Your guide to super’s proposed changes

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Simon Downes:
Hello and welcome to With Interest. I'm Simon Downes, external affairs lead here at CPA Australia. Planning for retirement is something every Australia needs to do. And the sooner you start to take practical steps to grow your retirement nest egg, the better. For most people, that means managing and making extra contributions to your superannuation fund. But the amount of savings you have for retirement could also depend on government policy and it's currently a hot topic in the corridors of power. CPA Australia has published our submission in response to the draft legislation set out by Treasurer Jim Chalmers, which plans to reduce the tax concessions enjoyed by Australians with the largest super savings.

This would mean doubling the rate of tax from 15 to 30% on earnings from superannuation balances in excess of $3 million. The draft legislation was released within a month of the government revealing plans to define an objective of superannuation for future generations and parliaments with the purpose of preserving savings in a "equitable and sustainable" way. So are these two government policies compatible? What does it mean for the super industry and what impact could it have on the way you plan for retirement? Joining me to discuss this is Richard Webb, he's Senior manager financial planning and superannuation policy here at CPA Australia. Welcome to With Interest, Richard.

Richard Webb:
Thank you, Simon. It is good to be here.

Simon Downes:
So Richard, you wrote our submission on the amendment of the Better Targeted Superannuation Concessions bill. Give us an overview of the bill and what it sits out to achieve.

Richard Webb:
Okay, Simon. Well, the draft bill implements the announcement of February this year to tax earnings from superannuation for balances over $3 million at an additional 15%. This is in addition to ordinary superfund earnings tax, which is normally either 15% in the accumulation phase or 0% in the drawdown phase. How it will work is that a calculation is done of your change in total balance over a normal financial year adjusting for contributions and withdrawals. The amount of earnings over 3 million is then broken out as a sort of a pro rata calculation based on one's holdings at the end of the year. Once the ATO have the necessary information which allows them to make an assessment, they will send through an assessment to the taxpayer who would then either need to pay it out of their pocket or forward it to their superfund for payment, or a combination of both of those methods.

Simon Downes:
So tell us about the main points that we've set out to make in response.

Richard Webb:
Sure. Indexation is a key issue and I think that the sector is almost completely united in opposition to the fact that the 3 million threshold is not intended to be indexed. So we are continuing to push hard to get that fixed, but in addition, it is important to be aware that the method which is going to be used to calculate the tax liability involves where superfund balances have moved. So for most members, this would include unrealized capital gains. And this method of calculation has problems. For starters, throughout the income tax regime, taxes normally only assessed on realised capital gains. On top of this, gains made on assets which have been held for more than 12 months are subject to a reduced tax rate compared to assets disposed of within 12 months of acquisition. Also, investment losses are not refundable.

They would only be used to offset future gains. Finally, trustees have been told for decades by their advisors to hold any assets which they do not need until retirement in super. This can include illiquid assets. And where their funds have no current need for large amounts of cash, this has not been an issue. This might create problems because funds in this situation and such a fund could easily be something like an SMSF with just a single property in it might be forced to dispose of these assets to meet the increased tax liability. What's worse is that some of these assets don't necessarily benefit from deeply liquid investment markets and might need to be put on the market now well before the 2025 implementation date in order to provide sufficient cash when the time comes.

Simon Downes:
Richard, I suspect that some people would just see this as a tax grab to fill budget black holes. Do they have a point?

Richard Webb:
Well, yes, Simon, they do, especially since the Minister Steven Jones is on record in parliament when he stated that the reason for this is to do precisely that. Naturally, we are not entirely happy about this. The proposed objective of superannuation, which you mentioned earlier and which in our view should have been passed by parliament ahead of this measure, talks about the superannuation system operating in a sustainable way. Naturally, this means that superannuation should be responsible when it comes to use of tax concessions. But the word sustainable absolutely does not mean that superannuation becomes a honeypot for the government to raid every time they get into financial difficulty.

Simon Downes:
What are the implications of the bill when it comes to the insurances that people hold through their superannuation?

Richard Webb:
Simon, the question around insurance held within superannuation is a serious one. We raised the issue back in March that as the calculation would remove withdrawals and under the proposal insurance benefits are to be classified as withdrawals for the purposes of the calculation, then this would create the invidious situation where families and members who had been disabled or been diagnosed with a terminal illness would incur the nasty additional shock of being hit with a tax assessment on top of that. It's important to remember that superannuation taken in the event of disability where a member is under 60 is already subject to taxation. And in the draft legislation, the calculation is stopped for anyone taking a death benefit.

But the issue that arises is that in the event that a member of a superfund takes a benefit due to disability or terminal illness, the benefit is added back as a withdrawal, meaning that there is chance of tax being charged to disabled or terminally ill Australians. So for disabled Australians who might already be paying tax on a disability benefit due to being aged under 60, they would be taxed again on money that is no longer in the superannuation system. Being taxed after withdrawal is likely to happen in the event of terminal illness as well. Benefits paid for terminal medical conditions, by the way, have been intended to be a tax-free condition of release from super since that was legislated originally in 2008.

Simon Downes:
And something that I know you feel very strongly about is the indexation of the $3 million super threshold, which is highly debated, shall we say?

Richard Webb:
That's right, yes.

Simon Downes:
Tell us about your view on this, Richard.

Richard Webb:
Simon, it is important to note that the $3 million threshold is not intended to be indexed. This is actually anomalous in the world of superannuation as almost everything else which fund members expect to be indexed is. So for example, contribution limits are indexed, the transfer balance cap is indexed, and thresholds for any applicable taxation of lump sum benefits are also indexed. These are things that members of superannuation funds might expect to keep case with inflation since superannuation is held for decades prior to retirement. Fund members don't expect to see their benefits eroded by thresholds which are not indexed, and they shouldn't be surprised by finding out the hard way in the future that they're suddenly subject to what is basically bracket creep on what will eventually be a relatively low balance.

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Simon Downes:
Let's just tie in the super objective at this stage. As we mentioned, the timing of the bill is significant because it comes at the same time that the government is seeking to define an objective of superannuation. Give us a quick update on the objective of superannuation and our position on it please.

Richard Webb:
Sure, Simon. The objective which is proposed to be legislated is, and I quote, "The objective of superannuation is to support savings to deliver income for a dignified retirement in an equitable and sustainable way." And that's the end of that quote. It's presently only available in draft form on treasury's website and will be introduced to parliament later in the year. We generally support an objective of superannuation, but it is important to note that super is only one element of the retirement saving system. For better results, we think that there should be an objective of the retirement saving system and that the objective of super should hang off that. That way we would have a clearer picture of how super meshes together with the age pension, non-super savings, and the family home, but also how all of these connect with care and residency options for retirees including healthcare and aged care arrangements. These are important elements to retirement and shouldn't be treated as separate systems.

Simon Downes:
So are you concerned about the timing of all of this? As we say, we note in our submission that our preference is for the objective of superannuation to be legislated before the bill is introduced to parliament and past. Just tell us why this is important.

Richard Webb:
Yeah, sure, Simon. This is important because the Better Targeted Superannuation Concessions measure is a big change which has far-reaching effects not only on superannuation, but the very idea about superannuation as a savings vehicle. To put that in some context, we presently have a series of limits and thresholds which have been designed to control how much people can even get into superannuation, and these have been around for many years. We have limits on contribution types and overriding some of these is the total superannuation balance restrictions, presently 1.9 million, which is a hard limit to any more non-concessional contributions.

People just can't get large amounts of money into super anymore. So when a government announces a measure like this, there is complex and contradictory messaging about whether the message has changed. Are we trying to stop money flowing into super or are we now saying that it is okay because we now have a new tax for higher balances? At the same time, we still have no tax relief for people with lower balances and who are on lower incomes. They may still be financially punished due to the normal super earnings tax, which might be higher compared to savings outside of super. So an objective of super is a crucial set of guidelines that will help us understand what the answers are to these questions.

