SMSF members perhaps may have some breathing space before being confronted with the changes to retirement income rules. The rumbles in the industry and in the government suggest that, at the very least, there will be more debate before the proposals go before parliament.
That would be a good thing – both for SMSF members and the superannuation industry. The government needs to clarify its aims and avoid rushing reforms. The side benefit for those potentially affected by the proposals is that the rules may be clarified, even modified, though not necessarily changed.
That doesn’t mean the government caving into demands to change the most controversial aspect – the $500,000 lifetime limit on non-concessional super contributions – but the government is playing with fire by back-dating the measure nine years.
This is, as the founder of SuperRatings, Jeff Bresnahan, says, the first ever retrospective legislative change for superannuation.
Arguments from the government that it isn’t retrospective are nonsense – and dangerous. Retrospectivity is an absolute. It’s like pregnancy: you can’t be just a little bit pregnant (or retrospective).
It’s dangerous because, if enacted, it would mean that the trust of super fund members over a quarter of a century would be shattered. Super has survived despite lots of political tinkering but, once retrospectivity is introduced, that unspoken trust is broken. While the government’s desire to repair the budget deficit is understandable – and the lifetime cap may be a reasonable approach – the fair approach would be to start it from 2016.
While such a change might look like the government is backing down, it would avoid having to draft rules to cover all the potential “hard cases”. Clear legislation, which doesn’t create potential loopholes should take precedence over budget repair.
The government has had such advice from Jeffrey Carmichael, former chairman of the Australian Prudential Regulation Authority and a member of the 1997 Wallis inquiry into the financial system. In an article (in the AFR 28/7) he said the proposals appear to focus on raising revenue and reducing tax shelters for the wealthy rather than the primary objective of establishing a policy for superannuation and retirement income.
For SMSF fund members, the debate will be critical to how much they can legitimately accumulate, tax-free, within their super savings. The cap of $1.6 million per member on super accounts may not be altered but, if fund trustees ensure contributions are spread evenly over two members, there should be scope to produce enough retirement income.
SuperRatings’ Bresnahan points out that a couple can have more than $3 million in super which produces tax-free income. Assuming 2.75% earnings on non-super money, they can have another $2 million-plus without paying tax . (The government has not changed the $57,948 cut-off for tax-free earnings by a couple from, say, investments.)
This would leave the $25,000 a year limit on concessional contributions as a final sticking point. If the $1.6 million ultimate cap continues and the $500,000 limit on non-concessional contributions only applies prospectively from 2016, the government should allow those approaching retirement to top up the accounts without a restrictive annual limit.
The arguments from industry figures querying the government’s approach should be a warning to Canberra of the dangers in its current plans. Reforms of retirement income policy need to ensure that the system still operates efficiently – that is, it allows people to provide for their retirement – while putting limits on how the system might be abused by some wealthy savers.
The government should separate its desire for what is, initially, a modest budget repair, from retirement income policy reform.
SuperRatings’ Bresnahan says retrospectivity in super can only breed a lack of confidence. “Middle class Australians, whilst wary of super, at least continue to support it. However, if any Government starts retrospectively taking away benefits, the industry and our Government’s desire for Australians to self-fund retirement, could be severely hampered.”
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