Tax changes to superannuation need to consider the objective and goals of the system: ASFA

ASFA is pleased to have the opportunity to make a submission as part of the tax white paper process. ASFA’s submission, released today, recommends that any changes to taxes on superannuation need to be considered against the objectives and goals of the system. Against these principles, ASFA has identified areas where the design of the system needs to be modified in the future.

The primary objective of the system is to enable the majority of Australians to save enough so that they have an income throughout retirement. This should provide a comfortable retirement without having to rely on the full of Age Pension.

To deliver on this objective, the system must be able to deliver on the balance between providing a high enough level of income so that the majority of retirees can live comfortably, while not funding amounts that can be used for other purposes such as estate planning.

ASFA CEO, Pauline Vamos stated: “Against the objective of superannuation, under the current tax arrangements, superannuation is substantially delivering on that balance by improving adequacy, achieving equity, sustainability, simplicity and maintaining confidence in the system.”

However, ASFA has identified that there is a risk of losing community confidence in the system due to an emerging concern that the system may not deliver on this balance. This may happen if some changes are not made in the future to ensure the equity of tax concessions and the adequacy of retirement incomes.

“Equity in relation to the application of tax concessions is an important part of the sound design of the Australian retirement income system as concessions are funded by all taxpayers. This requires that there is an appropriate ceiling on those taxpayer-funded concessions to ensure taxpayer value. In determining the ceiling, we need to look at the purpose of the system and ensure that the system is not used for other purposes.”

“While the vast majority of members do and will use the system for its intended purpose as their account balances are not high, a small minority of people have amassed amounts that the system was not designed to fully fund and, unless the system design is changed slightly, then an even greater proportion will fall into this category in the future.”

ASFA is recommending that a limit of $2.5 million be placed on the superannuation funds an individual can rollover to commence an income stream in retirement. This could be implemented by requiring that amounts above this ceiling remain in the accumulation phase and continue to attract the nominal earnings tax of 15 per cent or be removed from the superannuation system.

Non-concessional contributions should also be capped at $1 million over a lifetime to prevent very large balances from accruing in the future as an integrity measure to complement the $2.5 million capital cap.

“These two measures will assist the superannuation system to deliver on its objective, remain broadly equitable and sustainable within the tax system.”

To better deliver on adequacy, ASFA is also recommending that concessional contribution caps be changed in such a way that individuals with broken work patterns are able to make sufficient contributions.

“Providing flexibility in the system so that those with broken work patterns can catch up is a change that needs to be considered to improve the ability of the superannuation system to deliver a level of income in retirement. This way the majority of Australians will have a chance to live comfortably when they are no longer working full time,” Ms Vamos concluded.

For further information, please contact:

Glen McCrea, Chief Policy Officer, 0435 742 440.

About ASFA

ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral, and non-party political national organisation, which aims to advance effective retirement outcomes for members of funds through research, advocacy and the development of policy and industry best practice.