A Broken Promise for Broken Super
OK, lets start by getting one thing clear. Saying things like “We’ve said we have no intention of making any super changes” during an election campaign, and then making changes less than 12 months later, is clearly a broken election promise. It doesn’t matter whether the changes will directly impact less than 1% of people or not. Rather than arguing about whether or not this does constitute a broken promise, the government should own it, but also defend it based on the budgetary need. Instead, we’ve now got another storm in a teacup because Treasurer Jim Chalmers couldn’t “rule out” future changes to Capital Gains Tax exemptions on the family home during a diabolical interview with Kochie on Sunrise!
If history is anything to go by, we the voting public shouldn’t be at all surprised when the government of the day breaks an election promise. I’m sure it happens at least every term, if not multiply times in every term. And of course, the media and/or the opposition always want to score some cheap political points, but at the end of the day, good governments need to make hard, unpopular decisions, for the benefit of the country.
At the risk of being controversial … I was actually glad to hear the government were beginning to look like “breaking their promise” in relation to superannuation about a week ago. Jim Chalmers was saying things like “we should be prepared to have a conversation about whether we can afford to keep these types of concessions” and there were also memories from the election campaign, where they promised to “end the super wars”. Finally, I thought, here is a government that’s prepared to have the hard conversation. Yes, superannuation concessions are now costing close to what the Age Pension costs. Yes, there are a few people who have somehow managed to accumulate significant superannuation balances, despite the draconian limits currently in place in relation to annual contribution limits. However, lets not forget, that superannuation’s purpose, is to fund a person’s retirement. Most “ordinary” working people who have had the benefit of compulsory super over their whole working lives, will end up with a super balance that will make them ineligible for the age pension. We’re not there yet, primarily because those who are retiring now haven’t had superannuation for their whole working career.
There are though, many people, who have had superannuation for their entire working career, either through privately funded corporate superannuation schemes, or public sector superannuation arrangements. Many of those have accumulated reasonable balances despite earning modest wages, and now find themselves with too much money to receive the Age Pension. Our current superannuation system encourages those retirees to draw down their super balance, with tax free earnings inside the super environment once you start a pension. At age 60, there is also no tax to pay personally on any pensions you draw down, plus you can take an unlimited lump sum tax free as well. In fact, the concessions are so generous right now, that you could amass a combined super balance between “Mum & Dad” of over $3m, retire, draw all of the assets out of super, tax free, then blow it all on a new house, or round the world trip, or a combination of both, and end back on the Age Pension. Not that I recommend that strategy, because the Age Pension is hardly an amount worth striving for … it is a safety net after all.
Circling back to the broken promise … at first glance, it’s not the individual change that the government has made that is the problem. After all, if you’ve got more than $3M in your super account, you can probably afford to pay a little more in tax. The problem is, that’s one more change in a constantly changing superannuation regime. And its also a change that will hurt more people the longer it goes, as the arbitrary $3M threshold won’t be indexed to inflation. That means, if you have a current account balance of $2M, and make no further contributions, and no withdrawals, you’ll breach that $3M threshold in the next 7 years if you earn the average super return of approx.
7%. Similarly a $1M account balance would breach the $3M threshold inside 17 years under the same circumstances. This policy will clearly hit a much larger proportion of the population in years to come.
Digging further into the details reveals that the additional 15% tax won’t just apply to income you’ve actually earned. It will also apply to unrealised gains. That’s right, the government want you to pay 15% tax on the growth of your assets, regardless of whether you’ve sold them or not! Oh, and they won’t just automatically take this from your super account … they’ll send you the bill instead!
We constantly hear from clients who are only 10 – 20 years from retirement, who distrust the government and the superannuation system. For many, they don’t have enough time left to build a large enough super balance to be able to retire comfortably, and the fear of future changes that will limit their access to their own money makes many people unwilling to contribute. The change itself is only set to bring in around $2Bn a year, which is not insignificant, but certainly won’t right the proverbial sinking ship that is the current budget. How many more “promises” will need to be broken, if the government are only willing to tinker around the edges instead of making true reform, which is so sorely needed.
