Superannuation

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GUEST OBSERVER
The Productivity Commission has released its draft report setting out criteria for assessing the competitiveness and efficiency of the superannuation system. The final report will be delivered in November this year.
The study, the first stage of a three-stage exercise, is part of the Government’s response to the 2014 Murray Financial System Inquiry. Murray recommended that the Government “introduce a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system.”
This first stage does not assess the superannuation system; it merely sets out criteria for evaluating it. The second stage, to be delivered by mid-2017, will develop alternative models for the competitive process. The third and final stage will review the system. Only then, and only if the government finds there is still significant inefficiency, will it consider introducing one or more of the “models” developed in the second stage.
<h2>What’s at stake?</h2>
The efficiency of the superannuation system makes a big difference to incomes in retirement. Today, the system charges fees totalling about $16 billion, or 1% of GDP. There are too many unwanted accounts, too many funds, and many funds charge fees that are too high. Costs that are too high by even half a percent a year can reduce balances at retirement by over 10%, and many Australians are paying more than that in excess fees. The recent Stronger Super reforms and the Future of Financial Advice reforms have reduced fees somewhat, but billions of dollars in excess cost remain.
<h2>What the Commission proposes</h2>
The challenge in evaluating superannuation is to make sense of the system’s jargon and its maze of products, sales channels, governance structures, and performance metrics. Even people with real financial expertise struggle to assess funds' performance, and many members are inexpert and disengaged. What’s more, some providers and advisers have interests that are not aligned to those of members.
The Commission proposes a rich set of performance measures for this complex system. It begins from the Government’s announced objective for superannuation: “to provide income in retirement to substitute or supplement the Age Pension”, and proposes five supporting goals, including maximising net returns, meeting member needs, providing appropriate insurance at least cost, complementing a stable financial system, and competition that drives efficient outcomes.
It then sets out separate criteria for the competitiveness and efficiency of the superannuation system. Sensibly, it notes that “competition in the superannuation system is not an end in itself, but provides benefits to the community as a whole and members in particular when it promotes efficient outcomes.”
It proposes that the system’s competitiveness be assessed by reviewing such measures as whether members are engaged and informed, whether advisers and sellers are acting in members' interests, whether funds compete on costs and pass on cost savings to members, and whether member outcomes are affected by vertical or horizontal integration.
The criteria it proposes for the system’s efficiency include net returns after fees and tax, the costs of the system, the extent to which the system’s services align to members' needs and preferences (such as risk management), and the extent of unpaid contributions and lost accounts.
These criteria are all sensible, though many will prove much easier to specify than to measure against an ideal or acceptable outcome. As the draft notes, work must begin now to ensure the data is in place when it is needed.
<h2>Three critical additions to ensure the process works</h2>
The Commission needs to build on its draft report in three directions.
First, it should be more explicit about the weighting given to different performance measures. Not all measures are equally important.
Second, it should be clear about what matters to different fund members. The draft notes that default and choice superannuation members have different needs; those needs should be clearly set out in the final report. Many of the 9.5 million Australians with default products are disengaged. Few will engage much until they near retirement, if they ever do. Many do not have financial expertise. That means that risk-adjusted net returns should be given strong weight in evaluating default products.
Lost accounts and unpaid contributions will also be particularly important for this part of the market. For the choice part of the market – currently about 5 million people – returns should remain paramount, but member engagement and advice quality may play a larger role.
Third and most critically, the Commission must strengthen the links between the three stages of its work. The government’s response to the Murray Inquiry and the Commission’s Terms of Reference for the first two stages make it obvious that the three are intended to work closely together. Stage 1 must define criteria that inform the development of competition models in Stage 2, as well as the assessment of those models against today’s model in light of the findings of Stage 3.
But the draft hardly discusses these links. For example, there is no discussion of how the proposed measures will inform Stage 2. And there is no discussion of which measures will help government decide whether to deploy the models designed in Stage 2. Without much tighter links between stages, the whole purpose of the process will be defeated.
At a minimum, the set of measures in Stage 1 must include the performance of funds by governance type (industry, public sector, and for-profit) in different competitive contexts (tender, awards, direct, and advised) and across product types (default and choice, accumulation and post-retirement).
It must also include the performance of tenders for investment management and administration separately. And it must include the implications of those segment outcomes for the whole system. That type of detailed assessment will be vital if the Commission is to assess competitiveness and efficiency and so inform the government’s decision about whether and how to change the competition model for default super.
<h2>Broader lessons?</h2>
The Commission’s process might seem cumbersome, but it could prove a model for a better way of developing policy. Superannuation is not the only sector in which competition seems to be leaving many consumers little better off.
There are at least two opportunities to roll out the multi-stage market assessment model. First, in its response to the Murray Inquiry, the Government has already committed to implement periodic reviews of competition in the broader financial sector.
More generally, last year’s Harper Review recommended that government set up a new body that would have the power to initiate what it called “market studies”. That was one of the few Harper recommendations the Government left hanging, perhaps because it wasn’t convinced a new body was needed.
But if the Commission’s three-stage process can credibly assess both superannuation system outcomes and the policy options to improve them, it could prove a model for further market studies, whether undertaken by the Commission, the ACCC, or some new body.
Jim Minifie is productivity Growth Program Director, Grattan Institute and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/jim-minifie-10230" target="_blank">here</a>.
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jchancellor-FAypfDUnLy

PC sets groundwork for long-awaited look at super competition and efficiency

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GUEST OBSERVER
Australia votes on 2 July 2016 and never before has so much superannuation policy turned on one election. A Liberal victory could mean very different things than a Labor victory.
In this article, I explore some of the ins and outs of each party’s announced policies.
Labor
The policy
Labor has been consistent with their policies for superannuation (including SMSF) pensions. Its position is <a href="https://www.alp.org.au/fairer_super_plan" target="_blank">available here</a>.
