Are super changes fair?

As we plunge into Election 2016 campaigning, there are two competing proposals on the table concerning superannuation.

On the conservative side, one of the most significant changes to super in Treasurer Scott Morrison’s first budget affects the amount of capital you can keep in a tax-free super structure.

The policy of the other major party, the Labor Party, is to tax super over $75,000.

So are either, both, or neither of these policies fair?

First up, let’s consider the Turnbull Government’s Budget 2016 change, as this is likely to become law, assuming the return of a Coalition Government with a Senate majority. A big assumption perhaps, but a real possibility nonetheless.

This policy means that retirement savings accounts would be capped at $1.6 million and amounts over this cap can be held in superannuation accumulation accounts and taxed at 15 per cent or invested by other means. Additionally, a $500,000 lifetime cap on non-concessional contributions was put in place on 3 May 2016 and backdated to 2007.

The sting in the tail, of course, is the apparent retrospectivity of this proposed legislation. Whilst ministers Morrison and Bishop have declared that it is not retrospective – “It’s absolutely not retrospective. It’s about the tax rate on future earnings” Ms Bishop stated yesterday – the fact that this applies to savings accumulated over a nine-year period really does look, smell and even quack like retrospectivity.

This is the view of a former conservative Deputy PM Mark Vaille, who noted,

“What is happening is that year in and year out there is (sic) always changes to superannuation … (it) has become an issue which is tampered with too much and people can’t keep up with the changes”.

The alternative policy offered by the Labor Party would limit tax-free earnings for retirees to $75,000 a year, taxing earnings above this amount at 15 per cent.

Critics of Labor’s plan have noted that such a limit should be indexed for inflation or the (real) amount of tax would increase over time and fluctuating returns would, over the longer period, mean taxpayers are worse off. So if the actuaries are to be believed, the Labor Party will tax retirees at a higher rate over the longer term. The actuarial calculations, however, are based upon a $2.5 million balance with returns which range between -5.4 per cent to +17.8 per cent (a 6.6 per cent mean). Current retirees will perhaps gasp in wonder at the thought of a 6.6 per cent return – most haven’t enjoyed such a rate for a long while.

My take on this? A cap is necessary and a $2 million cap is much fairer than a $1.6 million one. But grandfathering of such legislation is essential. Retrospective changes are simply unfair to those retirees, rich or poor, who have saved for nearly a decade (2007 – 2016) under one system, only to have the rug pulled out from beneath their feet when back-dated changes are brought in. The arguments about retrospectivity are fierce – for instance Fairfax economics editor Peter Martin states clearly that the tax starts in 2017 so this tax cannot be retrospective. But this position seems to somewhat obtusely miss the point about retirement planning. It is not something that is – or should be – adjusted on a Federal Budget to Federal Budget basis. Most of us will live 25, 30 or more years in retirement. So planning our income for these decades requires consistency of legislative intent and stability of rules. As one recent YourLifeChoices survey respondent noted, “I would be fine if only they would stop shifting the goal posts”.

The Labor policy of limiting earnings is also defensible but, again, perhaps $100,000 is a better limit than $75,000, which is based on five per cent earnings on an assumed $1.5 million balance. Just as the Coalition’s cap could move from $1.6 to $2 million, so could the Labor assumption move to five per cent of $2 million, i.e. $100,000, as many retirees will need to fund themselves for 25-plus years. And if they eventually require aged care, our new ‘user pays’ system is far from inexpensive.

And this brings us back to the crux of the matter.

As we have noted before, the risk of retirement income funding has been shifted to the individual. This is now your problem. So those who have obeyed the ‘rules’ thus far need some latitude when it comes to savings and earnings caps – and an assurance that the goal posts will never again be retrospectively shifted. The grandfathering of any such legislation is a basic right, not a luxury now we are expected to more fully fund our own retirements.

What do you think? Are the proposed changes to the superannuation tax retrospective or prospective?

Written by Kaye Fallick

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