Are caps on superannuation redundant?

Author: Richard Webb, Senior Manager, Financial Planning and Superannuation Policy

Debate is raging about a proposal to increase taxation for Australians with superannuation balances over $3 million. With this in mind, it’s worth taking a look at the measures which were put in place to prevent large balances arising in the first place. This article asks whether the policy rationale for these measures is now redundant.

Various caps and limits have been a fixture of the superannuation system for the past decade and a half. They were designed to limit the amount of money flowing into superannuation accounts. This, in turn, was intended to prevent high-income earners from using their superannuation accounts as a tax shelter.

All of which was aimed at ensuring superannuation is used for its intended purpose – to provide benefits in retirement.
In 2007, the Australian Government introduced superannuation contribution caps as part of the “Simpler Super” reforms. The aim of these caps was to limit the amount of money that individuals could contribute to their superannuation accounts per year. They applied to concessional and non-concessional contributions.  

Prior to the reforms, there was no limit on the amount of money that could be contributed to super. There were, however, restrictions, in the form of Reasonable Benefit Limits (RBLs) on the amount able to be taken as a superannuation benefit at a concessionally taxed rate.

RBLs were introduced in the 1980s. They were designed to limit the tax concessions that individuals could receive in benefits from their superannuation accounts. Lump sums above the RBL were taxed at a higher rate while pensions above the pension RBL did not receive the 15 per cent rebate. The Government abolished RBLs as part of the Simpler Super reforms. 

The abolition of RBLs meant that individuals could receive unlimited concessionally taxed lump sum payments from super. Had the Government not subsequently legislated contribution caps, this may have led to a huge increase in the amount of contributions into superannuation.

The superannuation contribution caps operating on a per-year basis since 2007 vary depending on the type of contribution. For example, for the 2022-23 financial year, concessional and non-concessional contributions are capped at $27,500 and $110,000, respectively. Additional tax applies to breaches of these caps.

Contribution caps have taken up the role of limiting money flowing into superannuation since RBLs were abolished. This is particularly the case for high-income earners. 

Prior to May 2006, it was theoretically possible for individuals to contribute unlimited amounts of money to superannuation, subject to any RBL implications. The contribution caps now mean that high-income earners can no longer contribute large amounts. Moreover, they are required to pay additional tax on any contributions made in excess of the caps.

In 2017, the Australian Government introduced the transfer balance cap and the total superannuation balance limit. These measures, introduced as part of the Superannuation Reform Package, are designed to further limit the amount of money that can be held in superannuation accounts.

The transfer balance cap limits the amount of money that can be transferred into retirement phase accounts. The total superannuation balance, meanwhile, limits the total amount of money that can be held in a person’s superannuation accounts by restricting additional contributions. 

For the 2022-23 financial year, the general transfer balance cap and the total superannuation balance limit is $1.7 million.  

The introduction of the transfer balance cap and total superannuation balance limit has had a significant impact on the way individuals can use their superannuation accounts. Prior to the introduction of the transfer balance cap, it was possible for high-income earners to accumulate significant wealth in the tax-free pension phase of superannuation. 

Additionally, while contribution caps limited the amount that people could put into superannuation annually, the total superannuation balance now places an additional lifetime limit on non-concessional contributions. 

The introduction of these limits means that high-income earners would be more likely to consider alternative investment strategies to accumulate wealth.

As this summary shows, there are a variety of measures in place which limit large super balances. Hence, the proposed tax on super balances over $3 million raises difficult questions about the current restrictions on superannuation. 

For example, there is now very clear messaging that balances over $3 million are acceptable. This should mean that the total superannuation balance limit on contributions is redundant and should be repealed. 

Likewise, the role of contribution caps needs to be questioned. If high, yet still concessionally taxed, balances are allowed in superannuation, why should taxpayers be penalised for taking advantage of this? Arguably, contribution caps are also redundant.  

The $3 million super balance tax proposal is still subject to debate and discussion. However, it represents a potential shift towards a system where higher rates of taxation could be enabled. One where additional tax is the trade-off for people who wish to accumulate larger super balances.