CAANZ

Large balances in the crosshairs

TONY NEGLINE is superannuation leader at Chartered Accountants Australia and New Zealand. A concerted campaign has commenced for superannuation account balances to be limited to a specific amount or face additional taxation. To this end, an amount that gets mentioned often is $5 million, which could mean anyone with more than this arbitrary amount may need to pull money out of super.

These large balances exist for three main reasons. Firstly, there is the biggest cohort – those who took advantage of past policy settings; then we have two categories that are much smaller – successful investors and those who inherited superannuation account balances, often from their deceased spouse.

Between the mid-1980s and May 2006, it was possible to contribute unlimited amounts of aftertax contributions, which were called undeducted contributions. Nothing was done until the Better Super changes brought in by then Treasurer Peter Costello in May 2006.

Many people who took advantage of these policy settings would now be over 65, if not older. When they die, their account balances will need to be paid out of the super system.

By forcing people in the large account cohort to remove money from the super system or face higher taxation, we would be making a retrospective change.

In the past it was common for most adverse changes to the superannuation system to apply prospectively. Anyone who had put in place arrangements before a new set of rules applied was effectively protected, even though grandfathering old rules made the system messy and complicated.

In the past 30 years the only major change to the superannuation system made retrospectively was the introduction of the transfer balance cap, which originally limited a pension account balance to $1.6 million. Chartered Accountants Australia and New Zealand opposed this measure due to concerns it would make, and has made, the system unnecessarily complex and would impact, and has impacted, many super investors retrospectively.

Superannuation is a long-term investment and certainty, especially with government policy settings, is essential.

To some extent it is hard to see why someone might need many millions of dollars invested in superannuation. Maybe it has been put into super because of the potential tax concessions compared to other options. Perhaps super might also have been used for asset protection or estate planning purposes.

But other than maximise the permitted opportunities, what exactly have these people done wrong?

It is easy to shroud concerns about these large account-balance holders by making this an equity argument, especially when the federal government’s budgetary position is under financial stress. But that doesn’t make these attacks right.

Chartered accountants who work in the superannuation sector will know the ATO has a wide and deep arsenal to attack misbehaving SMSFs. It is reasonable to expect the ATO has looked, and regularly looks, closely at these large funds to ensure they are not doing anything inappropriate, with any misdemeanours very likely to face penalties.

Assistant Treasurer and Financial Services Minister Stephen Jones said in a recent speech that large balances should be assessed against a superannuation objective, which the ALP government will seek to legislate.

The former government’s idea, taken from the 2014 Financial System Inquiry, was that superannuation’s job was “to provide income in retirement to substitute or supplement the age pension”.

In our view this is too narrow and too focused on government. The purpose of super should focus on the individual and their family’s needs before the government’s financial situation and therefore should be “to create a national culture of saving and selfsufficiency in retirement”.

Regardless of which policy were to take effect, one that would see account balances greater than a certain amount be prohibited or face additional taxation would make the system much more complex. For example, how would this system work in conjunction with other elements such as the transfer balance cap and total superannuation balance? Would members with a large account balance that suffer a bad investment experience be permitted to contribute more to make up for those losses?

If we are going to attack large private sector superannuation scheme member balances, then, as a matter of equity, we also need to attack defined benefit pensions, including unfunded public sector super schemes. Most likely this could only be done by changing how such benefits are taxed when they are received by a retiree or their beneficiary.