Everyone with an SMSF should be taking an interest in David Murray’s Financial System Inquiry (FSI) because it asks some fundamental questions, like should there be any limitations on the establishment of SMSFs? And it makes some interesting observations, such as: The majority of superannuation tax concessions go to the top 20% of income earners.
Tax breaks and tax payments
Let’s start with this one.
It’s true that the majority of super tax breaks go to the top income earners. The FSI’s Interim Report has a chart showing the top 20% of earners receive 56% of the superannuation tax breaks. But that’s only half the picture. The report should also include another chart, based on ATO data, that would show the top 20% of earners pay 63% of all income tax collected. So, in fact, the top earners are more than paying for the super tax breaks they receive.
It’s important for policy makers, and those advising them, to look at the whole picture and not be swayed by the emotional arguments of people who see the world in simplistic terms like rich versus poor, terms which tend to be defined by individual perspective and ideology.
The Interim Report also notes that a small number of accounts (12%) hold a high proportion (60%) of superannuation assets. They are talking about SMSFs and the picture is hardly surprising. On average, SMSFs have much higher account balances than retail or industry funds. SMSF members tend to have higher incomes than members of managed funds and so are able to make larger compulsory and voluntary contributions. Many also make non-concessional contributions, while others have been able to transfer assets, such as business property, into their SMSFs.
Some commentators think that’s unfair and that SMSFs with high balances should be heavily taxed. They believe everyone should have a standard pension and pay tax on their retirement income. That may be how it is done in some other countries, but it’s not the way the retirement incomes system has been set up in Australia over the past two decades.
Superannuation drives many economic and social benefits
Superannuation helps Australians to save enough to support themselves financially throughout their years in retirement and into old age and to be independent of taxpayer-funded pensions. It is not a mechanism for the redistribution of wealth. That is achieved via the income tax and welfare payment systems.
The Government provides tax incentives to encourage people to save for retirement through the compulsory Superannuation Guarantee levy and via voluntary contributions up to set limits. The incentives are economically sensible, returning a dividend in the form of lower public pension costs in the future. Our research shows that the basic tax break given on the SG levy will be repaid three times over in reduced age pension costs.
Other economic and social benefits include creating a large pool of capital to be invested in the productive economy and giving people the security of knowing that they will be able to live decently in retirement and old age. As the Treasurer noted at the time of the last budget, only 20% of Australians are self-sufficient and 80% rely on some level of taxpayer support and this would still be the situation in 2050. Indeed many Australians don’t pay any net tax.
Superannuation gives people an opportunity to lift themselves out of a state of dependency on other taxpayers and super tax incentives, particularly voluntary contributions above the SG rate, encourage and enable them to do that.
Of course, there is some immediate cost to the budget, but there are some offsets. If the super tax breaks are removed or reduced, less money will flow into super and more people will ultimately have to rely on the pension. If the flow of money into super is reduced, the tax collected from fund earnings will be reduced. And people will use other tax effective ways, such as negative gearing, to invest.
We are not saying the present superannuation system is perfect – far from it. It is falling short of the objective of enabling most Australians to be financially independent in retirement, though the gap will be reduced if people work longer before retiring.
More flexible contribution caps
One change that should be made is to move towards a more flexible regime on contributions with the overall limit averaged over a cycle or maybe over a whole working life so people can pump more money into superannuation when they are able to do so. Many people don’t have the capacity to turbo charge their super savings until they have paid off their house and educated their children. A more flexible system would help people with broken work patterns, such as women taking time off to raise a family.
Another significant structural change may be to move, over time, from the current TTE system (tax on contributions and earnings but not on retirement pensions) to an EET system (no tax on contributions and earnings but pension income is taxed) as applies in other countries.
These are big policy questions that need to be tackled in a far-sighted and clear-headed way. When change is made, it must be implemented carefully, without haste and without disadvantage to people who have saved and planned their retirement under the existing rules. If there’s one thing that damages confidence in the superannuation system, it’s unexpected, arbitrary and piecemeal changes to the rules, particularly to taxation. This may be driven by governments’ need for revenue because they haven’t managed the budget well or in response to emotive arguments about fairness. These issues are no doubt near the top of the list for David Murray and his Inquiry.
Duncan Fairweather is Executive Director of the SMSF Owners’ Alliance (SMSFOA), which was set up to provide a voice for the one million Australians who are trustees of their own super funds. SMSFOA is a member of the ATO’s Consultation Hub and ASIC’s Consumer Advisory Panel.
The Editor of Cuffelinks, Graham Hand, will be presenting on SMSF Portfolio Construction at an SMSFOA Workshop on 9 October 2014.