Changes to superannuation insurance won’t jack up rates – but if anything they don’t go far enough

The life and disability insurance offered by superannuation accounts can be the best possible deal for members. But the experience is often bitter for younger people, who are “opted in” to insurance they won’t need until they have dependants, face administrative hurdles to opt out, and are often charged fees and premiums through multiple super accounts. Many see their small balances disappear entirely.

The latest federal budget proposes to turn this system around by making superannuation insurance opt-in for people younger than 25, and on accounts that are inactive or have a balance of less than A$6,000. However, the changes don’t address a more pernicious type of superannuation insurance – total and permanent disability (TPD) insurance.

There are concerns that removing healthy, young people could see the rest of us paying up to 30% more for insurance. But my analysis of superannuation data shows this is unlikely.

The following graph shows that premiums on superannuation insurance (taken from the website of a large fund) are roughly in line with the cost – shown here as the Australian population mortality rate. The lines are roughly the same, meaning that younger people aren’t subsidising the insurance of older groups.

Life insurance premiums for people under 25 are very much lower than average. Even allowing refused claims on multiple accounts, the extent of cross-subsidy to older people is minuscule.

The data used for the graph does not differentiate rates by gender, so this is an average of male and female rates – with an allowance for the fact that men earn more and are more likely to be employed. The fund does, however, differentiate by occupation.

As you can see, the rates charged for professionals are much lower than standard rates, which follows the population level fairly closely.

Superannuation funds are in a good position to offer good insurance deals because there are minimal marketing costs, mostly no need for medical evidence, and insurance needs to be integrated with retirement benefits anyway.

The government’s changes could save 5 million members up to A$3 billion of unnecessary insurance premiums. But this is an exaggeration as much of the insurance is useful and will not be cancelled.

If there is a large reduction in premiums, it may come from the 6 million accounts where members have lost contact. It is possible that many members or their families are not claiming these insurance policies. If so, premiums for those of us who are aware of our benefits will rise, although certainly not by 30%. If this number is significant it would be unconscionable and would be another matter for the Financial Services Royal Commission.

On the other hand

The proposed superannuation insurance changes may may well have unintended consequences. One of the main benefits of automatically enrolling people in insurance is that it removes the need to collect and evaluate health information. This not only reduces costs but means some people are able to get insurance who might be otherwise rejected.

If everyone has to opt in to superannuation insurance, it may mean that people are directed to more costly individual insurance policies. One worst case scenario from the changes is that we see an increase in high pressure sales for these policies.

Read more: Superannuation ‘objective’ likely to be captured by industry

The federal budget did not address the little appreciated drawbacks of total and permanent disability insurance.

One of the main issues is that the large benefit payable creates a perverse incentive to remain disabled, and can lead to wasteful and destructive legal disputes about whether the claimant is totally and permanently disabled.

TPD insurance does not cover situations where you are partially or temporarily disabled. This leaves members without protection if they are not both totally and permanently disabled.

Lump-sum total and permanent disability claims can also reduce the life insurance payable to the family on the death of a breadwinner. If the breadwinner is disabled and the disability payments are required for his or her maintenance, there may be inadequate cover should they subsequently die.

More to accomplish

The superannuation industry bodies have already created a code of practice where they agreed to restrict the cost of insurance to 1% of salary (or about 10% of premiums) so as not to “inappropriately erode” retirement benefits.

Funds that subscribe to the code promise to consider members’ different circumstances when designing cover.

The budget proposals go further than the code – probably too far. For younger people, it would have been sufficient to require superannuation funds to cancel life insurance within five business days of a request to do so. This is already in the voluntary code, so it is quite possible.

The ConversationBut since the government has already found an assertiveness to tackle some of the problem of insurance within superannuation, it would be good to see it looking at the issue of total and permanent disability insurance.

Written by Anthony Asher, Associate Professor, UNSW. This article was originally published on The Conversation. Read the original article.

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Angry at Labor’s imputation credit refund policy? Blame Costello

Opinion: Many of the recent policy changes impacting superannuation and retirement planning – including the ALP plan to stop refunding imputation credits – have been a complicated and confusing attempt to wind back tax concessions, and a fair share of the blame for this can be apportioned to the actions of Peter Costello when he was Treasurer.

Labor leader Bill Shorten last week announced the policy of stopping refunds of dividend imputation credits from 1 July 2019, assuming the ALP wins the next Federal Election and the measures makes it way through the Parliament.

Labor says the policy targets the wealthy, but as refunds of imputation credits are dependant on low taxable income it also catches people on lower incomes, including people drawing tax-free pensions from superannuation.

Australia has progressive tax brackets – the higher the income the higher the tax rate. But this was distorted by the change Treasurer Peter Costello announced in the 2007/08 Budget – shortly ahead of the GFC – to not tax most superannuation pension payments for people over age 60.

