Why the federal government’s superannuation policy leaves a lot to be desired

By Brad Twentyman

Australia is in the middle of an election campaign and it’s clear that superannuation policy is a key battleground, following the proposed changes outlined in the federal budget earlier this month.

As it turns out, the superannuation policy positions of both the federal government and the Opposition are broadly similar in terms of what contribution taxes and taxes on superannuation pensions will look like.

Both parties plan to increase taxes on contributions and pensions. Both parties will target higher income earners and those with higher current superannuation balances. Under both parties’ proposals, around a third of the extra revenue raised will be redistributed to lower income earners through a refund of the 15% contributions tax they would otherwise pay.

However, there are two critical difference in the policy positions of the parties.

Lifetime limit on super contributions

The first key difference is the $500,000 lifetime after-tax contribution limit announced by the Turnbull government in its May budget.

This is the most ill-considered element of the government’s proposed superannuation changes. It strips out of the system the last meaningful incentive to save enough to remove reliance on the age pension.

With such a limited non-concessional contribution cap, it’s doubtful that anyone coming through the system today will be able to save amounts greater than around $1 million, which is only marginally above the age pension qualification threshold.

There is almost no incentive to accrue the maximum amount of superannuation when saving a little less will ensure access to the age pension and all of its associated benefits, such as access to reduced utility bills and car registration fees and access to the pharmaceutical benefits scheme.

The $500,000 lifetime limit will also have major effects on certain groups. Divorcees who have already reached their $500,000 contribution limit and split their super with their spouse will be locked out of the system, as has been widely reported. It will be incredibly difficult if not almost impossible for them to accrue a super balance.

Downsizers planning to contribute property proceeds to their super, or people receiving an inheritance, will also be locked out of the system to any meaningful degree. Ex-pats returning to Australia will now be unable to bring their retirement savings with them.

Presumably, the $500,000 lifetime limit on non-concessional contributions eventuated out of concerns that significantly wealthy Australians were making the maximum $180,000 after-tax contributions year-on-year, as the policy itself raises very little revenue.

There aren’t many Australians with the ability to shovel $180,000 into superannuation every year but there are some. The government has stated that the purpose of super is to provide retirement income, not as a tax-favourable strategy for wealth accumulation.

A lifetime limit may be appropriate in order to deter these individuals, but the $500,000 figure affects so many Australians with aspirations to accrue enough savings to maintain living standards through retirement.

If a lifetime limit for non-concessional contributions is going to be introduced, it would need to be at least $2 million to avoid destroying the incentive to save for retirement.

As it stands at the proposed $500,000, the lifetime limit will result in the super system being unable to achieve its primary objective of facilitating the accrual of retirement savings sufficient to remove reliance on the age pension.

On that basis alone the policy should be immediately revised.

Retrospective changes

The other critical difference between the government and the opposition is the retrospectivity in many of the proposed changes.

Counting after-tax contributions from 2007 against the lifetime limit announced in 2016, taxing historical market value increases in pension asset values, and applying tax on transition to retirement pensions that were funded and commenced on the basis that tax did not apply, are clearly changes that have retrospective application.

If the government addresses these two critical policy differences, on a practical level the superannuation policy positions of the government and the opposition would be largely indistinguishable heading into the election.

In addition, and more importantly, it would allow people to make critical decisions over the next 12 to 18 months about their retirement planning without also needing to anticipate the likely winner of the federal election.

Brad Twentyman is a director at Pitcher Partners.