… reduce the tax-free concession available to people with annual superannuation incomes from earnings of more than $75,000. From 1 July 2017, future earnings on assets supporting income streams will be tax‑free up to $75,000 a year for each individual. Earnings above the $75,000 threshold will attract the same concessional rate of 15 per cent that applies to earnings in the accumulation phase
… capital gains will be grandfathered …
The drawbacks
The key drawback I feel is that the above could be very difficult to implement for those with pensions from multiple funds. For example, consider an individual who receives pensions from two superannuation funds. The earnings from the assets supporting the first pension in the first fund might total $60,000. The earnings from the assets supporting the second pension in the second fund might also total $60,000. Accordingly, total earnings (ie, $60,000 + $60,000 = $120,000) exceed the $75,000 threshold by $45,000. This raises a tricky question: in which fund is the $45,000 excess subject to tax?
I suspect that the most practical way of dealing with this problem is as follows. I stress that this is only what I suspect what would happen. Again, I have no special inside information.
At the end of each financial year, each fund tells their pensioners what the associated pension assets earnings of the fund are by way of a document that is similar to a PAYG payment summary.
Each pensioner has to lodge an income tax return with the total of all associated pension assets earnings from all funds. These figures would not constitute assessable income of the pensioner.
If total associated pension assets earnings is greater than $75,000, the ATO sends the pensioner a tax bill calculated as the excess (eg, $45,000 in the above example) multiplied by 15 percent.
The pensioner must give this bill to one or more for their superannuation funds to pay. The superannuation funds can adjust the tax bill by any deductions/losses they have in the relevant year.
The pensioner can only pay the tax bill him or herself if there is insufficient money in any of their superannuation accounts in any superannuation funds to pay the bill.
Naturally, the above would be very paperwork heavy. Further, it would be mean that pensioners who might not otherwise have to lodge income tax returns would need to start lodging tax returns. However, I suspect the above — or some version of it — is what would be needed to make the Labor policy work.
Another drawback is the question of what happens in respect of the sale of ‘lumpy’ assets such as real estate. Real estate can be quite low yielding in rent meaning that in most years the $75,000 threshold might not be used up. However, when sold, there could be a large capital gain. If this capital gain is greater than $112,500 (ie, $75,000 grossed up for the one-third CGT discount that superannuation funds currently get if the asset is held for more than 12 months), then the SMSF would pay tax at usual superannuation fund rates on the excess of the net capital gain over $75,000. However, some of the harshness of this would be mitigated by the fact that ‘capital gains will be grandfathered’. Also, there is no suggestion that the $75,000 threshold will be indexed.
The pros
Firstly, ‘capital gains will be grandfathered’. On one construction, this could mean that pension assets already owned in superannuation funds will remain CGT free upon sale. Alternatively, on a more charitable/optimistic reading of the sentence, this could even mean that the second drawback doesn’t even occur (ie, that there’s no limit on the pension exemption that applies to capital gains). Alternatively, it also mean even other things.
Liberals
The liberals made three noteworthy policy announcements in the Budget.
The first policy
The first policy is to:
… [f]rom 1 July 2017 … introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. Subsequent earnings on these balances will not be restricted.
This $1.6 million cap will be indexed in increments of $100,000 in line with the consumer price index. A fact sheet released on Budget night explains:
A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any single point in time. ― For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap
The drawbacks of the first policy
On its face, the Liberals’ policy is similar to Labor’s policy. Afterall, assuming that assets yield income of 4–5% pa, $1.6 million of assets will generate approximately $75,000 of income. However, I suspect the reality could be quite different. My reasoning is as follows. Firstly, remember that under Liberals’ policy ‘[s]ubsequent earnings on these balances will not be restricted.’ Accordingly, a taxpayer with greater than $1.6 million of assets will have a tremendous incentive to try to do a bit of ‘crystal ball gazing’ in order to determine which assets will experience significant capital appreciation and use those assets to fund their pension. This can work out in two ways:
If the crystal ball gazing is right and assets that will experience significant capital grow are allocated to the pension, then — contrary to the Liberals’ motivation — high wealth individuals could still experience significant tax free income, including net capital gains.
However, the opposite could occur (ie, the crystal ball gazing is wrong), and indeed I suspect the opposite will occur more regularly. That is, assets are allocated to commence pensions and those assets end up collapsing in value, for example, where the next GFC comes along. Because it very much sounds like the Liberals want to implement a lifetime cap of $1.6 million, if you pick the wrong assets (eg, if you started your pension with $1.6 million of shares in the next Enron), then it appears to be a case of too bad: even though the original assets might collapse in value down to effectively nothing, you can never use your pension exemption again.
This means that the income tax system would not be taxing income. Rather, it would be giving a tremendous free kick to those who are good at picking investments and it would be giving a tremendous kick in the guts to those who mis-predict future investment performance.
Other draw backs of this policy include:
It sounds like there will be a harsh penalty for exceeding one’s cap. This could occur if a fund miscalculates market values and starts a pension not with $1.6 million of assets but with what ends up being valued at, for example, $1.7 million of assets. The penalty would a tax on not just the earnings of the excess but also on the capital of the excess. Hopefully lessons from the poorly drafted excess contributions tax regime would be learnt and a sensible discretion will be given to the ATO (or even to taxpayers themselves) in order to avoid unfair and harsh outcomes.
It would require tracking of how much of each individual’s lifetime cap — as proportionally indexed — has been used.
The pros of the first policy
This policy would be conceptually easier to administer I think than the Labor equivalent.
The second policy
The Liberals have said that they will remove ‘the tax exemption on earnings of assets supporting Transition to Retirement Income Streams from 1 July 2017’.
The key point here is that to date, for those wishing to take no greater than 10% of their assets per annum, it has not made a huge difference whether they receive transition to retirement income streams or full account-based pensions. However, under this policy it would make a big difference. Accordingly, if this policy ultimately becomes law, those wishing to commence transition to retirement income streams will have an incentive to see if they can first ‘trigger’ a retirement event so that they can take a full account-based pension rather than a transition to retirement income stream and thus pension assets can access the pension exemption. It has been noted by many that — particular once someone reaches age 60 — ‘retirement’ as defined in superannuation law can occur in ways that are very unintuitive. For example, according to paragraph 22 of APRA’s Prudential Practice Guide SPG 280 Payment Standard, if a 60 year old works two jobs and quits one job (eg, to work even more in the other job) this constitutes retirement under the superannuation law.
The third policy
The Liberals propose to remove the ability to make a reg 995‑1.03 election that ‘allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.’