This costly, but popular with the people who benefit, measure has been the driver behind many of the controversial changes to superannuation in the decade since Costello made the change, as politicians try to fix the resulting Budget issues. But because it would be too politically unpopular to tax superannuation pensions over age 60 politicians have come up with other ways to limit and tax these pensions. The 2016/17 Budget superannuation changes, especially the $1.6 million Transfer Balance Cap and reductions in the non-concessional contributions cap, are some of these responses. Making indirect changes has increased the complexity of the measures – changes that would be simple at the individual level are complicated to implement and administer at the fund level.

Refunding excess dividend imputation credits was another, earlier, tax change made under the Howard-Costello government.

Labor’s policy is simply another in the line of flawed policy measures to wind back tax concessions without directly tackling the issue. If superannuation pensions were included in the taxable income of individuals than refunding imputation credits would be much less of an issue, and be fairer – another of the stated policy goals. People on lower incomes would still receive a refund of credits where they didn’t earn enough to offset the credits, and people on higher incomes would pay any extra tax on top of what was already paid by the companies.

Unfortunately this is unlikely to be the last complicated and flawed tax policy resulting from the decision in 2007 to not tax superannuation pensions.

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2018/19 Pre-Budget submission: Superannuation & SMSFs

This 2018/19 pre-Budget submission makes several superannuation-related recommendations, including prioritising the legislative objective of superannuation, repealing the ‘work test’ and indexing the LISTO to Super Guarantee rate.

Prioritise legislative objective of superannuation

Before further changes to superannuation are made priority should be given to enacting the objective of superannuation.

The Superannuation (Objective) Bill 2016 has not been debated in the Parliament in over a year. In the most recent sitting of Parliament every Government superannuation Bill, except the Objective Bill, was scheduled for debate. It is incongruous with having an objective of superannuation, one to which statements of compatibility are to be published, to pass all other super legislation before enacting the objective.

I note that in recommending setting objectives for superannuation in legislation the Financial System Inquiry said that “broad political agreement” for the objectives should be sought.

Repeal ‘work test’ for superannuation contributions

I urge the Government to proceed with a repeal of the ‘work test’, which restricts the ability of people aged 65-74 to contribute to superannuation.

Repealing the so-called work test was proposed in the 2016/17 Budget, but dropped as part of the changes to the non-concessional contributions cap.

When it was announced that the work test repeal would not proceed a joint Ministerial statement said: “…the Government remains supportive of the increased flexibility delivered by this measure…”

The 2016/17 Budget papers say repealing the work test would: “…simplify the superannuation system for older Australians and allow them to increase their retirement savings…”

This reasoning for the repeal of the work test stands and I encourage the Government to include it in the 2018/19 Budget.

Index Low Income Superannuation Tax Offset (LISTO) to increases in Super Guarantee rate

The Low Income Superannuation Tax Offset (LISTO) should be increased and indexed so that it keeps pace with increases to the Superannuation Guarantee rate.

The Explanatory Materials to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, which introduced the LISTO, says:

“The low income superannuation tax offset seeks to effectively return the tax paid on concessional contributions by an individual’s superannuation fund…”

However this is not fully achieved under the LISTO as it is structured. The LISTO is very similar to the Low Income Superannuation Contribution (LISC). When the LISC was introduced it offset the full amount of contributions tax – $500 – a low income earner would pay on their compulsory Superannuation Guarantee contributions (9% of $37,000 equals $3,330, $3,330 at 15% equals $499.50). However provision was not made to increase the LISC when the Superannuation Guarantee (SG) rate increased.

As such, as the SG rate increases, the LISTO fails to offset the full amount of contributions tax, meaning some low income earners will pay more tax on some of their superannuation contributions than they would on their salary and wages.

The LISTO should be indexed to increases in the SG rate, so that it fully offsets the contributions tax on the compulsory employer superannuation contributions for low income earners.

Encourage the use of corporate trustees for SMSFs

The vast majority of SMSFs are set up with individual trustees rather than corporate trustees. The latest available ATO SMSF statistics show that only 7.24% of SMSFs registered in 2015/16 had a corporate trustee.

This preference against corporate trustees for SMSFs was remarked on by the Super System Review, also known as the Cooper Review. The final report of the Review said:

The Panel and various stakeholders have expressed their surprise at this trend in various consultations and submissions. It is widely accepted by professionals and the ATO that a corporate trustee is superior.

Information on why SMSFs are increasingly being set up with individual trustees is limited. The Cooper Review suggested lack of education and the higher cost of the structures could be factors.

Corporate trustees for SMSFs do involve higher setup costs than individual trustees, however they also offer limited liability and require fewer changes upon the death of a member, easier removal and addition of members and clearer ownership of assets.

I recommend the 2018/19 Federal Budget include two measures to encourage the use of corporate trustees for SMSFs. Firstly, though ASIC offers a lower annual fee for special purpose companies, the setup fee remains. This ASIC fee can represent over 90% of the cost of a company, from some providers. Provision should be made in the budget for ASIC to reduce this fee for SMSF trustee special purpose companies.

Secondly, provision should be made for research into why individual trustees are increasingly being chosen for SMSFs. Based on this research an education campaign could be conducted by the ATO.

Reconsider time-frame for reaching a 12% Super Guarantee rate

I urge the Government to reconsider the decision to delay increases to the Superannuation Guarantee (SG) rate.

Delays to increases to the Superannuation Guarantee (SG) rate, MRRT

The SG rate was set to reach 12% on 1 July 2019, however it is now not scheduled to reach this level until 1 July 2025.

I urge the Government to reconsider this delay in reaching a 12% SG rate.

This is a 2018/19 pre-Budget submission by SolePurposeTest writer Luke Smith, it has been published here with permission, he retains all copyright.

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Here’s how superannuation is already financing homes

The federal government is split on whether first home buyers in Australia should be allowed to use part of their superannuation for home deposits. But what the more strident critics miss is that Australia’s superannuation system already channels a significant proportion of retirement savings into housing. The Conversation

It does this not via the traditional route of people buying a house outright, but rather through an indirect channel, by transforming the household’s compulsorily acquired superannuation equity into mortgages from commercial banks and other financial intermediaries.

Statistics from the ABS (December 2016) show that for every A$1 of assets managed by the superannuation sector, approximately 27 cents is directly financing Australia’s banking sector. This is via superannuation holdings of bank deposits (14c in the dollar), bank equity (7c in the dollar), and other bank liabilities (6c in the dollar).

What do banks do with this 27c? The ABS reports that 38% of bank financial assets are long-term loans to households. We have cross-inspected this data with figures from the Australian Prudential and Regulation Authority (APRA) and found that nearly all of these loans are mortgages.

This suggests that at least 10c of every A$1 of superannuation assets is indirectly financing house purchases via commercial bank debt.

But this also excludes other indirect financing of banks by superannuation. For example, the portfolios of non-money market mutual funds and other private non-financial corporations are also heavily weighted towards funding banks (24% and 36% of their assets, respectively), and superannuation funds allocate 6% and 24% of their funds to these agents respectively. This potentially adds a further 4c in every A$1 of superannuation assets that ultimately results in debt financing of housing.

Why using super for housing might be good idea

One of the merits of allowing households to use their superannuation to supplement their housing deposits would be to reduce unnecessary and expensive financial middlemen. Under the present system, the money from superannuation that finds its way into housing finance does so by passing through chains of two or more intermediaries. This means that it incurs management expenses at each step.

The first link in the chain is the superannuation sector (with an average expense ratio of 0.7%). Next is one or more financial intermediaries, like banks. A plausible estimate of the banking sector’s expense ratio, by our calculations, is 1% to 2.3% of bank assets.

Total expenses through the intermediation chain could therefore be as high as 1.7% to 3%. These expenses might be lower under a housing equity super access scheme.
Another potential benefit relates to the accumulation of debt and its consequences for financial stability.

Most of the money people put away into superannuation, because its compulsory, would have otherwise been used for other types of saving. If you look at the assets in a household’s balance sheet, it is clear that housing equity (representing 65% of non-superannuation assets) is the household’s preferred savings vehicle.

It is possible that growth in compulsory superannuation has contributed to growth in household debt in two ways. First, by frustrating people’s ability to finance home ownership through their deposit. Second, by increasing the supply of mortgage finance, as superannuation savings are recycled through the financial system, and converted to mortgages by the banks.

The risks with the plan

One concern about letting people divert money into buying a house is that their income in retirement could suffer as a result. To mitigate the risk of this happening, any policy on this would need to record and track the values of super funds’ home equity stakes (just as super funds presently track values for the traditional assets they hold).

But retirement income is determined by total net assets, not superannuation assets alone. In this context, home ownership provides retirees an important stream of stable tax-free, inflation-protected, income. This is recognised by the Association of Superannuation Funds of Australia benchmarks for “modest” and “comfortable” retirement income.

These assume that retirees own their home outright. So the decline in home ownership is a significant threat to the adequacy of Australia’s retirement income system.

A second risk is that the policy could further raise house prices, reducing affordability and exposing retirement savings to a house price collapse. In the present house price environment, this is a real risk, which would need to be monitored. But the policy’s two main merits (reducing intermediation costs and improving financial stability by reducing gross debt) are long-run benefits that will continue to hold beyond our current point in the house price cycle.

APRA also already monitors risks associated with housing credit growth, and has the tools, and the willingness to use them, should the policy promote undesired house price growth.

There are reasons to expect that a policy allowing first home buyers access to super will not lead to net growth in housing finance. Superannuation funds are already required by APRA to understand their underlying asset exposure risks. So super funds might try to maintain their total exposure to property risk under this policy, for example by reducing their exposure to the banks.

Written by James Giesecke, Professor, Centre of Policy Studies and the Impact Project, Victoria University and Jason Nassios, Research Fellow, Centre of Policy Studies, Victoria University

This article was originally published on The Conversation. Read the original article.

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The latest ideas to use super to buy homes are still bad ideas

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence. The Conversation

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing,
while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

Written by John Daley, Chief Executive Officer, Grattan Institute and Brendan Coates, Fellow, Grattan Institute. This article was originally published on The Conversation. Read the original article.

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How changes noted in the 1992-93 cabinet papers affect our super today

While superannuation changes were debated all through 2016 we were often reminded that the superannuation system is still maturing. Many workers retiring today were not members of a superannuation scheme for much of their working life.

The cabinet papers of 1992-93 released today by the National Archives of Australia give an insight into how, and why, the system was originally designed; and how some of those decisions are reflected in the current policy debate.

A new super scheme

The Superannuation Guarantee came into force from July 1 1992. In that year about 64% of employees had access to superannuation including white collar workers, public servants and workers covered by an award based scheme.

Award superannuation had been in place since 1987, following the Australian Council of Trade Unions (ACTU) agreement to trade off a wage increase for an occupational superannuation scheme. Industrial awards required employers to contribute 3% of wages for a worker paid under the award to superannuation instead of being received in the pay packet.

Under the 1987 agreement a further 3% was to be introduced between 1991 and 1993, however this didn’t happen because of the failed 1991 National Wage Case. As a result, the ACTU, supported by former Treasurer Paul Keating who was then on the backbench, called for a legislative scheme.

The Superannuation Guarantee was announced in the 1991 Federal Budget. It required employers to contribute to superannuation for all workers earning more than A$450 per month. The guarantee as legislated was 3% (or 4% if payroll exceeded A$1 million), increasing to 9% by the year 2000.

In February 1992, amid slowing economic conditions, the cabinet considered whether to defer the implementation of the levy by six months.

Not surprisingly the guarantee was not popular with employer groups, who regarded it as an additional cost imposed during a recession. This was because the new guarantee was estimated to increase labour costs by 1.4% in the first year, mostly for employers whose employees had not been previously covered by award superannuation, although there was an expectation that future wage increases would be moderated by the amount of the levy.

On the other hand, the ACTU was strongly opposed to any deferral, as there was already a division between those employees who did have access to a super guarantee and those who didn’t. The 1992 cabinet minutes record concerns that the ACTU would increase wage claims that year if the guarantee did not proceed as scheduled, and that this would threaten the eventual implementation of a legislated superannuation scheme.

Cabinet decided not to defer the implementation and the bills were introduced into the parliament on April 2 1992. When a similar set of circumstances arose in 2014, the Abbott government chose not to follow this precedent, and deferred the proposed increase.

The 10% rule

In 2016 the “10% rule” was abolished to improve flexibility by removing inconsistency of treatment for contributors, however this was also the reason for the introduction of the rule.

The rule limited tax deductions for superannuation paid by a person who earned more than 10% of their income from a source already covered by the super guarantee.

A person who is primarily self employed, or receives less than 10% of their income from employment sources, could claim an income tax deduction for personal super contributions. But an employee, who does not pay income tax on superannuation contributions paid on their behalf by an employer, couldn’t claim a tax deduction for additional personal contributions.

Prior to 1992, the income tax deduction for personal contributions was limited, with different limits applying to self-employed, employees covered by award superannuation or employees contributing to a non-award scheme.

The proposal before cabinet in June 1992 removed the distinction between employees covered or not covered by award schemes, denying tax deductibility for personal contributions. In this context the 10% rule was a safe harbour that ensured a person who was mostly self-employed did not lose the tax deduction for their superannuation contributions.

Paul Keating continues to support the superannuation reform program he introduced in 1992. Paul Miller/AAP

The abolition of the rule this year was not bipartisan: Labor and others opposed it. However the labour market has changed, and in the more casualised and flexible work environment of 2016 workers move between employment, contract work and self-employment far more than in 1992. The safe harbour of 1992 has now become an impediment to retirement savings.

Regulation of super contributions

Federal regulation of superannuation funds was limited before the introduction of award superannuation. This was exemplified in tax schemes where employers “contributed” on behalf of employees who were unaware of their entitlements, or who only became entitled after meeting onerous service and contribution requirements.

The Superannuation Industry Supervision legislation was enacted in 1993 to protect employee superannuation entitlements.

Under the new framework, the responsibility for employee benefits was placed with the employee, allowing employees to change between funds, protecting employees from fraud by the trustee and limiting control of the fund by the employer. Arguably this portability has also led to a structural change in superannuation funds, as the accumulation of funds in one account has replaced separate defined benefit funds as the default form of superannuation.

One of the current policy challenges is how to use these types of accumulated funds to provide a tax effective income stream, like those delivered by defined benefit funds.

Gender superannuation gap

Another consequence of an employment based retirement savings system is the gender pay gap is carried on into retirement. As noted in the 2016 Senate Committee Report, A Husband is Not A Retirement Plan, women and men experience work very differently, and this is reflected in their retirement savings.

This issue was also identified back in 1992 in the government report Halfway to Equal. The recommendations from this report included designing the superannuation scheme that takes into account women’s broken work patterns and superannuation funds ensuring that women retain membership rights while on maternity leave.

