$1.6m pension gap: what’s all the fuss about?

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$1.6m pension gap: what’s all the fuss about? Photo: Shutterstock
$1.6m pension gap: what’s all the fuss about? Photo: Shutterstock

It is generally acknowledged that Australia has a structural budget deficit – the country spends more than it receives. To reduce or eliminate the deficit means a combination of greater collections, lower spending and/or spending with more efficiency and ultimately less waste. What a dream!

Whenever tax and spending reforms are suggested by the incumbent Government, there are always a variety of affected interest groups who are vocal in their opposition to any change from the status quo.

Unfortunately, change, although unwelcomed by some, is often essential for the good of the country and generations to come.

As stated by Gerry Harvey (of Harvey Norman fame), the changes to super affecting the wealthiest members of Australian society should have come as no surprise. “A lot of people have had a wonderful run on that superannuation deal. They might complain and not be happy, but at the end of the day they can probably understand it. I think it was always going to change, it’s been in a long time.”

A very wealthy and successful individual, Gerry Harvey could no doubt see that the superannuation system is providing a tax-free haven and shelter far beyond the intentions of the original system design.

The superannuation system was designed to supplement or replace the age pension safety net for provision of retirement funding.

While not denying the legality of many super structures holding significant, if not at times excessive, stores of wealth, (many times the $1.6 million figure causing a stir), their huge tax-free or concessionally-taxed distributions and earnings to a small number of multi-millionaires are luxuries that Australia can no longer afford. Furthermore, leaving the status quo in place will come at the expense of the living standards and retirement prospects of the many generations of young Australians to come.

To view the flip side, net tax paying households in Australia are diminishing, and those paying the taxes are doing a good deal of the heavy lifting. There is no disputing the fact that many of these heavy lifters are high income earners who have always contributed strongly to Australia’s income tax receipts. In my childhood, high income earners had a marginal tax rate of 60 per cent and share dividends were double taxed! Governments want and need to encourage enterprise, innovation and business success which should mean more high income earners and ultimately more tax collected.

Sometimes tax-friendly structures, formed with a particular intention in mind, can be legally yet somewhat over-enthusiastically adopted in booming economic periods. Times and economic climates change and fine-tuning limits need to be put in place to bring the system back into the balance for which it was intended.

In the Australian Tax Office (ATO) overview of SMSF (self-managed superannuation fund) statistics for 2013-14, 29 per cent of the $2 trillion in Australia’s total superannuation assets is held in SMSFs. For the first time, in 2014, the average assets of Australian SMSFs grew to more than $1 million. In 2015 there were one million members of SMSFs and as at the September 2015 quarter, the total of SMSF assets amounted to $576 billion.

The ATO statistics report indicates that at 2014, 92.3 per cent of these funds had only one or two members while the remaining 7.7 per cent had three or four members. By 2014, 53 per cent of those members were in accumulation phase and 47 per cent in pension phase. Pre-budget rules placed no cap on the funds held in pension phase.

People who are over the age of 60 draw all money out of the super accumulation or pension phase tax-free. Nothing has changed in regard to this rule with the Budget announcements. Under current rules the earnings, including capital gains on all assets in pension phase, are tax-exempt.

The 2016 May Budget proposed that from 1 July, 2017, the amount held in pension phase, where future earnings are tax-free, will be restricted to $1.6 million for each individual account holder.

In other words, if you have $2 million in your pension account at 1 July, 2017, you must decide whether to move $400,000 back into accumulation phase, where earnings will be concessionally-taxed (usually between 10 and 15 per cent depending on the assets held), or if eligible you may cash the excess out of the super vehicle altogether.

Outside of super, investment earnings, such as bank interest, are taxed at the taxpayer’s marginal tax rate.

To put this in perspective, a wealthy couple could still hold $3.2 million in pension accounts and if over 60 receive all drawings tax-free. If they hold assets outside of the super vehicle and they are over 65, then their earnings will be taxable, but the seniors and pensions tax offset (SAPTO) will see the couple receive nearly $58,000 of combined income tax-free. (At a three per cent interest rate return, this means the couple could have nearly $2 million on deposit prior to having to pay tax.)

I am sure many working families would love to receive this SAPTO benefit allowing some tax-free opportunity – if only they were of qualifying age.
Taxes on households, consumers and businesses are essential to raise revenue to fund Government spending and the administration of their health, education, welfare, infrastructure, security and defence portfolios.

Unfortunately, you cannot fix the structural deficit without tax and spending reform.

Our Government expenditure as a proportion of Gross Domestic Profit is currently higher than the long-term average, with no booms in sight to reverse the trend.

Our demographics are such that our health and welfare budgets are ballooning to the point where Australian lifestyle values for present and future generations will be threatened. Many European countries, such as Greece and Spain, provide prime examples of why the Government needs to make some tough decisions.

Analysis by actuarial firm Rice Warner shows that despite the much maligned measure to limit the amount of money that can be transferred to a tax-free private pension, a wealthy couple could retire with $7 million in assets, excluding the family home, and pay just $18,600 in tax. According to the Australian Financial Review, this is $500 less than a worker on an annual income of $80,000 would pay in tax!

Budget proposals announced in relation to the $1.6 million pension phase cap can hardly be classed as austerity measures. They may be nonetheless necessary to safeguard Australia’s lifestyle and values for generations to come.

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