Succession planning
Both the Liberals and Labor’s proposals could have a massive impact on succession planning.
Currently, the legislature has been quite explicit that if a fund member dies in pension mode, so long as their benefits are cashed as soon as practical after death, the pension exemption at the fund level will continue and there will be no ‘back door’ death tax by way of CGT at the fund level.
This could change a lot regardless of who wins. I won’t give this full consideration in this article, however, I will note the following consideration in respect of the Liberals’ policy. Namely, unlike Labor where an infinite amount can support a pension, it appears that under the Liberals’ policy, someone can never receive pensions with assets that were worth more than $1.6 million upon their commencement.
This might mean in a mum and dad fund with real estate worth say $3.2 million, if dad dies and mum already has a pension, all of dad’s benefits (ie, a 50% interest in the real estate) might need to be cashed out of the fund by way of a lump sum with no scope of a death benefit pension to mum.
Therefore substantially more CGT may be collected in superannuation funds in respect of death benefits especially given the Liberals’ proposed removal of the anti-detriment deduction.
Disclaimer: The following is based on my view of materials publicly available as at the date of writing (16 May 2016). I suspect that when more details become known about both parties’ policies, some comments could become redundant.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. 
Bryce Figot is director, DBA Lawyers and <a href="https://www.dbalawyers.com.au/">can be contacted here</a>.
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Liberal v Labor: what different election outcomes could mean for smsf pensions

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GUEST OBSERVER
There is little justification in giving rich households generous superannuation tax concessions, as wealth has a limited impact on spending and wellbeing in retirement new research suggests.
Retirement income is at the core of the controversy around the federal government’s proposed changes to superannuation and yet very little is known about how retirees actually spend their money.
Our research found that, despite the large variation in the income levels of households, wealthier households spend at a similar level to those with more modest wealth.
Retiree couples aged 65-74 spent just $33,200 a year on average, while single households of the same age spent an average of only $18,400 in 2014.
These figures fall below the benchmarks set by the Association of Superannuation Funds of Australia (ASFA), which suggests a couple needs $33,784 a year to afford a “modest” lifestyle, and 20 percent lower than the $23,489 figure it benchmarked for single households in 2014.
In March, the federal government adopted the thinking from the Financial Systems Inquiry that superannuation’s objective was to provide income in retirement to substitute or supplement the Age Pension. But Treasurer Scott Morrison remains under pressure not to go through with plans to limit lifetime non-concessional superannuation contributions to $500,000.
The government appears committed to other super reforms aimed at dismantling super concessions for the wealthy, announced in its May budget.
At present retirement income needs are estimated either as a proportion of income during the working life or by using income “standards” (such as those used by ASFA) which estimate the income needed to attain a given quality of life.
Our analysis, using data from the most recent Household, Income and Labour Dynamics in Australia (HILDA) survey, shows spending levels are largely driven by cost-of-living pressures such as geographical location (with spending highest in Sydney and lowest in regional South Australia). Household structure and home ownership are also important.
It’s likely that the wealthiest households are indeed “saving” – either deliberately to ensure they can pass on their wealth to the next generation, or to self-insure against possible future aged-care and health expenses – particularly if they own their home outright.
In comparison, retirees who are in the rental market spent on average $11,500 on rent – almost 40 percent of their total annual expenditure. This points to a need for a real focus on the plight of retirees exposed to the rental market, particularly single-person households.
With a large bulk of their spending swallowed up by rent, these households appear to struggle to afford basic household items. Our analysis showed households that rely on the Age Pension as their major source of income had much lower relative spending on health care and insurance – $1,900 annually, compared to $4,300 for self-funded retirees.
Single-person households also struggled, with almost 80 percent of households unable to reach even a modest standard of living.
For these households, increases in welfare payments or housing assistance will likely have a greater impact on well-being than raising the current 9.5 percent Superannuation Guarantee to 12 percent.
On the positive side, we found that superannuation already provides a valuable source of income for younger retirees – around one-fifth of annual income for those aged 65-74. Superannuation wealth has grown enormously over the past decade. In 2014, households aged 65-74 had superannuation assets 190 percent higher (in real terms) than their counterparts in 2002.
And this huge growth in superannuation and household wealth has coincided with increases in household spending, with current retirees spending more than previous cohorts.
Further growth of the superannuation system through greater participation and the rising Superannuation Guarantee will likely see the wealth of retirees continue to grow. But until there is a clearer picture of superannuation wealth and retirement income, it will be hard to ensure superannuation reforms deliver on their objective.
Eliana Maddock is research officer, Australian Centre for Financial Studies and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/eliana-maddock-293619" target="_blank">here</a>.
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Rich and poor retirees spend about the same

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GUEST OBSERVER
We are about to enter a period of substantial reform.
We have therefore prepared a brief ‘stock take’ of what the reform proposals look like as at the start of July 2016. In particular, we consider the proposals announced in the 3 May 2016 Federal Budget by the Liberal Government.
We also briefly compare these with the Labor Government’s proposals. Remember that these proposals are not yet law and the final form they take if they are introduced as law depends on a number of variables.
<h2>
LIBERAL PARTY PROPOSALS - CHANGES THAT APPLY FROM 3 MAY 2016
</h2>
The following change, if enacted, will apply from the date of the Budget announcement, being 7.30pm on 3 May 2016:
<h2>Lifetime non-concessional contributions cap</h2>
A lifetime non-concessional contributions (‘NCC’) cap of $500,000 will apply. This lifetime cap will take into account all NCCs made on or after 1 July 2007. Contributions made before the Budget announcement, however, will not result in excess NCCs.
The most difficult aspect of the Liberal Party’s superannuation reform proposals is the practical retroactive application the lifetime cap by including almost 9 years (ie, 1 July 2007 to 3 May 2016 is around 3,230 days or just over 8.8 years).
Thus, people who have previously relied on the law during this 9 year period in making contributions to their superannuation funds may now have no or little lifetime NCC cap remaining. Despite this practical impact, the Liberal Party is firm (and correct) in its view that this proposal is not retrospective (from a strict legal perspective).
