Issues of inequality in the superannuation system were tackled in the Turnbull Government’s first Budget delivered on Tuesday, reversing many measures brought in by the Howard/Costello Government in 2006.
The industry reaction to the Budget focused on four areas: the introduction of the Low Income Superannuation Tax Offset (LISTO); a $1.6 million cap on money that can be put into the retirement phase; concessional contribution caps being reduced to $25,000; and more high-income earners attracting a 30 per cent tax on concessional contributions.
Overall, peak bodies, participants and professors have cautiously welcomed the direction of the changes, but lament that progress does not go far enough.
The 2016 federal Budget took a small step towards reversing inequities in the superannuation system associated with its tax incentives but we remain “locked in a flawed system,” said UTS Business School professor of finance, Ron Bird.
‘Baby step’ to reverse inequality ‘not enough’
“What we have seen in the budget is a baby step to reverse the inequities associated with the tax inducements related to superannuation,” said Bird.
Finance lecturer Rosalie Degrabriele – who specialises in superannuation – says the measures reverse many of the changes brought down by the Howard/Costello Government in 2006, which favour high income workers.
Tom Garcia, chief executive of the Australian Institute of Superannuation Trustees (AIST), said the government’s decision to rethink a super tax break for low income earners was a much-needed win, particularly for low paid women who faced many challenges in saving enough for retirement.
However, Garcia added that more needed to be done to improve fairness in super, noting that the changes to the Age Pension Asset – announced in the previous 2015 budget but due to come into effect on January 1, next year – would have a significant negative impact on part-pensioners.
“The new Age Pension asset test will hit middle Australia hard,” Garcia said. “While the budget changes includes some good news for low income earners, there is nothing to compensate the many hundreds of thousands of part-pensioners for the significant drop in their retirement income that lies around the corner.”
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia (ASFA), said it would be important for the government to consult on the implementation of a number of the measures, particularly as some of them have the potential to significantly increase administration costs of funds.
“There is a lot in these announcements. We will need time to assess their impact and fully understand the consequences,” Vamos said.
Deloitte superannuation leader, Russell Mason and Deloitte private superannuation tax partner and self-managed superannuation leader, John Randall, both agree that overall the changes proposed for superannuation are “reasonable but could have been more flexible”.
Introduction of the Low Income Superannuation Tax Offset (LISTO)
A factsheet released by the Government says a Low Income Superannuation Tax Offset (LISTO) will replace the Low Income Superannuation Contribution, from July 1, 2017.
According to the government, this non-refundable tax offset will mean that those with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation contributions, up to a cap of $500.
This is a measure for which AIST, ASFA and Industry Super Australia (ISA) have all strongly advocated.
“ASFA welcomes the introduction of the Low Income Superannuation Tax Offset. This will provide a benefit of up to $500 a year for over three million people, of whom around two-thirds are women,” Vamos said.
ISA chief economist, Stephen Anthony, said: “This top up payment, which was due to be abolished in 2017, is critical in ensuring lower paid workers don’t end up paying more tax on their super than they do on their take home pay.”
He adds, however, with a “whopping” 45 per cent gap in super savings between men and women, more will need to be done to actively boost the super savings of this lower paid group to help them reach a comfortable retirement standard.
$1.6 million cap on money into retirement phase
The Government’s factsheet also explains the plan to introduce a $1.6 million cap on the total amount of superannuation savings that can be transferred from a concessionally-taxed ‘accumulation account’ to a tax-free ‘retirement account’.
Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15 per cent.
According to the factsheet, those individuals already in retirement at July 1, 2017, with balances in excess of $1.6 million, will need to either transfer the excess back into an accumulation superannuation account, or withdraw the excess amount from their superannuation.
“This cap is a good first step toward a more sustainable super system, while also funding other important measures like the LISTO,” said Garcia. “We will be putting it through our AIST-Mercer Super Tracker to assess its impact on fairness, sustainability and adequacy of the system, and will also be looking at the effect on other savings vehicles and behaviours.”
