The reintroduction of compulsory cashing and the creation of a new class of pension with specific tax treatment would meet the policy objectives of the Division 296 bill without imposing an impost on unrealised gains, according to the Institute of Financial Professionals Australia (IFPA).
In a submission to the Economic Reform Roundtable, the industry body stated if the policy objective behind the proposed new impost was to reduce tax concessions for individuals with high superannuation balances, there were “more effective and principled alternatives” that should be considered.
While it repeated its call for Division 296 tax to be based on actual earnings above the $3 million threshold, IFPA stated compulsory cashing and a new pension was a viable alternative that would reduce concessions and boost government revenue.
“Returning to the original policy rationale targeting large or ‘mega’ superannuation balances, we propose that individuals with high balances be required to either withdraw the excess from the superannuation system or convert it into a pension by a certain age,” IFPA said in the submission.
“As only $2 million can currently be used to commence a retirement-phase pension, a separate class of pension could be introduced for the excess amount.
“This would apply to amounts exceeding a member’s transfer balance cap, allowing those excess funds to be placed into a separate pension structure without there being a limit on balance size.”
It pointed out compulsory cashing into a new style of pension would create two policy levers for the government, with the first being the controlled exit of large balances from the superannuation system, ending further accumulation within the concessionally taxed framework, and secondly the application of distinct tax and higher drawdown rates to the excess pensions.
“Creating a separate class of pension – distinct from standard retirement-phase pensions – would help limit the benefits flowing to very large balances, while preserving concessional treatment for the vast majority of retirees,” it said, adding this model was more in line with the original intent of the superannuation system.
The industry body also proposed that instead of taxing unrealised gains, the government could place a flat 15 per cent impost on the taxable component of withdrawals made from the accumulation phase for individuals with total superannuation balances above $3 million, regardless of their age.
IFPA head of technical services Natasha Panagis said: “Taxing unrealised gains is a dangerous precedent that could seriously damage trust in the system.
“There are fairer, more effective ways to limit concessions on large balances without disrupting the retirement plans of everyday Australians.
“We need a tax and super system that delivers certainty and confidence, not just for the next budget, but for generations to come.”