The Liberal Party takes the view that the lifetime cap is prospective as it only affects excess NCCs made after the Budget announcement. That is, if more than $500,000 was contributed prior to 3 May 2016, that amount is not required to be withdrawn from superannuation.
However, if someone who has contributed more than $500,000 after 3 May 2016 (including contributions made prior to that date), the excess must be removed from superannuation or will be subject to penalty tax. A special ATO release authority will issue allowing the removal of the excess.
The Liberal Party has stated that there may be transitional provisions implemented for superannuation trustees who entered into contractual arrangements prior to the Budget announcement and who intended to make additional NCCs to settle the contract.
The proposed lifetime NCC cap will replace the existing NCC caps of $180,000 each financial year (or $540,000 averaged over three years under the bring-forward provisions). The $500,000 NCC cap will be indexed to average weekly ordinary time earnings (‘AWOTE’). Further, this proposal does not alter contributions made to superannuation under the CGT cap.
For more information on the $500,000 lifetime NCC cap, <a href="https://www.dbalawyers.com.au/announcements/new-500000-lifetime-contribution-cap-retrospective-bad-law/" target="_blank">click here</a>.
<h2>CHANGES THAT APPLY FROM 1 JULY 2017</h2>
<h2>Retirement transfer balance cap </h2>
A balance cap of $1.6 million on the total amount of accumulated superannuation a member can transfer into the tax-free retirement phase will be introduced. 
Currently, the earnings on assets supporting the trustee’s liability to pay a pension to a member are tax free without any maximum limit; this is known as the exempt current pension income (‘ECPI’) exemption. This proposed measure caps the ECPI of each member at $1.6 million of capital that can be used to commence a pension.
There will, however, be no restrictions placed on the subsequent earnings on the balance cap of $1.6 million. Therefore, the tax free status of the earnings derived from assets supporting a pension will not be limited.
Amounts in excess of the balance cap can be maintained in accumulation phase. Generally, earnings during the accumulation phase are taxed at 15%, with a 10% applying to net capital gains on assets held for more than 12 months after allowing for the 1/3rd CGT discount. 
Members already in the retirement phase with balances above $1.6 million will be required to reduce their pension account balance to $1.6 million by 1 July 2017.
A tax on amounts that are transferred in excess of the $1.6 million cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess NCCs. 
Excess amounts will need to be transferred to accumulation phase or withdrawn, and tax paid on the associated earnings after allowing a 15 percent tax offset. 
The balance cap remaining for a member seeking to commence more than one pension will be determined by apportionment. Broadly, this means that if a member only uses part of their balance cap, they can utilise the remaining balance cap and if the cap has been indexed, they obtain a proportionate increase to their remaining cap.
The $1.6 million balance cap will be indexed in $100,000 increments in line with CPI.
For more information on the $1.6 million balance cap, <a href="https://www.dbalawyers.com.au/announcements/1-6m-balance-cap-examined-tax-death-benefits/" target="_blank">click here</a>.
<h2>Division 293 threshold</h2>
The threshold at which high income earners pay additional contributions tax will be lowered from $300,000 to $250,000 from 1 July 2017.
Annual concessional contributions cap will be reduced to $25,000
The annual concessional contributions (‘CC’) cap will be reduced to $25,000 each financial year (indexed in line with AWOTE).
<h2>Rolling 5 year concessional contribution cap</h2>
Members with a superannuation balance of less than $500,000 will be permitted to make additional CCs where they have not reached their CCs cap in the prior five FYs. This will effectively equate to a rolling five year average CC cap of up to $125,000. 
For example, if a member contributes $10,000 in FY2018, the member will effectively have a CC cap of $40,000 in FY 2019 (ie, $25,000 plus $15,000). 
<h2>Tax deduction for personal superannuation contributions</h2>
All members up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions up to their CC cap. This effectively allows all individuals, regardless of their employment circumstances, to make CCs up to the CC cap.
For example, if an employer makes superannuation contributions of $10,000 on behalf of an employee, the employee may make an additional $15,000 of personal CCs to superannuation, and claim a deduction for this amount (subject to having sufficient taxable income to offset the deduction).
For more information on personal deductions, <a href="https://www.dbalawyers.com.au/ato/budget-means-right-now-personal-deductible-contributions/" target="_blank">click here</a> 
<h2>Abolishing the work test for members under age 75</h2>
The current restrictions on people aged 65 to 74 from making superannuation contributions will be removed. In essence, this means that the work test requirements (ie, gainful employment for 40 hours in 30 consecutive days before a contribution can be made) will cease to apply for members under age 75.
For more information on the CC proposals, <a href="https://www.dbalawyers.com.au/announcements/spotlight-concessional-contributions/" target="_blank">click here</a>.
<h2>Low income superannuation tax offset</h2>
A low income superannuation tax offset (LISTO) will be introduced to reduce tax on superannuation contributions for low income earners. Note that this announcement ensures that the Low Income Superannuation Contribution, which has been legislated to cease on 30 June 2017, will effectively continue to operate.
<h2>Spouse tax offset</h2>
The income threshold for the recipient spouse (whether married or de facto) of the low income spouse tax offset will be increased from $10,800 to $37,000. The contributing spouse may be entitled to a maximum tax offset up to $540 for contributions each financial year made on behalf of the recipient spouse.
<h2>Transition to retirement income streams</h2>
The tax exemption on earnings derived from assets supporting transition to retirement income streams (‘TRIS’) will be removed from 1 July 2017. Therefore, members who have reached preservation age, but not yet retired will be able to commence a TRIS (or continue to receive a TRIS), but the earnings will be taxed at the concessional rates that apply to amounts in the accumulation phase.  
<h2>Lump sum election</h2>
It is proposed to remove the provision that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes under regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (Cth). This measure will primarily affect members under age 60 in receipt of a TRIS. 
<h2>Anti-detriment provisions</h2>
The anti-detriment provision in respect of death benefits from superannuation will be removed from 1 July 2017.
<h2>LABOR PARTY PROPOSED SUPERANNUATION CHANGES</h2>
At this stage, the Labor Party has proposed the following two changes to superannuation if it wins the July 2016 election:
<h2>Pension exemption limit of $75,000 p.a.</h2>
If elected, the Labor Party intends to reform the tax exemption for earnings on superannuation balances in pension phase that exceed $1.5 million. From 1 July 2017, future earnings on assets supporting income streams will be tax‑free up to $75,000 a year for each member, while earnings above the $75,000 threshold will be taxed at 15% that applies to earnings in the accumulation phase.