Randall of Deloitte said the introduction of a $1.6 million cap seems reasonable. “This amount will be indexed in $100k increments. However if you are already in pension phase and you have exceeded this level, you will have to move the excess monies back from your superannuation accounts from July 1, 2017. This will pose administrative challenges for both members and administrators, especially for those individuals with multiple accounts,” Randall said.
Previously, ASFA had supported a $2.5 million cap on balances that can be transferred to the tax free retirement phase.
According to modelling at the peak body, a $2.5 million cap will impact more than 50,000 people, and involve additional revenue of under $500 million a year – while a $1.6 million cap will affect more than 100,000 people and result in additional revenue for the Government of $1.15 billion by 2019/20.
Meanwhile, Industry Super Australia supports the introduction of a $1.6 million cap on the total amount of super that can be transferred into a tax-free retirement account – saying this will go some way in limiting the exploitation of super for tax minimisation and wealth accumulation.
Concessional contribution caps reduced to $25,000
The government says it will lower the annual concessional contributions cap from $30,000 for those aged under 50, or $35,000 for those over 50, to $25,000 for all individuals. The cap will index in line with wages growth.
Garcia said that AIST is concerned about the impact this may have on older workers planning for their retirement, however he also noted that the introduction of flexibility on caps offers some compensatory benefits to those with balances of $500,000 or less.
Vamos of ASFA is likewise concerned. “We do not support the reduction of annual concessional caps to $25,000. While today less than 2 per cent of people – around 255,000 – with superannuation make contributions above $25,000, a significant number of such individuals that have low balances are attempting to catch up. For instance, around 36,000 women with balances less than $200,000 in 2013/14, were making contributions in excess of $25,000,” Vamos said.
“The changes to the flexibility caps will allow women, in particular, who currently retire with less than half the superannuation of men, to catch up. However, the restriction of a five year period for the calculation of previously unused cap amounts restricts the effectiveness of this.”
Mason of Deloitte added that the reduction in the cap was a retrograde step. “Reducing the concessional cap and having a rolling five-year catch up is not sufficiently flexible, especially for women and older workers. Deloitte has always stated that having a lifetime cap is a better approach.
“However the extension on the deduction for contributions to those aged up to 75 and for everyone regardless of employment status, is a positive step,” adds Mason.
Thirty per cent tax on concessional contributions (Division 293 taxation)
The government’s factsheet states individuals with incomes over $250,000 will now be required to pay an additional 15 per cent tax on their super contributions (commonly referred to as the Division 293 threshold). Previously the threshold was $300,000. To be liable for a 30 per cent tax, a person would need to have at least $250,000 in combined income and concessional superannuation contributions.
This change will also be reflected in defined benefit schemes. Some of the money saved from this measure is earmarked to help fund the LISTO.
According to AIST, in 2017/18 approximately one per cent of fund members are expected to pay Division 293 taxation.
Deloitte believes that bringing down the income threshold from $300,000 to $250,000 per annum and applying an additional 15 per cent tax on contributions is fair, predicting the measure will affect around 60,000 taxpayers.
“[But] the government could have gone further in helping to address the inequity and we would not have been surprised if it had been reduced to $180k,” Randall said.
Professor Bird of UTS also believes the measure does not go far enough. “By the government’s own admission, these changes will only reduce the extent of tax benefits associated with contributing to superannuation for the top few per cent of income earners,” Bird said.
‘Humongous’ benefits to wealthy now only ‘huge’
“It still remains that something like the top 30 per cent will continue to receive annual gifts from the government – that is, other taxpayers – to the tune of $25,000-plus per year over their lifetime.”
He adds at the other end of the scale, the government has chosen to continue a tax benefit that reduces the additional tax impost compulsory superannuation would otherwise impose on low-income earners.
“However, this offset is only partial and at the end of the day low-income earners actually have to pay additional tax for the pleasure of being forced to contribute to superannuation.
“In other words, for close on 25 years, our inequitable superannuation policy has delivered humungous benefits to the already wealthy while delivering an impost on the poor. Sure, the government in this budget has changed this – the ‘humongous’ has been slightly reduced to ‘huge’. But we are locked into a flawed system that this and probably no future government is likely to be willing to redress.”