Cabinet papers show both recommendations were supported by the government at the time. These reforms did ensure that women’s contributions were preserved, but the structural problem of the link between retirement savings and earnings was not addressed in the design of the system.

The current superannuation gender gap was foreseeable. The remedies implemented by the government in 1992 protected entitlements rather than addressing the root cause: the superannuation guarantee legislation is gender blind, and this gender blindness has continued to the current day.

Looking back at the decisions of 1992, the superannuation guarantee scheme has served the purpose it was designed to. Most working Australians now have some superannuation to supplement the age pension.

The next radical reform to superannuation, which allowed massive injections into superannuation savings, was in 2007. I look forward to reading the cabinet papers for those discussions.

The ConversationWritten by Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin University. This article was originally published on The Conversation. Read the original article.

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Submission: Senate inquiry into Superannuation (Objective) Bill

This is a submission to the Senate inquiry into the Bill to set a legislated objective for superannuation.

Thank you for the opportunity to make a submission in relation to the Superannuation (Objective) Bill 2016.

This submission will deal with three issues: the need for broad support for the objective before it is set in legislation, long-term reporting on meeting the objective for superannuation and that both the primary and subsidiary objectives for superannuation should be set in legislation.

A legislated objective for superannuation could be a useful tool setting the direction of policy to achieve retirement goals, or it could be an empty phrase – either ignored or changed to suit the whims of the day. Based on the development of the objective so far it appears the latter is much more likely.

Objective of superannuation should have broad support

The Financial System Inquiry, in its final report, recommended that “broad political agreement” be sought for the legislative objective for superannuation, however this does not appear to have been achieved for the proposed objective.

Recent statements by senior members of the Labor Party indicate that there is not bipartisan support for the objective as currently drafted. In November Chris Bowen told the House of Representatives: “So we should have a bipartisan agreed objective. I am sorry to say that, at the moment, we do not.”

“The objective that the government announced is not bipartisan and has not been agreed with us and will not meet with our support. If the government wants to continue those discussions which the minister and I had before the election, I am very open to that idea. I think we could reach a bipartisan objective for superannuation. That would be better. But we are not simply going to sign up to an objective which the government decides and which we think could be improved and which many in the sector think could be improved.”

There is also a view in the superannuation industry that the objective does not go far enough, particularly in terms of adequacy, and is flawed by so strongly linking superannuation to the Age Pension. Failing to reach broad support for the objective risks that it will be amended in the near future, undermining the objective.

Reporting on the objective of superannuation

In addition to the Statements of Compatibility with the objective of superannuation the Superannuation (Objective) Bill 2016 should include longer-term reporting on meeting the objective, as recommended by the Financial System Inquiry (FSI).

The FSI final report said: “In addition, Government could periodically assess the extent to which the superannuation system is meeting its objectives. This could be done in a stand-alone report or as part of the Intergenerational Report, which is prepared every five years.”

I also encourage the Parliament to consider regular reporting on meeting the objective of superannuation. However I think this should be more frequently than the Intergenerational Report, as superannuation policy changes quicker than demographic trends.

Primary and subsidiary objectives for superannuation should be set in legislation

The subsidiary objectives for superannuation should be included in the legislation, not set by regulation.

According to the Explanatory Memorandum the proposed subsidiary objectives are:

●  facilitate consumption smoothing over the course of an individual’s life;
●  manage risks in retirement;
●  be invested in the best interests of superannuation fund members;
●  alleviate fiscal pressures on Government from the retirement income system; and
●  be simple, efficient and provide safeguards.

These are important objectives and changing them should be done by Parliament, not simply through regulation.

I note that an exposure draft of the Superannuation (Objective) Regulation 2016 is currently subject to consultation, and that the wording of the objectives in this proposed regulation is slightly different than those in the EM.

This is a submission to the Senate Standing Committee on Economics into the Superannuation (Objective) Bill 2016 by SolePurposeTest writer Luke Smith, it has been published here with permission, he retains all copyright.

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Submission: Fair and Sustainable Superannuation Bill 2016

Submission to Inquiry into Superannuation (Excess Transfer Balance Tax) Bill 2016 [Provisions] and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [Provisions]

Thank you for the opportunity to make a submission to the inquiry into these Bills. This submission will deal with:

  • 1.0 Insufficient time for consultation
  • 2.0 The overly complicated nature of the changes
  • 3.0 Indexing LISTO to increases in Super Guarantee rate
  • 4.0 Welcome extension of time for Transfer Balance Cap transitional relief

1.0 Insufficient time for consultation

I am concerned that insufficient time has been allowed for public consultation on some 500 pages of legislation and explanatory materials. By my count, the time allowed for public consultation on the draft superannuation Bill tranches is as follows (including weekends):

  • Tranche 1 – 9 days
  • Tranche 2 – 13 days
  • Tranche 3 – 7 days

In my opinion this indicates a rushed process with little regard for actual public consultation. The exact amount of time for consultation for the third tranche is unclear, the original media release says the consultation would close on Friday the 21st of October, after being released late on a Friday afternoon. However the Treasury website, currently, says that the consultation was open until Sunday the 23rd of October. The above figure is based on the media release from the Treasurer.

