The Science Party has two core proposals to improve superannuation, which we believe will make it fairer, decrease its use as a tax minimisation strategy for the very wealthy, and still allow it to achieve its objective of reducing the burden of the aged pension on the taxpayers of the future.
Why give tax concessions to super in the first place?
The tax concessions offered to superannuation investments are intended to give people an incentive to put money away for the future. Super’s compulsory nature forces people to save, but to be most effective it also needs to encourage people to put away additional money over and above the compulsory amount. By giving savers a tax concession that incentivises them to fund their own retirement, the government can reduce the amount it will need to pay on the aged pension when those people retire. The result is a small reduction in tax revenue today in exchange for a larger reduction in age pension cost in the future.
What’s wrong with the current tax arrangements?
Above a certain level of wealth, we can assume that a person will not rely on the age pension to fund their retirement, nor will they require tax incentives to encourage them to save for the future. Yet at present, the same concessional tax rates apply to an investor with a balance of $10 million — enough to fund ten comfortable retirements — as they do to someone with $100,000, which is barely enough to last a decade of modest retirement.
The Science Party believes that superannuation should not be used as an intergenerational tax haven. Under the current superannuation rules, the mechanism by which people are prevented from transferring excessive wealth into superannuation is through annual contributions caps. Unfortunately, although the contributions cap is still quite large ($180,000 for after-tax contributions) some people who make the majority of their earnings later in life (such as those who have a career change or defer their careers to act as primary child carers) and are limited in their ability to save for retirement early on in their careers, are prevented from contributing enough later in their career due to the contribution caps.
Other proposals that have been put forward to limit the tax concessions available to wealthy superannuation investors, such as Labor’s proposal (http://www.alp.org.au/fairer_super_plan) that any earnings in super above $100K would be taxed more heavily in pension phase, are difficult to administer and also have the effect of punishing investors with more modest balances if they happen to experience a one-off year of strong investment returns.
We need a more effective way to achieve the dual objectives of encouraging the majority of people to save for retirement and preventing the very wealthy minority from exploiting the system to reduce tax.
The Science Party proposal
Our proposal is to put a cap of $2 million (indexed to inflation) on the total size of each individual’s superannuation balance and to remove the non-concessional contributions cap for people aged 50 and over.
We believe that $2 million can provide a retiree with ample funds for their retirement. With this amount invested in a lifetime annuity, a retiree could generate an annual income of around $75 000 per year (inflation adjusted) for life, even in the current low interest rate environment. If we make the reasonable assumption that people who have large super balances also wholly own their primary residence, then an annual income of $75 000 provides ample funds for a very comfortable retirement.
Under the Science Party’s proposal, concessional contribution caps (contributions made from an individual’s pre-tax salary) will remain at their current levels; however, the cap on non-concessional contributions (contributions made after tax) will be removed for people over 50. This will allow people who have a late start on their saving to “catch up” later.
What about people with multiple super funds?
The cap will be applied across the sum of all the balances. This can be easily administered by the ATO who collect information from all funds that can be consolidated based on people's Tax File Number.
What happens when you hit the cap?
If, at the end of the financial year, a member’s superannuation balance breaches the $2 million cap, the member must withdraw the excess above $2 million within 12 months. These withdrawals will be treated as assessable income for the member and will be taxed at the member’s relevant marginal tax rate.
Will this cause problems with illiquid assets? For example, if a SMSF holds a property will the fund be forced to sell it?
No. The fund may sell other assets, or may use loans against an illiquid asset to pay out the excess.
How will this be implemented? Will there be a transition period?
For the vast majority of Australians, the proposed changes will have absolutely no impact on their superannuation savings.
Those with balances above $2m however, will need to reduce their balances to below $2m, and the Science Party proposes allowing investors a 12 month period in which to do so. For investors in a retail, corporate or industry superannuation fund, this will be a simple withdrawal of funds from their account; however, for those who hold illiquid assets in a self-managed superannuation fund (SMSF), this is not so straightforward. For these investors, the proposal would allow for a one-off transfer of ownership of assets from an SMSF to an individual (an in specie transfer), meaning the fund would not have to liquidate the assets. Such a transfer would be classed as a CGT event, and the fund would be required to pay tax on any capital gains, but any stamp duty amounts payable for the transfer of ownership would be rebated.