The only certainties in 2016 – polls and taxes

Election years always represent a challenging period for superannuation funds and, as Mike Taylor reports, the looming poll combined with a rolling tax debate has made 2016 a particularly problematic year
for funds.

With 2016 being a Federal Election year superannuation policy change can be split into two parts – that which the Government will seek to implement before polling day, and that which it knows must await a more amenable parliament. 

Thus, while the Treasurer, Scott Morrison and his Assistant Treasurer, Kelly O’Dwyer, have used virtually every media interview since the beginning of 2016 to reference the need for changes to fund governance and the default funds regime, they may well take a back seat to superannuation tax changes in the May Budget. 

Why? Because, notwithstanding some of the findings of the Trade Union Royal Commission, on the available evidence, the Australian Labor Party, the Greens and a number of independents will combine in the Senate to ensure the continued defeat of changes to fund governance and the default fund regime. 

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However, a thorough reading of statements made by the Treasurer and Assistant Treasurer since the start of 2016 reveals that there is more on their agenda than the 2015 issues of fund governance and defaults. There are the far more politically potent issue of more equitably targeting superannuation tax concessions. 

To be fair, many of the comments made by Morrison were generated by media questioning but the Treasurer made his position on the taxation of superannuation and equity issues very clear. 

In a question clearly reflecting a position posited by Deloitte Access Economics, the Treasurer was asked whether he was attracted to reform of taxing super at the point of entry and at a personal income tax level with a 15 per cent or 20 per cent discount. 

The 15 per cent or 20 per cent proposal owes its origins to a recommendation within the Henry Tax Review and to modelling undertaken by Deloitte around a version of the contributions tax where everyone received the same tax advantage out of a dollar going into super, with a concession of 15 cents in the dollar. 

Morrison acknowledged it as one of the issues which had been raised in the super debate, but said he was looking at superannuation in a broader context than simply tax. 

“I think that’s the first point to make about superannuation. We’ve said we want it to be fit for purpose. This is what the Murray Review said. It said you need to define the purpose of what you’re doing with superannuation in a statute. I thought that was a good point, and we’ve said the purpose of superannuation now and, by definition then any tax incentives that are put into the system to support superannuation, is to ensure that people would be less reliant, or not reliant at all, on a welfare payment, i.e. the pension, in their retirement. “ 

However, Morrison noted the need for the Government to look to the needs of low and middle income earners who, “if they’re not building up their superannuation over time, they’re the ones who are most likely to be drawing down heavily on a welfare payment in the pension in the future”. 

“So our argument on super is we’ve got to ensure the incentives are targeted to address the purpose and are not there as the form of building inheritance pools or tax free inheritance pools to pass on. That’s not what super’s about,” the Treasurer said. 

In short, the Treasurer seemed to signal that the Government was more than prepared to consider adjustments to the superannuation tax regime that directed more benefits to low and middle income earners at the expense of those earning higher incomes with high account balances. Further, he seemed to strongly imply the imposition of increased taxes for those inheriting super balances. 

Deloitte partner, Russell Mason believes that, consistent with Morrison’s public statements, the Government has room to move on the taxation of superannuation in the May Budget. 

He believes that while the Government might struggle to get its changes to superannuation fund governance and the default fund regime through the Senate, it will likely experience little difficulty in securing support for tax changes which are perceived to inject greater equity into the super tax regime. 

“I think changes which alter the superannuation tax treatment of higher income earners is not going to generate a lot of resistance,” Mason said. 

He also believes there is scope for the Government to alter the tax settings with respect to superannuation as an inheritance, in the context of the Treasurer’s comments regarding “tax free inheritance pools”. 

However Mason believes it would be unfair for the Government to tamper with superannuation accumulations which have been legitimately accrued under the current legislative settings – something which might give rise to the need for grandfathering. 

The Financial Services Council (FSC) has campaigned solidly on a number of fronts with respect to superannuation policy and spent much of 2015 strongly arguing the case for changes to superannuation fund governance and the default regime. As the year closed out, the FSC also threw its weight behind calls for the injection of fund choice within enterprise agreements. 

Hardly surprisingly, the FSC has also campaigned strongly on the need for broader tax changes including with respect to company. 

FSC director of policy, Andrew Bragg acknowledged that the current make-up of the Senate made achieving change to superannuation fund governance and the default funds regime a challenge for the Government, but he believed injecting choice into enterprise agreements was less problematic. 

Like Mason he believes the greater opportunity for the Government lies in making key adjustments to the superannuation tax regime, noting the attraction of some senior members of the Government to a 15 per cent rebate. 

“We, of course, would argue for a 20 per cent rebate,” Bragg said referencing the FSC’s own research published in early January. 

That modelling undertaken within the FSC’s research showed that the rebate would need to be at least 20 per cent and the superannuation guarantee (SG) would need to rise to 12 per cent from the current rate of 9.5 per cent. 

The FSC said this model would “deliver increased savings for middle Australia, those earning up to $80,000, while the better off would be taxed slightly more”. 

“Other models in the current debate, including a 10 per cent or 15 per cent rebate option, leave Australians worse off across every income bracket and remove billions from people’s super savings,” the FSC research analysis said. 

Association of Superannuation Funds of Australia (ASFA) chief executive, Pauline Vamos believes 2016 will prove to be a particularly challenging year for the superannuation industry because of the wide range of policy issues which are in play. 

“It is a big policy conversation,” she said. “We have a range of important issues from tax, governance and disclosure through to the completion of issues such as investment fees, portfolio holdings disclosures and product dashboards.” 

“There is also the question of post-retirement products,” Vamos said. 

She said that a part of the challenge for the industry this year would be dealing with the inter-related nature of many of the policy change issues, particularly as the Government sought to deal with the tax settings. 

Super Review’s conversation with Vamos came just days after the Prime Minister, Malcolm Turnbull had found himself needing to scotch suggestions that the Government was looking at scrapping the timetable for lifting the superannuation guarantee to 12 per cent. 

Like her counterparts in the FSC and the Australian Institute of Superannuation Trustees (AIST), Vamos was relieved that the media speculation did not represent Government policy reality, but she did acknowledge the likelihood of changes to the superannuation tax settings particularly with respect to high income earners. 

However it was in areas such as post retirement product development that the ASFA chief executive said that challenges existed, particularly for not for profit funds. 

Vamos said that while retail funds, by their very nature, generally had experience in product development and manufacture, this was not the case for not for profit funds and would represent a challenge as they sought to deal with liability issues. 

While acknowledging that the Federal Treasurer had pointed to the purpose of superannuation being to relieve pressure on the age pension, Vamos said she believed  that could be regarded as an over-simplification in circumstances where the increasing health costs associated with an ageing population also needed to be taken into account. 

She believes that, taken together, factors such as changed governance arrangements and changes to the tax settings will act as a driver for further consolidation in the industry. 

“But that doesn’t necessarily mean small into big,” Vamos said.