It is proposed, however, that assets acquired prior to 1 July 2017 will be grandfathered for capital gains tax purposes. In respect of future discounted gains (ie, capital gains entitled to the 1/3rd discount), the gain will be added to income earnt in any year and included in the $75,000. 
<h2>Division 293 threshold</h2>
The Labor Party also proposes to reduce the Division 293 threshold from $300,000 to $250,000.
<h2>Labor Party’s position</h2>
While the Labor Party has stated that it opposes the retrospective effect of certain Liberal Party proposals, Labor has not as yet formally adopted a position with regard to the Liberal Party proposals. 
For more information on the Liberal Party v Labor Party pension proposals, <a href="https://www.dbalawyers.com.au/announcements/liberals-v-labor-different-election-outcomes-mean-smsf-pensions/" target="_blank">click here</a>. 
<h2>CONCLUSIONS</h2>
The superannuation reforms will have wide ranging impact and are likely to take several years to finalise. Most people will have to adjust their superannuation planning, especially their SMSF succession planning, and are best positioned to do so if they monitor and keep on top of the changes. There are strategies that can be implemented ahead of these proposals becoming law and expert advice should be obtained as needed.
DBA Lawyers will be continually refining its SMSF and related documents to keep at the forefront of this change. We also offer an extensive range of education options to keep you updated on an ongoing basis.
Daniel Butler is director, DBA Lawyers and Rebecca James is special counsel. They can be contacted <a href="https://www.dbalawyers.com.au" target="_blank">here</a>. 
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Property 101: Proposed super reform

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GUEST OBSERVER
Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence.
It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.
A seductive idea with a long history
Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.
Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.
Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.
Having learned from that that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.
Using voluntary super savings for deposits
The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.
Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.
First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.
But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.
In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.
A “shared equity” scheme for super funds
The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.
Details are scarce, but the proposal raises several questions.
First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?
Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.
Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.
If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.
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Focus on what matters
If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.
On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little - we estimate they would be about 2% lower than otherwise.
The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing, while helping improve the budget bottom line.
At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.
The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.
While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.
John Daley is Chief Executive Officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>. 
Brendan Coates is Fellow, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>. 
Both are authors for The Conversation.
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The latest ideas to use super to buy homes are still bad ideas

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<img src="https://counter.theconversation.edu.au/content/64733/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The Federal Government’s plan to wind back superannuation tax breaks would create a fairer superannuation system more aligned to its purpose of providing income to supplement the Age Pension, according to new Grattan Institute analysis.
It would also contribute to budget repair.
The analysis shows how either of the reform packages proposed by both major parties would be a big step in the right direction. It explores how the current system provides much larger benefits to those with such ample resources that they will never qualify for an Age Pension. And it shows how the proposed changes would affect them - and pretty much nobody else.
As they debate the Coalition government’s proposals to wind back tax breaks on superannuation, politicians on all sides can do three big things: create a better and fairer superannuation scheme; take an important step towards repairing the Commonwealth budget; and show that our political system still works.
Both main parties have laid out their preferred reforms to super tax concessions. While they agree on all but the details, they are yet to strike a deal. Our new research shows what is at stake.
<h2>A better, fairer, super system</h2>
First and foremost, the proposed reforms to superannuation announced in the 2016 budget are about making super better, and fairer.
Tax breaks should only be available when they serve a policy aim. The purpose of super identified in the budget and <a href="https://sjm.ministers.treasury.gov.au/media-release/053-2016/">due to be defined in legislation</a> is to provide income in retirement to substitute or supplement the Age Pension. Super tax breaks don’t fulfil this purpose when they benefit those who were never going to qualify for an Age Pension in the first place.
The plans of both the government and the ALP would be big steps towards aligning super tax breaks more closely with their purpose. They would trim the generous super tax breaks enjoyed by the top 20% of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension.
Retirees with large superannuation balances will start paying some tax on their superannuation savings, but still pay much less tax than wage earners on lower incomes. For a small proportion of women with higher incomes later in life, the changes will reduce their catch-up contributions. Yet the changes will reduce the tax breaks far more for wealthier old men.
Claims that the budget changes will affect many low and middle-income earners are wrong. Our research shows the changes will affect about 4 percent of superannuants, nearly all of them high-income earners who are unlikely to access the Age Pension. Nor are the proposed changes retrospective. Many reforms affect investments made in the past, and no-one suggests they are retrospective. Rather, the changes will affect taxes paid on future super earnings, and entitlements to make future contributions to super.
Any plausible combination of the packages on offer would make the super system fairer. At present, someone in the top 1% of income earners can expect to receive nearly three times as much in welfare and tax breaks from super in their lifetime as an average income earner. The government’s changes would trim some of these excesses: the top 1% would instead receive just twice as much as low or average income earners. And by targeting tax breaks that go to the top 20 percent of income earners, neither side’s plan would see much of an offsetting increase in Age Pension spending.
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Modelling on super reforms The Grattan Institute, Author provided
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<h2>An unsustainable tax system for seniors</h2>
Decisions by the former Coalition Government to abolish taxes on superannuation withdrawals in 2007 and radically increase the amount senior Australians could earn before paying income tax have dramatically reduced the tax bills of older Australians.
These changes are one of the main reasons why households over the age of 65 (unlike households aged between 25 and 64) now pay less income tax in real terms today than they did 20 years ago. At the same time, the workforce participation rates and incomes of seniors have jumped. Generous super tax breaks have been funded by deficits. The accumulating debt burden will disproportionately fall on younger households.
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Tax breaks to older Australians are also a major cause of the increase in the “taxed nots” identified by Treasurer Scott Morrison. The number of older Australians not paying any income tax has increased from three in four in 2000 to five in six today. The rise of these “taxed nots” coincides with the introduction of the Senior Australian Tax Offset in 2000, and tax-free super withdrawals in 2007.