All these consultation periods are short, both in terms of time for interested parties to draft a submission but also to give proper consideration to the complicated details and potential interactions, likely leading to poor outcomes.

Apart from the short time allowed for public consultation, splitting the legislation into tranches could impede consideration of how these complicated measures interact.

The limited time for consultation is particularly concerning in regards to the third tranche. This tranche includes complicated measures involving limiting non-concessional contributions based on if a superannuation balance is close to or over the general Transfer Balance Cap. Unlike many of the other measures, this was not announced in the 2016 Budget, but is a much more recent change and also includes a substantial reduction in the non-concessional contributions cap.

I am calling for further time to be allowed for consultation on these measures. The changes, if legislated, could impact the superannuation system and retirement savings for decades to come and should not be rushed.

2.0 Changes are overly complicated

Some of the measures contained in the Bill are overly complicated, in particular those dealing with the Transfer Balance Cap – including proportional indexation and issues with linking non-concessional contributions to the general Transfer Balance Cap.

2.1 Bring forward rules

The changes to the non-concessional contributions cap are particularly complicated in regards to the provisions dealing with people who are near the, initial, $1.6 million cap or who have triggered the bring forward rules.

I recommend that where the bring forward rules have already been triggered that the existing rules continue to apply until the end of that bring forward period.

Some super funds, in particular SMSFs, will have issues in accurately determining the balance of a member in a timely manner. This could be an issue for people considering using the bring forward provisions in the future. Small misestimations of balances, for instance between $1,399,999 and $1,400,001, can mean a $100,000 difference in the amount of non-concessional contributions that can be made in a single year.

This issue was recognised in regards to the Transfer Balance Cap, with transitional relief provided (see 3.0). However no such measure is included for the new non-concessional contribution cap rules. I recommend that relief be provided for, relativity, small and unintentional excesses of the limit on non-concessional contributions linked to the general Transfer Balance Cap.

These issues are discussed further in Appendix 3.

2.2 Proportional indexation

The proposed proportional indexation of the Transfer Balance Cap is also overly complicated. Going forward, as some people use portions of their Transfer Balance Cap and proportional indexation is applied, the amount of the Transfer Balance Cap will vary from individual to individual. The Transfer Balance Cap could remain a relevant figure for decades to come, by which time original records needed to recalculate the Cap – including transaction amounts, dates and details – would likely no longer be kept.

If proportional indexation is to apply to the Transfer Balance Cap then a reporting system should be put in place. Given the ATO will need to collect detailed information about transactions in order to administer the Transfer Balance Cap, this information should also be made available to taxpayers. The Low Rate Cap could provide an example of how this could be implemented. Though information available to individuals on their Transfer Balance Cap should include all details reported to the ATO, not just the final calculated figure.

This issue is discussed further in Appendix 2.

3.0 Welcome extension of time for Transfer Balance Cap transitional relief

I welcome the extended time period for transitional relief to apply for limited breaches of the Transfer Balance Cap on 1 July 2017.

The draft legislation (explanatory materials 1.266 – 1.268) only allowed 60 days for breaches of the Transfer Balance Cap as at 1 July 2017 of less than $100,000 to be rectified before giving rise to notional earnings or an excess transfer balance tax liability. This would have caused issues, in particular for SMSFs, which may not have been able to accurately determine a member balance within this time frame. The first reading version of the Bill extends this time period to 6 months (explanatory memorandum 3.315 – 3.317). Though it should be noted that some SMSFs will not have financial accounts, and so member balances, prepared until the 2016/17 tax return is due to be lodged – which for some will be around 11 months after 1 July 2017.

4.0 Indexing Low Income Superannuation Tax Offset to increases in Superannuation Guarantee rate

The Low Income Superannuation Tax Offset (LISTO) should be increased and indexed so that it keeps pace with increases to the Superannuation Guarantee rate.

When the Low Income Superannuation Contribution (LISC) was introduced, which is effectively replaced by the LISTO, it offset the full amount of contributions tax a low income earner would incur on their Superannuation Guarantee (SG) contributions ($37,000 x 9.0% = $3,330, $3,330 x 15% = $499.50). However allowance was not made for increases in the SG rate, meaning over time the LISC/LISTO doesn’t offset the full amount of contributions tax for low income earners. This should be rectified as part of the introduction of the LISTO.

This issue is discussed further in Appendix 1.

This is a submission to the Senate Inquiry into Superannuation (Excess Transfer Balance Tax) Bill 2016 [Provisions] and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [Provisions] by SolePurposeTest writer Luke Smith, it has been published here with permission, he retains all copyright.

Want to be kept up-to-date with SMSF and Superannuation changes, why not subscribe to our Newsletter?

This article, as with all content on this site, is for informational purposes only, and is not legal, financial, tax or other advice. Please read our Terms and Conditions of Use.

