Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks about the role of superannuation in relation to retirement.
The amount of money held in superannuation has now topped $3 trillion, making Australia the fourth-largest holder of pension fund assets in the world. Sadly, when this amount of money is mentioned, all the vested interests come out of the woodwork to suggest ways to “improve the system.”
Last week the Association of Super Funds of Australia (ASFA), who represent some of Australia’s biggest funds, made several recommendations. One of them was that if a person had a balance of more than $5 million the surplus should be removed from the superannuation system. Another was that indexation should be abolished for both the non-concessional contribution cap, and the transfer balance cap. Both are currently $1.6 million and which, due to indexation, will rise to $1.7 million on 1 July.
These recommendations are not unexpected, because ASFA is not a fan of self-managed superannuation funds. But they are unrealistic and unworkable. For starters, less than 1% of self-managed funds have balances of more than $10 million, and the assets of these funds are usually in big, illiquid assets. Let’s work through a hypothetical example to see how it may work.
Jack and Jill are both aged 75, and have an SMSF with a balance of $16 million. Apart from some listed shares, the principal asset is a large industrial building from which they have been running their business for more than 30 years, and which is now worth $15 million. Thanks to improvements and renovations over time the cost base is $10 million. ASFA argues that this is not fair, as they are taking advantage of the 15% tax environment, but the bulk of the value is in unrealised capital gain which will contribute nothing to government coffers until the property is sold.
Admittedly, when they do dispose of the asset the capital gains will be taxed at 10% instead of the 22.5% that would apply if the asset was held in their own names. But the tax saved is only $625,000.
These continual attacks on the relative few with large balances miss a major point: within two decades almost all these funds will be gone. Jack and Jill, like most trustees of large self-managed funds, are in their senior years – their life expectancy is likely to be about 15 years. When they die, the most they can leave to a dependent within superannuation would be $1.7 million. Any remaining funds have to be removed from the system. So the bottom line is that within 15–20 years almost all the big funds will be a thing of the past.
I also fail to see the reasoning in ASFA’s suggestion that indexation of the superannuation caps be abolished. The purpose of indexation is to preserve the status quo in real terms; in a perfect world, income tax rates, payroll tax and stamp duty thresholds would all be indexed. The reality is that governments are quick to index items that produce revenue, such as fines, but slow to use indexation in tax areas, because this would benefit taxpayers and not the government. The classic example in Queensland is the land tax thresholds, which have not been indexed for 13 years. This has hit landlords hard, as land tax bills have been increasing in line with their assessed site value.
Superannuation should be the cornerstone of Australia’s retirement system. For God’s sake, leave it alone, and let people accumulate money for a welfare-free future, free from continual tinkering. Continual changes to the system lead to distrust in it. Did I mention that we have the fourth-biggest system in the world? That’s a major achievement!
Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
23 Feb 2021