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<h2>Repairing the budget</h2>
The increased cost of services and reduced taxes per older household explain in large part why the Commonwealth budget is in trouble. For eight years, budget deficits have persisted at about 2 to 3 percent of GDP, and the future looks little better. The returned Turnbull government is putting a priority on budget repair, now described as a “massive moral challenge” by the Prime Minister. Winding back some of the tax breaks given to older Australians during the happier times of the mining boom is an obvious step.
The government’s super package would save the budget at least A$800 million a year. Alternative proposals by the ALP, which broadly supports the Coalition’s reforms, and then goes further, would save more than A$2 billion a year. Should Treasurer Morrison seek a deal with the ALP or the Greens, any “concessions” will mostly improve the budget position.
Nor is the Turnbull government likely to find more attractive opportunities for budget savings. Unlike most of the government’s savings measures, changes to super tax breaks are broadly popular. Electorates more likely to be adversely affected by the super changes – that is, those with more old and wealthy voters – tended to swing less to the ALP at the last election than other electorates. And a survey before the election showed that the proposals had more support amongst those most likely to be adversely affected.
<h2>A test for our political system</h2>
Even after the reforms, super tax breaks will still mostly flow to high-income earners who do not need them, and the budgetary costs of super tax breaks will remain unsustainable in the long term. Further changes to super tax breaks will be needed in future. But agreeing to the super package now before the Parliament would be progress in the right direction. And there is a broader issue at stake.
Super is only the first of a number of difficult choices that will come before the Parliament as government seeks to promote economic growth in a sluggish global economy, and bring the budget back under control. There is no easy road to these ends that will keep everyone happy all the time. Pragmatic compromise will be critical.
The proposed changes to super tax breaks are built on principle, supported by the electorate and largely supported by the three largest political parties. If we cannot get reform in this situation, then our political system is in deep trouble. In coming weeks, our MPs have the chance to show how government in Australia can still change the nation for the better.
John Daley is chief executive officer, Grattan Institute, and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Brendan Coates is a friend of The Conversation and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
William Young is associate, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/william-young-260984" target="_blank">here</a>.
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New Grattan research shows what is at stake in the superannuation debate

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GUEST OBSERVER 
The Productivity Commission’s draft report on our super system may make self-managed super funds (SMSF) more popular.
The draft report, designed to stimulate discussion about competition in the superannuation sector, examines whether the system is working in favour of fund members.
It questions whether larger institutional funds and service provider groups are passing on benefits to fund members in the form of lower fees, better services or improved investment returns.
The report refers to SMSFs as a core segment of the superannuation industry, and a benchmark to which APRA-regulated funds can be compared.
The Productivity Commission’s findings so far will come as no surprise to many Australians, especially those who already have their retirement savings in a self-managed fund.
Granted, technology is improving and fees are coming down, but the Productivity Commission believes there is still a long way to go. Ultimately criticism of the way APRA-regulated funds operate could motivate many more Australians to take control of their retirement future and set up their own self-managed fund.
The SMSF sector is competition operating in its purist form - its members are individuals who have exercised their choice as free consumers to establish their own funds but they are not without vulnerabilities.
The government’s view that SMSFs swim ‘outside the flags’ means they are on their own when victim to financial misconduct. The Trio Capital fraud saw 400 SMSFs, who lost a total of $60 million, refused any form of government compensation or support. It’s vital trustees have access to the independent advice and guidance they need to avoid the traps.
The Productivity Commission is not just reviewing competition and efficiency in the superannuation sector, but whether trustees of APRA-regulated funds are acting in the best interests of members. 
Any doubts about trustees acting in members’ best interests will ring alarm bells. People all over the world are already becoming more cynical of institutions, from the ‘Brexit Effect’ to the ‘Trump Effect’, but here we might just see the ‘Super Effect’
Christopher Page is managing director of market intelligence company Rainmaker and can be contacted <a href="https://www.rainmaker.com.au" target="_blank">here.</a>
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Review of super system will push more Australians into SMSF

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<img src="https://counter.theconversation.edu.au/content/66209/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
So much of the national conversation about superannuation simply assumes that “savings for retirement” is synonymous with “superannuation savings”. This is a big mistake. 
This mistake partly explains why we got into such a mess with excessively generous tax breaks for super. It also underlies misguided plans to increase superannuation contributions to 12 percent of earnings. 
<h2>Super doesn’t equal retirement savings</h2>
Any sensible conversation about superannuation policy must start by recognising how households save for retirement, and why.
It’s become conventional wisdom that people will retire on their superannuation savings, perhaps topped up by the Age Pension. Even ASIC’s retirement savings calculator – which enables people to estimate their future retirement income – presumes that superannuation and the Age Pension alone will fund retirement. The assumption that superannuation accounts for the bulk of households’ retirement savings has underpinned claims that most Australians aren’t saving enough for their retirement. 
Yet the stark reality is that superannuation savings account for only a small portion – about 15% – of the wealth of most households. Even without counting the family home, the average Australian saves as much outside as inside the super system. For older households close to retirement, assets other than super are often even larger than the value of their homes.
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Super’s modest contribution to retirement savings is true for households of most levels of wealth and income, as confirmed by new analysis for the Grattan Institute of both ABS data and the Melbourne Institute’s HILDA survey. 
It is true that many of those with little wealth report a larger share of savings in superannuation than in other assets, but only because their total savings are small. For such low-wealth households, the Age Pension will always be their main source of retirement income.
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<h2>Even younger households save a lot outside of super</h2>
When confronted with facts about the modest contribution of super to retirement savings, super’s cheerleaders point out that the system is immature. Compulsory super only began in 1992, with compulsory contributions of 3% of wages, rising to 9% by 2002 and 9.5% since 2014-15. It will be another two decades before typical retirees will have contributed at least 9% of their wages to super for their entire working lives. So surely super will account for a larger share of household savings in future? 
While we might expect younger households to save more in super, and less outside, that’s simply not true. Their assets outside are typically as large as their assets inside superannuation, even without counting home ownership. This is so even for households in the 25-34 and 35-44 age groups who have had high levels of compulsory super for most of their working lives. 
<h2>Non-super savings will remain large</h2>
The enduring importance of non-super savings should come as no surprise. While compulsory superannuation forces people to save more via superannuation, there’s little evidence that non-super savings have fallen very much in response. 