Simon Downes:
I wonder how all this is being received within the industry. So what is the impact or at least potential impact on all of this proposed change in the industry itself?

Richard Webb:
Well, quite a lot, Simon, but fortunately the operational architecture for this to work is largely in place with some exceptions. Basically, the ATO need to know about three things to do with every taxpayer's super arrangements, start and end of year super balances, movements into funds, which are all bundled under contributions and movements out, which are all bundled under the heading of withdrawals. For SMSFs, this is mostly already sent to the ATO. And for APRA regulated funds, this is also mostly reported through a combination of existing reporting frameworks. But there are gaps. And for APRA funds, these will need to be fixed with more and enhanced reporting. Fortunately, there is a bit of time to implement all of this since it's not due till the 2025, '26 financial year, but there will be a gap for members who will, in the presence of an unindexed threshold, be more and more in need of advice. I'm guessing that this is a question you might have for me actually, Simon.

Simon Downes:
Well, that's right. I guess that listeners who are not as immersed in the world of super like you are will want to know what it means for them. What, if anything, do they need to think about going forward?

Richard Webb:
Yeah, and I think there's going to be a lot of listeners who fall into that category. I can really only stress the importance of financial advice, Simon, and how much it can assist our listeners in relation to this. There's nothing inherently wrong about having too much super, by the way. If you think that you could be in this situation in a couple of years’ time, remember that this measure still needs to be legislated first, but also you have time to prepare, so see your advisor and plan ahead. Also, the current numbers quoted by the treasurer suggest that only 0.5% of superannuation fund members are likely to find this a problem initially. This still leaves 99.5% who are likely to be unaffected, but as we move into the future with an unindexed $3 million threshold, more and more people will be caught out. So it is important to keep track of your superannuation throughout your lifetime and everyone can do this. And I think that there are a lot of tips for folks who want to keep a closer eye on their retirement savings.

Simon Downes:
Well, I should probably ask you about some of those tips then.

Richard Webb:
I think that folks can also benefit from doing basic stuff, looking at their superannuation balance frequently and not just once a year when your statement arrives in the mail. If you're in an APRA fund, why not sign up to use their online service to see your balance occasionally? Also, if only to see if you're eligible to make superannuation contributions this year, check out the ATO's part of the government's myGov website. Your total superannuation balance at the end of the previous financial year is there and should be able to give you an idea of where you are at as at the 30th of June. If you're in an SMSF, updates at myGov can be a little slow. But I'm guessing that our listeners who have one of these already are probably keeping a very close eye on asset values anyway.

Once you have these, there are plenty of places to go to road test your super balances. The government's MoneySmart website still has one of the best retirement planning calculators around in terms of simplicity and assumptions. But if you don't like that one, a lot of superfunds and financial websites have retirement calculators and other tools capable of providing projections. They all vary in terms of features and not all funds limit access to these to just their members. I think that even if you are nowhere near $3 million, by the way, as most of us are, these tools will be incredibly useful anyway. And if you think you're going to get close to that $3 million limit, don't fret. Your financial advisor will have plenty of ideas about what to do next. Even if this proposal gets changed between now and June 2025, it's still good to be prepared as much as possible.

Simon Downes:
Well, thank you, Richard. That really was a deep dive into the world of superannuation policymaking. And if you ask someone who was aware of the impending changes but not really across the detail, then I hope that really helps to put things into context for you. And no doubt there'll be more to come on this in the months ahead. And that's all we've got time for today. So thanks very much to our expert guest, Richard Webb. He's senior manager of financial planning and superannuation policy at CPA Australia. Our submission on the Better Targeted Superannuation Concessions Bill can be read in full on our website. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.