By Paul Rickard

The usual suspects have jumped onto the bandwagon to support BT Financial Group CEO Brad Cooper’s call for a $2.5 million super cap. Industry Super Australia, the Australian Council of Social Service (ACOSS) and The Actuaries Institute backed it, with some arguing that it should be even lower.

In case you missed it, in a speech last Friday entitled “How can super reach its full potential”, Mr Cooper argued that the maximum balance that a self-funded retiree should be allowed in the pension phase of super, where earnings are taxed at 0%, should be capped at $2.5 million.  This figure was calculated on the assumption that an account balance of $2.5 million could generate an annual income of $150,000 (assuming an average rate of return of 6.0% per annum), which is twice average weekly earnings of $75,000 per annum.

ACOSS went even further. Rather than just capping the amount at $2.5 million, it argued in its submission to the Government’s retirement incomes review that the tax rate in the pension phase of super should be increased from 0% to 15%.

Why is there so much focus on raising super taxes, or making the system less accessible?

Short memories

Mr Cooper argues that “super is meant to be used to generate replacement income in retirement”.  He says that it is not there to build incredibly high levels of wealth, or serve as a proxy estate planning tool. Rather, he says that “it is entirely appropriate, and necessary, to place a limit on the tax concessions people receive”.
Many might agree. I would also argue that this is exactly what the current system does.

We also have incredibly short memories. There have been two super systems in Australia – the system up to 2007, and the system post 2007.

Until 2007, you could essentially put as much money as you liked into super, but it was taxed on the way out. Taxation of lump sums and pensions was incredibly complicated, with concepts such as the calculation of your reasonable benefits limit or RBL, and the gaming of your highest average salary (HAS).

Peter Costello realized that this system was too complex and turned it on its head. No tax on taking money out (lump sum or pension, including the assets supporting the payment of a pension), but a cap on the amount of money you could get into the system.

Fast forward to today, and the fact is that it is nigh on impossible to get $2.5 million into super. Okay, there are a few big balances around, but these are a legacy of the pre-2007 system. With a general concessional cap of only $30,000 per annum, and a non-concessional cap of $180,000 per annum, 99.9% of Australians cannot get a retirement balance of $2.5 million. The system is already capped.

So what was Brad Cooper trying to achieve? Well maybe he wanted to be seen to be making a concession to the “tax it more” lobby group, recognizing that nearly all high super balances are in SMSFs and outside the reach of the bank-owned or industry super funds and as such, BT had very little to lose. Maybe he had forgotten about the pre 2007 system, or maybe he had forgotten how easy it would be to get around the cap by splitting super with your spouse – who knows.

What we do know is that this is not the end of “helpful” ideas to change the super system.

Cut government expenditure, rather than just raise taxes

And why is the debate just about which tax to raise, or which tax concession, usually from the super system, to curtail? Where is the debate looking at the expense side of government?

Do we need Gonski, years five and six, when there is precious little evidence that smaller class sizes are leading to improved educational outcomes? And if we do believe in Gonski and a “needs based approach” to education funding, wasn’t he given a fatally flawed brief by former PM Gillard that said “no school could be worse off”? Easy for me to say (my kids have finished at private schools), but does the Government really need to pour more money into some of those private schools with their synthetic/all weather hockey and football pitches and indoor 50 million heated swimming pools (sorry, if your school only has a 25 million indoor heated swimming pool, it just isn’t cutting itl)

We have a proposal for a National Disability Insurance Scheme (NDIS) of which no one has any idea about how much it is going to cost, and another $89 billion to be spent on naval frigates in Adelaide to protect a few coalition seats in SA. Chances are that this project will add to the litany of badly managed shipbuilding projects by the Australian Navy. I could go on….and on.

My “helpful ideas”

Back to super and ideas about how the Government could raise more money from the system, and arguably, make it a little fairer and sustainable. Here are my top three “helpful ideas”.

Firstly, get the super preservation age back in sync with the pension age. The Gillard Government moved the pension age from 65 to 67, and the Abbott Government talked about going to 70 (both being phased in over a long transition). However, no one has done anything about the age which super can first be accessed (the preservation age) – so this gap has gone from five years, to seven to 10 years.

Move the preservation age to 62 or even 65. At the same time, change the age brackets on lump sum withdrawals and super pensions so that the effective 0% tax rate also only applies from age 62.

Next, scrap transition to retirement pensions. Prospectively, not retrospectively.

While the transition to retirement pension, an idea of the Howard Government, was well intentioned, the reality today is that in most cases, it is just used today to reduce tax. As any financial adviser knows, if you have turned 55 and aren’t taking a transition to retirement pension, you have rocks in your head.

Finally, apply the Division 293 tax (the higher tax on superannuation contributions) to the $180,000 income level. This will mean that most taxpayers are enjoying a tax benefit of around 20% - probably the amount that is needed to encourage people to make additional contributions to super and accept the trade-off that they will be locking their money away for up to 40 years.

As the following table shows, persons earning more than $300,000 get a tax benefit of 19.0% by making extra contributions into super. However, persons earning between $180,000 and $300,000 get a tax benefit of 34.0%.

The ALP has proposed that the $300,000 threshold be lowered to $250,000. Taking it all the way back to $180,000 will take out any remaining perceived inequity.

Enough “helpful ideas”.