The difference a consultation paper makes

superannuation objective

The government’s proposed objective of superannuation has a number of problems and issues that need to be worked through before it can be legislated.

On Monday, 20 February, the federal government released a consultation paper on legislating the objective of (private sector) superannuation. Within hours the criticism of the proposed objective had reached fever pitch.

The objective specified in the paper is to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. (Emphasis is taken from the paper).

By unpacking, decoding and deconstructing this text, we can make the following observations.

Why have an objective for superannuation? To constrain and channel future changes to the purpose of private sector superannuation.

The problem is that even if legislated, the objective cannot actually prevent a future government from subsequently repealing or changing the legislation. There is also the question as to whether the High Court would hold that a subsequent inconsistent act is invalid merely because it is inconsistent with the legislated superannuation objectives.

Given this, why have a legislative objective? Probably because it is likely to at least influence federal decision-makers and the judicial interpretation of superannuation law.

Preserve savings

What is preserving savings in this context? It means reducing or eliminating the ability of a superannuation member to access their super savings before retirement. Access routes might include:

  • transition-to-retirement pensions,
  • accessing super on or after preservation age and being retired, but before age 65,
  • First Home Super Saver Scheme, and
  • a member crisis such as terminal illness and pandemic shutdown.

Given the wording of the preserve savings element of the proposed objective, allowing access to super, whether retired or not, before age 65 could be seen as being inconsistent with this element.

Additionally, allowing access to super before attaining the qualifying age for the pension, being age 67 for those born on or after 1 July 1960, could also be seen as being inconsistent with the preserve savings aim.

Deliver income

What is delivering income in this context? It could refer to how much super must be invested in income streams or particular types of income streams. Additionally it could refer to a prejudice to invest in income assets as opposed to growth.

Is it requiring superannuation benefits to be taken as income streams or at least some percentage, perhaps 50 per cent, of a person’s total super balance being taken as an income stream? In any event, the income stream will have to be non-commutable otherwise the stated purpose could easily be defeated by commencing a pension and after three or four payments, for the sake of propriety or appearance, commuting the income stream.

Or does it mean that all or most of people’s super must be invested in a closed investment pool where there are either no rights to exit the pool or only being able to exit the pool subject to very significant exit fees? Even worse, where on death outside any guarantee period, the notional balance of the pension is forfeited to the pool?

Does this mean superannuation could not be used to discharge the mortgage?

Dignified retirement

This element is rather vague from a legal viewpoint. Does the dignity of the retirement vary depending on your pre-retirement lifestyle or is it to be a single objective standard? Possibly it is about allowing super funds, namely industry funds, to provide non-financial services to members, such as financial advice services, aged-care advising or aged-care services. Or does it mean simply reducing the current legislative and regulatory obstacles to super funds providing financial advice to members in relation to their retirement savings?

Alongside government support

This is another legally nebulous concept. Does it mean no tax deduction for contributions once the total super balance reaches the transfer balance cap? Or perhaps it means no earnings tax exemption on super in excess of the transfer balance cap.

It also raises questions as to what happens if a person’s transfer balance cap is well in excess of the point at which the super balance alone excludes a member from the age pension on the assets means test.

Further, if the rationale for government support for super is to reduce the age pension burden, then once an individual’s super balance is sufficient to reduce any entitlement to nil, will there be any policy justification for additional government support?

Finally, will it lead to the removal of the ability to make capital gains tax (CGT) non-concessional contributions, which is currently the only means to make substantial transfers of wealth into super?

Equitable and sustainable way

The consultation paper states the purpose of this phrase is to emphasise government support for superannuation should be targeted to those in need. Presumably, government support refers to the foregone tax arising from super concessions (that is, tax which would otherwise have been raised but for the concessions, which is estimated to be around $53 billion for the current financial year).

The main tax expenditures arising in relation to super are the reduced earnings tax, 15 per cent rather than the average rate of tax, in accumulation phase and the earnings tax exemption in respect of retirement-phase pensions, nil rather than the average rate of tax.

If this objective is to be taken as a serious statement of government policy, then should not the regulations:

  • limit or prohibit CGT non-concessional contributions. While the CGT contribution can be large in value, there is a lifetime cap per individual of about $1.6 million and very few individuals are qualified to make such contributions so that in the total super system, super tax concessions in respect of CGT non-concessional contributions are not significant,
  • limit or prohibit conventional non-concessional contributions. The current cap on these contributions is $110,000 per financial year so while not having the attention-grabbing potential of CGT non-concessional contributions with their $1.6 million cap, ordinary non-concessional contributions are more frequently made, resulting in the aggregate super tax concessions in respect of ordinary non-concessional contributions being greater than CGT non-concessional contributions, and
  • increase the tax rate on super contributions and earnings to a point where it is still concessional and therefore attractive, but not so that the cost to the federal budget is so high.

The consultation paper is a Pandora’s box of potential ways to restructure the superannuation system. Only by setting clear objectives for super, such as the destination, can you work out the necessary design changes to establish how to get there.

Michael Hallinan is self-managed superannuation executive consultant at SuperCentral.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital