Sharper targeting of super tax concessions

While there has been much talk about the tax concessionality of superannuation, more will be achieved by ensuring they are better targeted. This is part two of a roundtable.

Mike Taylor, editor, Super Review: Well at the same time as the Government’s been talking about a purpose for superannuation, they’ve also - post the change in Prime Ministers - been talking about everything being back on the table in terms of the tax debate and that would include the tax concessionality of superannuation and contribution caps and everything else. Is that a debate that is helpful at this point? I mean I believe personally that it is, but are the tax settings right, what can be changed? I’ll start with you Andrew. 

Andrew Boal, managing director, Willis Towers Watson: I think that it is a worthwhile debate having. I think it’s making sure that there’s confidence in the system and that even if it’s not the everyday Australians talking about whether the system is equitable or not, enough of us have concerns about the equity of the system to make sure we do get those settings right. 

I don’t think you have to do too much to get it right. So looking at the contribution side of things, there’s just one - well, there’s two glaring areas for my liking. One is at the low end. So the low end superannuation, the Low Income Superannuation Contribution (LISC), needs to stay to make sure that the low income earners have that tax concession. 

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So they’re actually penalised by the tax system at the moment, or when the LISC gets removed, if it does. The other side is the little anomaly between $180,000 a year and $300,000 a year, where for some reason they get a 30 per cent tax break compared to above $300,000 and below it’s lower. So if threshold of $300,000 was reduced to around $200,000, so $180,000 plus an allowance of $20,000 for super - that would then basically mean that everybody got a tax concession for their superannuation contributions of between 15 and 22 per cent.  

 That is close enough to equitable. The Henry proposals of getting a rebate of 15 per cent for everybody is another way of doing it. But I think that requires dismantling the whole current system and starting again and I think that’s just too disruptive. If you could just tinker with what we’ve got at the moment, just to even it up a little bit more that’d be helpful. 

MT: Glen? 

Glen McCrea, chief policy officer, Association of Superannuation Funds of Australia: Yeah look I think debate’s important and I think if you shy away from debate I think that’s where we get into problem, and I think tax reform is an important debate, but it’s tax reform in its entirety, and I think you don’t just look at one element, I think you need to look at the whole tax system. 

ASFA has been quite upfront. We think in terms of equity there’s something to be said with having effectively a $2.5 million limit on the system and we think there are people who have very high balances who don’t necessarily need any additional tax concessions. At the same time we think things like the non-concessional caps, we think you could set basically a lifetime cap of $1 million and on the concessional side the idea of a lifetime cap of around $1 million is something we think is appealing for the system. 

I think the interesting thing about the debate is there’s been a lot of focus on contributions and I think what we need to start doing now is [asking] what does that mean for adequacy in retirement? Because ultimately if the purpose of the system is to be concerned about how people live in retirement one of my concerns is that if you effectively reduce the amount going into super - and I can’t remember whether it’s Towers Watson or Rice Warner, but there’s the number where it’s 30 per cent is contributions and 70 per cent is earnings. So the less money going into the system means less money at the end, which is going to have a consequence for people’s retirement outcomes, and that is a concern because you know there’s a risk that it’s going to have a big impact on the budget in 10, 20 years’ time. 

But also in terms of people’s wellbeing, and that’s what as a society I think we need to be concerned about as well. I think the other issue that we are looking is broken work patterns. You still have a scenario where women are typically retiring at $100,000, compared to $200,000 for men. So we need to do something more there and I think there’s some things we could maybe even do with the caps in terms of trying to make them more targeted as well. 

 I think it’s a worthwhile debate, but I think ultimately - and going back to your first question, we need to think about what is the objective and purpose of the system, to make sure we get the settings right, not just now but for the next 10, 15, 20 years. 

MT: Jocelyn? 

Jocelyn Furlan, Furlan Consulting: I agree with all of that, but I also think that it would be useful for the tax debate to include taxing super post retirement. I think that that’s a really big area that in a way exacerbates the gulf between people who are going to suffer if the LISC gets repealed, (and I completely agree with Andrew that must not happen), and the people at totally the other end of the spectrum who the system currently says you get to 60, here’s your money, knock yourself out it’s all tax free. I think any debate must include debate about that, and particularly too in support of what Glen was saying, I think that it’s much better to tax afterwards than on the way in because of the effect of compound interest. 

 So if you have the capacity to build up more, have more flexibility and more choices, but there is a limit to - there are arrangements to - because our income is taxed when we’re working. If we actually want to kind of really have a sensible income in retirement system, there’s a place for taxing that too.  

AB: But to put those two sorts of points together, and looking at the post-retirement period, there’s a reasonable argument to put forward that superannuation earnings, investment earnings, should be taxed at 15 per cent the whole time. But for the post-retirement, if you go into products that meet certain criteria - that the earnings can be tax free but you have to actually rollover into that product. It’s not just a continuation of your current environment. You have to, at a certain age - say the preservation age or the pension age at 67 - you have to - if you wanted to do that, you have to crystallise all of your capital gains earned in the 15 per cent environment before going into the tax free environment, and then you put a limit of some number, whether it’s $2.5 million or whatever is politically acceptable, on what can go into the tax free environment. Anything above that can stay where it is and still be taxed at 15 per cent, but there’s a limit on how much will get into a tax free environment post retirement. 

JF: That’s a really good point, because picking up one of the sessions yesterday, you could use a conversation about tax post retirement as a nudge, and say we want to encourage people to take incomes rather than lump sums. 

Russell Mason, partner, Deloitte: We’ve got to be careful we don’t go overboard. Andrew talked about what’s feasible and what can be changed. We’re a believer in the rebate system, so that you have a 15 or 20 per cent rebate on contributions. That gives you equity between low and high income earners. So we’ve got tax on contributions, tax on earnings. To then tax the post retirement phase I think would be probably controversial. Also [with respect to] the lump sum limit. You’ve got limits on how much goes in. Do we need effectively two reasonable benefit limits, one on how much goes in, and how much people can take at the end. 

If people have legitimately accrued a large balance, and some people have, then why should they be penalised for that? So today, someone entering the workforce, and for most of us here the limit on contributions will not allow us to accrue those mega balances, that just won’t happen. But if someone has in the past accrued it, should they be penalised? So we take... 

JF: We have a progressive tax system for income. If you get to - if you work in a job that pays really well you cop the top tax rate. I’m not seeing why we have a difference between that and what happens post retirement, and we’re talking a very small number of Australians who will be affected. 

AB: Under the current system, it is still possible for - in 20 years, to put in $180,000 a year after tax... 

RM: At this stage, yes. 

AB: Right now. So at the moment there aren’t limits really that stop people accruing $7, $8, $9, $10 million in superannuation and having that completely tax free after age 65. So is that the system - is that how we think the system was designed, to get some - you know, more Australians reliant on the full Age Pension? 

RM: I genuinely feel if there’s going to be a lifetime contribution cap, and again I think that’s good, and we’ve come up with a number of $580,000 as a start of the debate and nothing more - that will produce the comfortable retirement standard to the 75th percentile of longevity. It could be a greater number, but there’s a start. I cannot believe that the Government will not touch non-concessional contributions. So to limit lifetime to some number, be it $580, $680, $1 million as proposed and then leave the non-concessional, I think the two will end up going hand in hand. 

AB: Well we could almost just put one limit, concessional, non-concessional, this is the most you can get into superannuation. 

JF: In the meantime, we’ve got a baby boomer bubble that could make a big difference to our - the bottom line of the budget for people who are living on or below the poverty line. 

Ange Calvitto, Northern Trust: Is it as simple as a grandfather system, you know grandfathering and saying okay policy change, but only impacting people that are at this age now, and because sometimes we’re thinking about the problem we have today, and we do, and you know can they take lump sums, what’s happening, taking a lump sum, and having the holiday around Australia, et cetera, spending the money and then you know drawing on the age pension. Yes, that’s an issue, and how do we manage and tinker with that. But take a more long-term view on this and say for the system to really be sustainable and deliver for the future generations, policy change, but effective for these individuals only. 

[It’s] still a political challenging matter for whatever party’s in power you’re going to need to engage. 

AB: I agree with that and I think back to one of your earlier points about evidence based. I think let’s look at some of the numbers about who is making large contributions and when, and I suspect that mostly it will be people over age 50. So if that’s the case, anyone who is under aged 50 hasn’t been yet affected by what has been proposed, so changing the rules for them probably isn’t as big a deal. If someone has been doing it for six or seven years and relying on a system, well let’s let them get through unchanged. I guess that in part also goes to one of the issues around adequacy is that the SG only got to nine per cent 13 years ago, and so there’s still a generation of people who haven’t had a full working life of the SG contributions. So let’s give them a chance to catch up and get to a certain point before we change the rules possibly. 

GM: I think it’s a real balancing act, and reform is never easy, and I always use a story about the GST. 1975 it was proposed and it didn’t happen til 2000 because [of] so many twists and turns. 

But one of the issues here is intergenerational equity. Obviously there are younger people who are coming into the system, and we want to develop confidence in the system. So I think we need to be conscious that any reforms maintains that confidence in the system. I think we need to talk the benefits of the system as well in the current environment. 

 But it’s one of the biggest pension systems in the world, so but we want to keep this system. It’s not broken. Can it be improved? Yes. But we want to see future generations benefiting from it, and I think we just need to be conscious, whatever the Government does that we’re confident that it’s a sort of 20, 30 year horizon, not just a short term political fix. 

AB: One of the things that the system gets rated down for is around the retirement income product area, and the lump sum mentality. But having said that there’s a lot of research starting to emerge now which supports what we thought anecdotally for some time, that if people take the lump sum out they often will stick it in a term deposit and just draw on the income and just draw it down very furtively anyway. So they’re actually using it as an income stream, they just withdraw it from superannuation and put it somewhere else to do it. So I think we get rated down unfairly on that front. 

AC: Yeah I don’t think there’s enough analysis really in terms of what’s happening, on your point Andrew, once it’s withdrawn. There’s this debate about oh it’s just being spent on a family holiday and buying a new car and paying off the mortgage, and I don’t know that that’s necessarily the case, or it’s in the high percentage numbers. But that makes news, so that’s what’s been talked about. I personally haven’t seen a lot of analysis and statistics on what’s actually happening when it comes out of super. 

JF: Paying off the mortgage is not necessarily a bad thing, and it actually does improve your income. 

AB: That does introduce another very difficult conversation, but there’s a lot of equity and asset tied up in the family home. Now at the moment we have a system that makes it difficult for people to access some of that equity if they want to, and you know if they take the money out of the home and then stick it somewhere else well, all of a sudden, that becomes part of the means-tested environment. So there are people living well below a reasonable standard of living in retirement sitting on a lot of equity. Their children don’t need that bequeathed to them, and yet mum and dad aren’t living a life that they could. 

JF: The settings don’t support being sensible around that because of the way means testing works, yeah. 

Part one: Giving super a purpose

Part three: Super millionaires - more fiction than fact

Part four: Governance and choice - distractions or priorities