given that doesn’t include compounded growth over decades. And, the fund would still be taxed at higher rates from essentially that point anyway.
“Such proposals will ensure that people have an opportunity to grow their superannuation balance, but that the very wealthy cannot park their assets so as to have a tax-free retirement income stream,” Mr Agland wrote.
“It will reduce the costs of the superannuation tax concessions to the very wealthy and discourage excess amounts of money being put into superannuation.
“We believe our proposals will provide billions in savings from superannuation concessions while making the system more equitable without discouraging middle income earners from topping up their superannuation with personal contributions. This should negate the debate that superannuation concessions are too skewed to the already wealthy.”
This takes the proposal a step or two further than ASFA took it about a month ago (covered in this column on 7/7/14).
And gearing won’t be caught in the crossfire
I don’t think that there could be any plan that involved the like’s of TA’s recommendations that didn’t also somehow restrict the use of gearing in superannuation.
Why? If you are going to tax the income of any funds bigger than $1 million in pension, then negatively geared property, for example, could be used to keep the income of those funds down. Currently, it doesn’t make much sense to have a negatively geared property in a pension fund. But taxing pension funds could change that perception and it could make sense to have some mild gearing in your fund.
It might not be used to minimise income back to zero, but it could be used to reduce income. It might be that they decide to disallow negative gearing.
Unless they were to do that everywhere – both inside and outside super – I’m not sure it would be seen as equitable. However, gearing in super is reasonably new, so banning it just seven years after it is introduced might be better than trying to ban it 20 years in.
*****
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