The relentless media-fuelled debate about speculated changes to superannuation is becoming a broken record where unfortunately all too often the claims and accusations are flawed and certainly counterproductive to building community confidence in the super system.
Pension tax exemption speculation
Let’s start with the calls from a number of self-interested parties to make the system ‘fairer or ‘sustainable’.
One proposal is to tax pension fund investment earnings in excess of $75,000 where the first $75,000 would remain tax-free. This is simply a reincarnation of the federal opposition’s policy when last in government (except the previously proposed threshold was $100,000). There is no explanation for the proposed reduction in the threshold, suggesting it is arbitrary and without reasonable foundation. Furthermore, it must be remembered the original measure was ultimately dismissed following feedback from the industry and regulators that it would have been impossible to implement and administer.
Lowering the high-income earner threshold
Another proposal is to reduce the threshold above which concessional contributions are subject to an additional high-income earner tax of 15 per cent from $300,000 to $250,000. This is once again a totally arbitrary measure. These proposals, it was argued, would raise $14 billion in revenue – but over the next decade. It would arguably cost more to administer the measures, which in effect would be a blatant tax grab and have nothing to do with making the system fairer. Does anyone remember the super surcharge?
Sustainability of the tax concessions
On the matter of sustainability, one key observation we would make is that there is little if any evidence to support the view put by some that our current superannuation system is not sustainable (especially the tax-free status for individuals over 60). In any event, it is paramount any review of superannuation is not conducted in a silo and properly acknowledges the super sector as a whole and its relationship with our tax and social security systems.
Super borrowing take-up rate relatively low
The ability for superannuation funds to borrow directly to invest is still in its relative infancy, having been in place since 2007. The take up by SMSFs has to date been relatively low, with the reported value of assets under limited recourse borrowing arrangements (LRBA) comprising a little over 1.5 per cent of the total SMSF pool of $557 billion. Nevertheless, there continue to be calls from a number of self-interested parties for borrowing to be banned, with support from a corresponding recommendation made in the recent Financial System Inquiry report.
Some major banks have stepped back, but not away
The Self-Managed Independent Superannuation Funds Association has also observed the recent decisions of at least two major banks to step back from the super lending space. We understand this is limited to residential investment property deals and is principally to do with the pressure on the banks to quell demand for investment property loans in general as opposed to an attack on lending to superannuation funds.
Greater emphasis on LRBA advice process needed
The real issue with LRBAs through superannuation is how and why consumers end up with them. They typically arise in connection with the purchase of real property and it may be the property that first leads to the borrowing, which may not be the most appropriate strategy, taking into account all the relevant circumstances. This is a case of the tail wagging the dog and our long-held view has always been that advice and strategy must come first, be appropriate in the circumstances and be delivered by suitably qualified professional advisers under the authority of an Australian financial services licence.
Government position
In its response to the Financial System Inquiry on 20 October, the government announced it will not be adopting the panel’s recommendation that the use of LRBAs be prohibited. “While the government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the government does not consider the data sufficient to justify significant policy intervention,” it said.
The government did commit to commissioning the Council of Financial Regulators and ATO to monitor leverage and risk in the superannuation system and report back to government after three years.
SISFA is pleased to see LRBAs remain part of a properly structured retirement plan, provided appropriate regulation and supervision is enforced and supported by the data collected by the ATO.