A recent Reserve Bank of Australia study found that each extra dollar of compulsory superannuation savings was accompanied by an offsetting fall in non-super savings of only between 10 and 30 cents. As a result, compulsory super has added a lot to private savings in Australia – an estimated 1.5% of GDP a year over the past two decades. 
There is little reason to expect this pattern of non-super saving to change radically. Households hold a material portion of their wealth outside of super so that they have an option to use it before turning 60, and because they are nervous that government may change the superannuation rules before they retire.
Other asset classes, such as negatively geared property, are taxed lightly and so will likely remain an attractive vehicle for accumulating wealth. Whatever the motivation, most households heading towards retirement have substantial non-super, non-home assets to draw on.
Super as a proportion of total assets is somewhat higher for 55-64-year-olds when compared to younger households. This is partly because households aged over 55 contribute more voluntarily. They transfer assets they have already accumulated into super to attract a lower tax rate, knowing that if necessary they can withdraw immediately, or within a year or two. While this asset shuffling reduces their tax bills, it adds little to genuine retirement savings. 
<h2>One implication: super tax breaks should be more limited</h2>
Acknowledging super’s more modest contribution to retirement savings has big implications for retirement incomes policy. 
Since most Australians will rely upon a range of assets and income sources to support their retirement, we shouldn’t expect superannuation alone to provide an “adequate” or even a “comfortable” retirement, as the super industry demands. 
A number of prominent studies claim we face a retirement savings crisis, but they ignore non-super savings. This leads them to advocate ever-more-generous tax breaks so that super alone is enough to provide an adequate retirement income, even though the reality of retirement incomes will be different for most households. 
The government plans to legislate that the purpose of superannuation is to provide income to supplement or substitute the Age Pension. This implies that super tax breaks should cut out at the point that people no longer qualify for even a part Age Pension (a pre-tax income of A$75,000 for a couple). If the earnings on non-super savings are ignored, then this leads to super tax breaks for a lot of people unlikely to qualify for an Age Pension. 
The next round of reforms to super tax breaks will need to do better on this score. 
<h2>Another implication: no need to increase the Super Guarantee to 12 percent</h2>
Ignoring non-super savings may also lead policymakers to force people to save too much through superannuation. A common aim of retirement income policy is to support lifetime consumption smoothing: maintaining a more consistent standard of living across people’s lives. Compulsory saving via the Superannuation Guarantee forces people to save while they are working so they have more to spend in retirement. 
But there is no magic pudding when it comes to superannuation. Higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today. 
In fact current levels of compulsory super contributions and Age Pension are likely to provide a reasonable retirement for most Australians. 
If we project forward the retirement income for a median income earner working for 40 years, and account for just compulsory super contributions – in other words, we ignore any voluntary superannuation contributions and savings outside of super – we find that today’s 9.5% Superannuation Guarantee and the Age Pension would provide the average worker with a retirement income equal to 79% of their pre-retirement wage (also known as a replacement rate). 
About two-thirds of income earners can expect a retirement income of at least 70% of their pre-retirement income – the replacement rate for the median earner used by the Mercer Global Pension Index and endorsed by the OECD. 
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Once non-super savings are taken into account, many workers are likely to have a higher standard of living when they retire in 40 years’ time than during their working life. This is before we consider that people have much lower spending needs in retirement, particularly in the later stages of life when government covers much of their largest costs of health and age care. 
This modelling of the future shouldn’t be a surprise. It matches what is already happening today. The non-housing expenditure of retirement-age households today, many of whom did not retire with any super, is typically more than 70% of that of working-age households today. 
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Current levels of retirement spending appear to be sustainable. Most households in retirement only draw down very slowly on their superannuation and their broader savings. Consequently, most are likely to leave material bequests. 
The policy implication is that there is no compelling case to compel households to save 12% of their income through the Super Guarantee as currently legislated. This would effectively compel most people to save for a higher living standard in retirement than they enjoy during their working lives. 
In practice, given typical retiree spending patterns, a 12% Super Guarantee will primarily result in larger bequests. It would be better to leave the Super Guarantee where it is – at 9.5% of wages. This is consistent with the 2009 Henry Tax Review, which found that the Super Guarantee of 9% then in force would be enough to give most Australians “a substantial replacement of their income, well above that provided by the Age Pension”. 
<h2>Ignore the vested interests</h2>
Powerful vested interests are pushing the idea that super equals retirement savings. Yet such a view is inconsistent with the facts. Super’s importance to retirement savings has been overblown for far too long. 
As the debate heats up over policy for Australia’s A$2 trillion super sector, recognising what households actually save, and why, would be a big step in the right direction.
John Daley is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here.</a>
Brendan Coates is a friend of The Conversation and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
Hugh Parsonage is associate, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/hugh-parsonage-210671" target="_blank">here</a>. 
All are authors for The Conversation.
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The superannuation myth: why it’s a mistake to increase contributions to 12 percent of earnings

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GUEST OBSERVER
The Howard government, when flush with revenue, made a bad tax decisions which continue to haunt current policy makers. 
It removed the tax on the retirement phase of superannuation, this has been partly resolved by current government’s recent changes. But the Howard government also replaced the full taxation of real capital gains with concessional treatment of capital gains (only 50% of gains taxed). This remains as a tax avoidance loophole which both parties acknowledge but are reluctant to act upon.
The reason is straightforward. Assets put into superannuation in the accumulation phase and held until the retirement phase, can then be sold with no, or minimal, capital gains tax payable. This a major incentive to put assets into super and hold them until the retirement phase.
Without further changes to superannuation taxation, this is simply going to worsen the social problem of the well-off adopting tax minimisation strategies by piling as many assets into super as possible. Remember, it will still be possible to contribute up to A$100,000 per annum as non-concessional contributions.
Consequently, the well-off could easily build up a pool of assets of several million dollars or more, which when sold in retirement will still get very, very, favourable capital gains tax treatment under super.
If superannuation assets in retirement are under the A$1.6 million cap, no tax will be payable on capital gains from sales of assets. If assets are above the cap, the tax rate applied to capital gains is 10%.