 

The government shouldn’t use super to help low-income savers

Compulsory superannuation payments help many middle-income earners to save more for retirement, but super is simply the wrong tool to provide an adequate support for low-income earners. Our analysis shows top-up measures targeted at helping this group save for retirement are poorly targeted and an expensive way to do so.

Australia’s superannuation lobby wants the government to define in law that the purpose of Australia’s A$2 trillion super system is to provide an adequate retirement income for all Australians. The government disagrees: it confirmed instead that the purpose of super is to supplement or substitute for the Age Pension.

The government is right: super can’t do everything. Income from the superannuation of low-income earners will inevitably be small relative to the value of the Age Pension. The government boost to super aimed at low income earners is not tightly targeted. And fees will eat up a material portion of government support provided through superannuation.

With the Age Pension and Rent Assistance, government already has the right tools for assisting lower income Australians.

Government provides two super top-ups for low income earners

The Low Income Superannuation Contribution (LISC), introduced by the Labor government in 2013, puts extra money in the accounts of low-income earners who make pre-tax super contributions. Under the LISC, those earning less than A$37,000 receive a government co-contribution of 15% of their pre-tax super contributions, up to a maximum of A$500 a year.

The Abbott government was set to abolish the LISC, but the Turnbull government now plans to retain it, renaming it the Low Income Superannuation Tax Offset (LISTO), at a budgetary cost of A$800 million a year.

The super co-contribution, introduced by the former Howard government in 2003, puts extra money in the accounts of low-incomes earners who make post-tax super contributions. It boosts voluntary super contributions made by low-income earners out of their post-tax income by up to A$500 a year, at a budgetary cost of A$160 million a year.

Super can’t help many low income earners

Superannuation is a contributory system: you only get out what you put in. And low-income earners don’t put much in.

Their wages, and resulting super guarantee contributions, are small and their means to make large voluntary contributions are even smaller. Their super nest egg will inevitably be small compared to Australia’s relatively generous Age Pension.

For example, a person who works full time at the minimum wage for their entire working life and contributes 9.5% of their income to super would accumulate super of about A$153,000 in today’s money (wage deflated), making standard assumptions about returns and fees. If the balance were drawn down at the minimum rates, this would provide a retirement income of about A$6,500 a year in today’s money.

By contrast, an Age Pension provides a single person with A$22,800 a year. For someone who worked part time on the minimum wage for some or all of their working life, super would be even less, but the Age Pension would be pretty much the same.

Top-ups are not tightly targeted to those that need them

The LISC and the super co-contribution aim to top up the super and thus the retirement incomes of those with low incomes. But our research shows about a quarter of the government’s support leaks out to support the top half of households.

Whereas eligibility for the pension is based on the income and assets of the whole household, including those of a spouse, eligibility for superannuation top ups depends only on the income of the individual making contributions. That means the top ups also benefit low-income earners in high-income households. A far better way to help low-income earners is to increase income support payments such as the Age Pension.

Super top ups provide some help to households in the second to fourth deciles of taxpayers. But they do very little for the bottom 10% of those who file a tax return.

These households, many of which earn little if any income, only receive about 7% of the benefits of top ups. A further set of households file no tax returns – typically because welfare benefits provide most of their income. Very few of them receive any material super top up.

Super fees erode super top ups

Super fees will erode a sizeable share of the funds in the super accounts of low-income households, as a result of super top ups. Our research shows that super fees levied on most workers receiving the LISC erode between 20 and 25% of the value of the extra funds at retirement. This finding is consistent with previous Grattan work on super fees.

But super fees do not usually erode super top ups as much as they erode contributions to super in general. Fees eat up a higher proportion of the super savings of people with low balances because most fees have a fixed component that’s the same whatever the account balance. In effect the personal super contributions of low-income earners absorb that fixed component, which is typically the same whether or not government tops up the account.

However for those with very low super savings and sporadic employment, fixed fees can erode the value of their super top ups. That’s because at some point in their lives, their super balances can drop close enough to zero and fixed administration fees eat into the value generated by the top up.

Many Australians face low incomes and irregular work. They may not be able to contribute enough to their super to make up for fixed fees. Lucy Nicholson/Reuters

Some top up is still needed for low income earners

Superannuation compels people to lock up some of their earnings as savings until retirement. High-income earners are compensated for this delayed access because their contributions are only taxed at 15%, rather than their marginal rate of personal income tax.

Without the LISC, which reduces the tax rate on their compulsory super contributions to zero, those earning between A$20,542 and A$37,000 would receive relatively little compensation for locking up their money in superannuation. The 15% tax on contributions would be only slightly less than their 19% marginal tax rate.

And for those earning less than A$20,542, the absence of a LISC would take them backwards when they made super contributions taxed at 15% rather than keeping the money in their pocket tax free.

Reflecting these concerns, the LISC, reborn as LISTO, appears crucial to gaining support in the Senate from Labor or the Greens for reforms to super tax breaks. Continuing the offset is a reasonable price to pay to unwind billions of dollars in unnecessary super tax breaks.

