What’s the real objective of super?

Many have welcomed the government’s announcement to legislate an objective of superannuation, however, I question whether we really need it. Who is this potential change to super really for?

The introduction of words such as “equitable” and “sustainable” in the proposed definition have raised new questions and triggered a national debate about a broader review of the superannuation tax concessions. Shortly after releasing the consultation paper, the government also announced it will introduce an additional tax of 15 per cent on earnings for individuals whose total super balances (TSB) exceed $3 million at the end of a financial year.

If the objective is to provide stability and confidence to the Australian community and help protect superannuation from political interference, but the government then announces a new proposed tax on super, what’s the point of having an objective?

Introducing an objective will not stop the government from tinkering with the system. This is our concern. Legislating the purpose of superannuation was initially intended as a shield to protect super against tinkering, but our fear is it might be turned into a sword so that once you’ve reached the level that the government thinks is enough superannuation for a “dignified retirement”, then anything above that is fair game, as illustrated by the new tax. It seems as though the purpose is really for the policymakers, regulators and the government’s financial situation rather than focusing on members’ and their families’ needs.

So contrary to expectations that the objective of superannuation is about preserving your super until retirement, it is a strategic move by the government to restrict the tax concessions in the super environment in order to claw back some revenue to repair the current budget deficit.

I think the answer to what the purpose of superannuation is for already exists by way of the sole purpose test. This test requires super funds to be maintained for the sole purpose of providing retirement benefits to their members’ or to their dependents if a member dies before retirement.

As the sole purpose test already exists, it could be revisited to tighten up existing preservation rules if access to superannuation is currently thought to be too easy. However, to that end, the consultation paper unfortunately states the objective of superannuation is not intended to guide the regulation of trustees’ conduct and the sole purpose test.

Turning back to the new tax proposal, is it really equitable and fair that certain members will be subject to potential double taxation as a result of having to pay tax on unrealised gains for assets that haven’t been sold, and then paying tax again at the time those assets are sold? This is not the way the Australian tax system works and this proposal goes against the general tax principle of paying tax on income that has actually been derived or on actual realised gains. This proposal will also mean those funds that have liquidity issues will need to ensure they have sufficient cash flow to pay this additional tax, particularly on unrealised gains.

Also, what if the market is volatile and crashes, causing a member’s TSB to drop to below $3 million? Well unfortunately without the loss carry-back rules being available, members won’t ever be able to recoup the additional tax already paid.

Treasury has stated the newly proposed tax is the easiest to administer under the existing superannuation fund reporting system and will “keep compliance costs low”. Should that outcome take priority over members’ best interests and the broader objective of super?

Although we want the superannuation system to be fair and equitable for all Australians, the introduction of another cap is unnecessary as there are already mechanisms in place, such as contributions caps and the transfer balance cap, to address the issue the government sees as a problem.

But if we really do need to see the tax settings change for larger balances, surely there are easier ways to do this that are more reasonable, practical and fair rather than a regime where the main driver seems to be the need for an urgent tax grab the government will not need to pay back if markets crash.

To this end, the proposed change appears to put the objective of having “a more equitable superannuation system” as a priority that runs a distant second.