For example, an asset costing $100,000 and held for 15 years, increasing in price at an average of 7% per annum would be sold for $276,000. If in super, tax payable would be $17,600. If outside of super, on the top marginal tax rate (including levies) of 49%, the tax payable would be $43,096.
If the concession on capital gains tax was reduced (without addressing the concessionary rate in super), the incentive would be even bigger. For example, if the concession was reduced to 25%, tax payable on the capital gain outside of super would be $64,644, an even larger gap to the tax payable in super of $17,600.
Putting $100,000 per annum into super for 15 years with an average 7% capital gain per annum generates a portfolio worth $2.7 million. The capital gains tax savings on this being in super, rather than outside, are more than $1 million!
So, what are the consequences if a brave government elects to reduce the concession applied to capital gains tax? If they make no changes to super tax arrangements there are at least two likely consequences.
First, there is increased incentive for individuals to set up self managed super funds to exploit these tax arbitrage or minimisation loopholes.
Second, despite taxation of earnings on retirement income balances over the A$1.6 million cap, maximising non-concessional contributions into self managed super funds will remain attractive, to take advantage of the difference in capital gains tax rates on assets inside versus outside super – to the detriment of future government budgets.
The consequences for self managed super funds incentives to borrow (via non-recourse arrangements involving trusts) to purchase assets such as property are unclear. As described on one adviser’s website:
Such borrowing will enable trustees to acquire assets over and above the assets that can be obtained from contributions. The caps on contributions can therefore be “overcome” by such borrowings.
However, it is doubtful that there are tax arbitrage benefits from using leverage to purchase assets via super (because higher marginal tax rates mean higher tax deductions for interest on borrowings outside of super).
For reasons of social equity, any general changes to the capital gains tax rate will also need to address capital gains tax within super. Admittedly there is already a lower concession in the case of super (two-thirds of gains are taxed versus one-half).
But that means taxing capital gains in super at only a 10% rate, leaving strong incentives to thwart higher capital gains tax by locating assets within super. Failing to reduce the capital gains tax concession in super would be likely to undo a substantial part of the effectiveness of any general changes the government has already made.
Kevin Davis is research director of Australian Centre for Financial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies. He is an author for The Conversation and can be contacted <a href="https://theconversation.com/profiles/kevin-davis-3497" target="_blank">here</a>.
 
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Despite superannuation changes, one tax loophole remains: Kevin Davis

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GUEST OBSERVER
Will competition in the superannuation system improve efficiency, or is this an ideological argument extended beyond its usefulness?
If more competition would promote efficiency, what design and policy issues need to be addressed to accommodate the changes?
The Productivity Commission’s draft report on superannuation’s efficiency and competitiveness seeks to address whether increased competition will, in fact, drive efficiency, or whether this proposal is ideologically driven by either a belief in the free market or a desire to weaken the role of the unions in industry superannuation funds.
The Commission confronts this, saying that the role of competition is to drive efficiency, and is not an end in itself. Competition is justified only if it drives funds to become more innovative and efficient. An increase in the number of funds could lead to inefficiencies as smaller, potentially more innovative, funds would not have the economies of scale of bigger funds.
A number of participants in the consultation process made the case that competition may not lead to greater efficiency: the ACTU raised the concern that competition could weaken the superannuation system, noting failures when other services, specifically technical education, were opened to the market.
Other submissions discussed whether consolidation of the existing range of providers would improve efficiency; Fiduciary’s Friend thought this would detract from innovation, while the Financial Planning Associationand Financial Services Council thought that competition could incentivise underperforming funds to consolidate with more efficient funds.
Another perverse effect of competition could be to change the investment policies of superannuation trustees. If members were encouraged to switch funds, this could place stress on the liquidity of the fund. If funds retained more investment in liquid assets this would not only flow through to capital markets but would affect the returns of the fund.
The draft report does make the point that superannuation is a unique environment, so the usual frameworks for assessing efficiency need to take that into account. Specifically, superannuation is an instrument for government policy, and is compulsory. Member disengagement continues to be relatively high, as shown by the number of members who accept the default options both of their fund and of investments within their fund.
Although the introduction of MySuper with the Stronger Super Reformswas intended to increase efficiency and reduce costs, the behavioural effect could well be to further reduce member engagement with the superannuation system.
Since 2005 most employees have been able to choose their fund, but according to the PC report, about two thirds of employees remain in their default fund and less than one third switch their investment options within their fund. There are also about 20% of employees who are not able to choose a fund other than the default fund nominated in their award or enterprise bargaining agreement (EBA).
This contributes to a large number of agency relationships in the system: the employer acts as an agent for the members when nominating a default fund; there is a fiduciary relationship between the trustees of the fund and the members in respect of managing the fund; and many trustees outsource functions to external service providers.
Given the combination of member disengagement and the agency relationships, competition needs to be considered more broadly than facilitating member choice.
The report also discusses the relationships that arise at the wholesale level, including a range of services provided to the superannuation sector. Insurance is particularly in the spotlight here as many members are entitled to insurance benefits through their superannuation fund.
Superannuation trustees are able to obtain policies at far better rates than most individuals – although this has been under the spotlight recently as members find exclusions in their policies. The effect of competition in this area could be less efficient than the current system.
The Productivity Commission sets out a series of objectives for the superannuation system, that sit below the policy objective that the superannuation system is “to provide income in retirement to substitute or supplement the Age Pension”. These objectives include:
<ul>
<li>Competition that drives efficient outcomes through facilitating rivalry and contestability in supply and demand conditions and allowing suppliers to compete on adding value to members</li>
<li>Maximising net returns over the long term</li>
<li>Meeting member preferences and needs over the member’s lifetime</li>
<li>Providing insurance that meets members needs at the lowest cost</li>
<li>The Superannuation system complements a stable financial system</li>
</ul>
The development of these objectives is the first stage: the report goes on to refine the objectives into assessment criteria and indicators.
It is important that the superannuation sector operates efficiently as it is becoming an increasingly important retirement policy instrument and a major component of household wealth. This report has articulated a set of objectives that would strengthen the superannuation system and the faith that members have in their superannuation fund.
Helen Hodgson is associate professor, Curtin Law School and Curtin Business School, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/helen-hodgson-94553" target="_blank">here</a>.
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