Treasury's recent Retirement Income Review observed that retirees with large superannuation balances receive too much in tax concessions.
It noted that 11,000 people currently have over $5 million in super, and claimed that people with incomes in the 99th percentile receive more tax concessions both during their working lives and in retirement than any other group.
The obvious inference is that superannuation concessions should be wound back for those with large balances. But rule changes already made mean that within two decades there will be very few big balances.
Cast your mind back to June 30, 2017, when the Turnbull government introduced the Transfer Balance Cap. This restricted the amount that could be transferred to superannuation's tax-free pension mode to $1.6 million. Earnings on the balance of a fund were to be taxed a flat 15 per cent.
The ability to make contributions was also slashed. A fund member whose balance exceeds $1.6 million can no longer make a non-concessional contribution. For members with lower balances, the annual contributions cap was dropped by 33 per cent - from $150,000 to $100,000 a year. Furthermore, the limit on concessional contributions was reduced from $35,000 a year to $25,000.
Undoubtedly some self-managed funds had the good fortune to invest in shares like Magellan, Fortescue and CSL, which would have given their balances a mighty boost. But keep in mind that these are usually long-term holdings, and the value increases are only paper gains until the shares are liquidated. Until then, CGT on these would contribute virtually nothing to Australia's tax income, irrespective of what tax bracket the owner was in.
Most members of large super funds are aged at least 70, which means they are likely to die in the next 20 years. And a person with a large balance cannot pass the entire balance to their family within superannuation mode.
If their partner is nominated as a reversionary beneficiary, the widow or widower may receive up to $1.6 million, and the rest of the deceased member's account must be cashed out and paid to the beneficiary. It has left the superannuation system.
If the inheriting partner already has a balance of $1.6 million in pension mode, to receive $1.6 million from the deceased they would need to commute their existing pension balance back to accumulation mode, to make space for the money being transferred in.
Suppose in three more years the surviving partner dies - if leaving money to a non-dependant, the estate may well be liable to pay tax of 17 per cent on the taxable component of the surviving partner's account.
Alternatively, if they had taken advice, their attorney would have withdrawn the money from the fund tax-free and deposited it in their bank account. In both situations the entire balance has left the superannuation system once both members are deceased.
I fail to see how the review can make the comment that tax concessions go disproportionally to the wealthy. If a person earning $400,000 a year was under the $1.6 million cap and wished to contribute $100,000 to super from after-tax dollars, they would have to use gross income of $189,000 to make an after-tax contribution of $100,000.
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If they wanted to boost their balance further with a $25,000 concessional contribution, they would pay $7500 in contributions tax, leaving just $17,500 as a net contribution.
The pre-tax cost to a high-income earner of contributing a net $117,500 into super would be $214,000. That's hardly the stuff that tax rorts are made of.
When the Turnbull tax changes became law the industry gave a huge sigh of relief, in the expectation that finally superannuation rules were settled, and no more changes were in the pipeline.
Now more than ever Australia needs a superannuation system that gives certainty. We don't need any more changes.
Noel answers your money questions
I'm 52 and single. I have recently set up a SMSF. I am a sole trader and my yearly income varies year to year between $20,000 and $35,000. I have already used the non-concessional bring forward rule to put $300,000 into my SMSF.
This current financial year I hoped to make a personal concessional contribution of $25,000 but I was told that unless I earned over $25,000 I would not be able to make this contribution as a personal concessional contribution.
Any portion over what I have earned would be considered a non-concessional contribution and I would be in trouble because I have already used it. For example, if I only earned $20,000 I could only contribution $20,000 and that the other $5,000 would be considered a non-concessional contribution.
I also want to make a personal concessional contribution from last year - I have read this is possible as I didn't contribute anything last year. I was too confused and in fear which left me feeling paralysed to do anything. If the above is correct and I must earn at least $25,000 to contribute in any given year, then do I have to earn $50,000 this financial year in order to make these years and last year's contributions?
You are being confused with half-truths. Generally speaking, anybody under 65 is entitled to make concessional contributions up to a maximum of $25,000 a year, except that the regulations state that a personal concessional contribution cannot exceed the contributor's taxable income.
This makes perfect sense. Concessional contributions lose a 15 per cent contribution tax, so it would be a bad move to make concessional contributions and lose this entry tax if you had a low income. You would be better off to simply make a contribution as a non-concessional contribution in which case there would be no entry tax.
Having used the bring forward rule you can make no more non-concessional contributions for three years. But I suggest that you defer making any concessional contributions until your income rises to a point where there is a tax advantage in making a concessional contribution and losing 15 per cent, instead of taking the money in hand and losing tax at a much higher marginal rate. You also mention catch-up contributions - these are certainly possible provided your superannuation balance is less than $500,000.
Just bear in mind that running your own self-managed fund requires you to have a good knowledge of the way superannuation law works. Based on your question this does not appear to be the case, so I urge you to get specialist advice if you think running your own fund is your best way forward.
My husband is 66 and I am 68. We are retired. Our superannuation is still in accumulation phase. Next year we plan to withdraw my super worth $280,000 and live on that. My husband's super will be $750,000 which we will leave in accumulation. Will we still be eligible for the CSHC given the deemed amount of my withdrawal?
You are both a pensionable age, which means your eligibility for the Commonwealth Seniors Health Card will be based on your adjusted taxable income, and the deemed value of your superannuation assets. Once the money is withdrawn from superannuation, it ceases to be deemed - the income from it, if any becomes part of your adjusted taxable income. Based on the information given you will easily qualify for the CSHC.
How long can you hold a principal residence obtained from a deceased estate before you have to pay capital tax once sold? Does the 50 per cent discount apply?
Provided the property was the deceased's principal place of residence, you have two years from date of death to sell the property free of CGT. Once two years have passed you would be liable for any increase in value from the date of death - the 50 per cent discount would apply. The ATO has the discretion to extend the two year period for delays beyond your control such as the will being challenged.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. firstname.lastname@example.org