Better ways to provide adequate retirement incomes for low-income earners

However super top ups should not be expanded. It is too hard to target them tightly at those most in need, and super fees can eat up their value.

Instead, a targeted boost to the Age Pension would do far more to ensure all Australians have an adequate retirement. But there is an even better way to improve the retirement incomes of those most in need.

As previous Grattan research shows, retirees who do not own their own homes are the group at most risk of being poor in retirement. A A$500 a year boost to rent assistance for eligible seniors would be the most efficient way to boost retirement incomes of the lowest paid, at a cost of A$200 million a year. Only 2% of it would flow to the top half of households, with net wealth of more than A$500,000.

By contrast, a wholesale A$500 boost to all Age Pension recipients would cost A$1.3 billion, with half the benefit going to households with net wealth of more than A$500,000, mainly because the home is exempt from the Age Pension means test.

In defining an objective for Australia’s superannuation system, the government is right that super is not a universal pocket knife. Super top ups are a costly way to ensure that every Australian enjoys an adequate retirement.

The ConversationWritten by John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute, and William Young, Associate, Grattan InstituteThis article was originally published on The Conversation. Read the original article.

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This article, as with all content on this site, is for informational purposes only, and is not legal, financial, tax or other advice. Please read our Terms and Conditions of Use.

Submission: superannuation reform package – tranche three

Thank you for the opportunity to make a submission in relation to the third tranche of superannuation reform package draft legislation. This submission will deal with two main issues: the insufficient time allowed for consultation and the overly complicated nature of the changes.

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

Insufficient time for consultation

More time should be allowed for consultation on the changes to the non-concessional contributions cap due to the recent announcement of the new measures, the substantial reduction in the contribution cap and the complicated nature of the changes – both separately and when combined with changes in the rest of the legislation.

I note that only one week has been allowed for public consultation on this draft legislation, which was released late on a Friday afternoon. This reflects poorly on the consideration given to public views on draft legislation and should be avoided in the future.

More time should be allowed for consultation on these measures, particularly given the substantial changes from what was announced in the 2016 Budget. Also, the new measures can have complex interactions with other changes, in particular the Transfer Balance Cap.

Whereas there has been many months of debate on the changes announced in the 2016 Budget, though not on the exact detail of the measures, the new non-concessional cap changes were only announced just over a month ago. They contain a substantial reduction in the non-concessional contributions cap, complicated changes to the bring-forward provisions and a new restriction on contributions – linking it to the Transfer Balance Cap threshold. More time should be allowed for consideration of such changes from a policy and legislative prospective.

I call on the Government to extend the amount of time allowed for consultation on the changes contained in this draft legislation before it is put before the Parliament

Changes are overly complicated

In my view the changes limiting non-concessional contributions based on a particular superannuation balance, initially $1.6 million, is overly complicated. This is especially the case for provisions dealing with people who are near the cap or have triggered the bring forward rules.

Some of this complication comes from the transition to the lower non-concessional cap for people who have already triggered the bring forward rules. I suggest that where the bring forward has already been triggered contributions should be allowed to continue as expected under the existing rules.

The rules, and resulting timing issues, where people are near or over the Transfer Balance Cap threshold are also complicated. The draft legislation proposes that non-concessional contributions be prohibited where superannuation balances are over the, initially, $1.6 million balance threshold. However there are timing issues in implementing this aspect of the measure. Super fund members, in particular SMSF members, may not be able to get accurate calculations of their superannuation balances until some time after the end of the financial year. This is particularly the case where information to calculate tax amounts are not available for several months after the end of the financial year. This issue was recognised in relation to the Transfer Balance Cap, to an extent, in the second tranche of draft legislation, with a 60 day period allowed to correct excesses. The Explanatory Materials to the draft Bill says:

The rationale for this relief is that it will be difficult for individuals with existing superannuation income streams to predict their retirement phase balances as at 30 June and ensure they are not in breach of their $1.6 million transfer balance cap. Small breaches of less than $100,000 are likely to be unintentional.

However no such provision is included for the non-concessional contributions cap.

The importance the new non-concessional cap rules place on accurate and timely superannuation balance figures can also be an issue for people considering using the bring forward provisions in the future. Small misestimations of balances, for instance between $1,399,999 and $1,400,001 can mean a $100,000 difference in the amount of non-concessional contributions that can be made in a single year.

If these complicated measures are to remain then I recommend that relief provisions be included in the legislation so that people aren’t penalised for inadvertently exceeding the new caps.

This is a submission to the Treasury superannuation reform package – tranche three consultation process by SolePurposeTest writer Luke Smith, it has been published here with permission, he retains all copyright.

Want to be kept up-to-date with SMSF and Superannuation changes, why not subscribe to our Newsletter?

This article, as with all content on this site, is for informational purposes only, and is not legal, financial, tax or other advice. Please read our Terms and Conditions of Use.