Various federal governments of the day have a habit of instigating White Papers – but perhaps less of a habit of following the resulting recommendations (Ken Henry?s comprehensive tax review, less than 10 years ago, springs to mind). Submissions to the most recent White Paper, on tax reform, closed on 1 June 2015. While it appears that the federal government has ruled out changes to the taxation of superannuation in this election term, the Association of Superannuation Funds of Australia (ASFA) has raised some important long-term issues in its White Paper submission. The two main issues raised are outlined below.
As a concessionally-taxed investment vehicle, superannuation is criticised by some as a retirement savings incentive that unfairly benefits those who are already more well off. As an example, before-tax contributions made into superannuation are taxed at 15%. This compares to individual income tax rates of 19%, 32.5%, 37% and 45% and obviously the higher your individual income tax rate, the more savings you make by having your superannuation contributions taxed at just 15%.
ASFA proposes to ensure equity of the superannuation system by imposing a ceiling on the amount that can be contributed to superannuation at these concessional tax rates. To quote the ASFA submission:
“ASFA considers that the superannuation system should not be used for the purpose of estate planning, and that to fulfil the purpose of the system, account balances should be close to zero on death, taking into account normal longevity.
In essence, this means that there should be a ceiling on where the system should stop providing taxpayer support for accumulating retirement savings or supporting incomes in retirement. On analysis, it is ASFA?s view that the ceiling today should be above $2.5 million.”
Specifically, ASFA is recommending:
- A limit of $2.5 million be placed on the superannuation funds an individual can roll-over to commence an income stream in retirement;
- Non-concessional contributions to be capped at $1 million over a lifetime.
Due to the power of compounding, superannuation also benefits those who have an unbroken work history. Analysis has shown that the gender pay gap can result in 39% less super – and those who take additional time off work – or are out of work for an extended period – can be behind the eight ball. Our current concessional contribution caps (the amount of superannuation that can be paid into your account each year at the 15% concessional tax rate) are $30,000 per annum. But for workers who are unable to make concessional contributions for a few years (either due to unpaid leave or time between jobs) there is no allowance to “catch up” on concessional contributions.
ASFA is recommending that concessional contribution caps should be changed in such a way that individuals with broken work patterns are able to make sufficient contributions. Specifically its suggestion is to:
- Create a permanent, higher, annual concessional contributions cap of $45,000;
- Imposing a lifetime concessional contributions cap of $1 million
It remains to be seen what the White Paper will recommend in relation to superannuation – and of course what the federal government may decide to implement. The suggestions, though, are certainly food for thought.