Calls to reform tax concessions on superannuation come as the government struggles to manage the budget and support an ageing population. Photo: Jessica Shapiro
Pressure is mounting on the government to change the rules that allow wealthy people with millions of dollars in superannuation savings to access their money in tax-free lump sums.
The tax white paper, to be released on Monday, is expected to put the issue squarely on the agenda, as debate already rages about other changes to super rules proposed by the financial system inquiry.
The Association of Super Funds of Australia (ASFA) has been campaigning for people with more than $2.5 million in superannuation to be forced to pay tax on lump sum payouts.
Taxing lump sum superannuation payouts would be one way of encouraging people to invest in retirement income products.
"The government's tax white paper, to be released on Monday, can be expected to address the question of this nature," ASFA chief executive Pauline Vamos said.
Deloitte's head of superannuation, Russell Mason, backed ASFA's proposal provided the government did not enact it retrospectively.
"I think it [taxing lump sum super payouts over $2.5 million] would be a fair thing to do so long as it only applied to money people put into super after the rules had changed. If people have abided by the rules and legitimately accumulated $2.5 million or more in super then why should they be penalised?" Mr Mason said.
Introducing a tax on lump sum super payouts has the potential to be administratively complex and unfair, at a time when the sector is already grappling to adjust to a raft of other recent changes, Mr Mason said.
The peak body for self-managed super fund investors has also thrown its "in principle" support behind the call to introduce a tax on lump sum super payouts above a certain threshold, but wants an integrated review of how tax, super and social welfare payment rules interact.
"In principle we support taxing lump sum super payouts above a certain threshold but it is unclear what that threshold should be," SMSF Association senior manager policy Jordan George said.
"We acknowledge the system needs better incentives to encourage people into retirement income products rather than taking lump sums, but want to ensure people have enough flexibility to withdraw money when they need to."
'Strong nudge, not a default'
Calls to reform tax concessions on superannuation come as the government struggles to manage the budget and support an ageing population. Treasury's 2015 intergenerational report, released in March, forecast that in 2055 Australia will have a population of 39.7 million, with an average life expectancy of 96 years, and relatively fewer young people.
A key plank of the findings of the financial system inquiry, chaired by David Murray, was that the government should strengthen the law to ensure that the intended purpose of the superannuation system as a source of retirement income is protected.
One of three recommendations made by the Murray inquiry in relation to super was that it should "meet the needs of retirees better by requiring superannuation trustees to pre-select a comprehensive income product in retirement for members to receive their benefits, unless members choose to take their benefits in another way".
As reported by Fairfax Media earlier this week, Treasury executive director and chief operating officer John Lonsdale has signalled that recommendations from the Murray inquiry put forward to overhaul superannuation are likely to be adopted. This means retirees could be pushed into an allocated pension-style fund rather than automatically getting access to a lump sum.
Challenger's head of retirement income, Jeremy Cooper, who led the 2010 super system review, backs the plan to encourage retirees into a retirement income-orientated style fund at the end of their working life, provided it remains optional.
"The origami-like careful wording of David Murray's recommendations make it clear that this should remain an opt-in arrangement rather than a default," Mr Cooper said. "What has been proposed is a strong nudge into retirement income products, not a default, and I think that is the right setting because retirees have very individualistic needs."
But other experts argue that a much stronger crackdown on lump sums is on the horizon.
Looking at the recommendations of the Murray inquiry and the findings of the 2015 intergenerational report together, the debate over whether to ban lump sum payments from superannuation is a live issue, said Antoinette Elias, EY Oceania's head of wealth and asset management.
"The big question is whether the government should act to prevent lump sum payouts," she said.
Draw-down plans the norm
The current suite of tax concessions, aimed at encouraging people to top up their compulsory super payments from employers with additional voluntary contributions, were put in place so more people would be able to self-fund at least part of the income they need in retirement.
Calls to reduce access to superannuation raise the gnarly issue of how to deal with the rights of those people who have already been voluntarily contributing extra money to their superannuation in good faith that, as under the current rules, they would be entitled to access this money in a lump sum at retirement.
"Any significant change to the lump sum rules would only be reasonable if there were strong transitional rules in place so the changes weren't applied on voluntary contributions people have already made," Ms Elias said.
Mr Mason supports the idea of banning access to super balances in a lump sum retirement, so long as the reform is well-implemented and an exemption is put in place for people with small balances.
"It does not make sense for people with a superannuation balance below $50,000 to be forced to buy a pension – they should be allowed to take that money in a lump sum on retirement. But if someone has a superannuation balance of $500,000 then a draw-down pension plan makes a lot more sense than a lump sum payout," Mr Mason said.
A self-funded pension-style draw-down plan is already the norm for people with higher balances. Last financial year just $8 billion was withdrawn from super in lump sums by 182,000 new retirees, most of whom had balances of $50,000 or less.
In comparison, $45 billion was withdrawn from super as a self-funded pension with a draw-down rate averaging 4 per cent by another 155,000 new retirees who had a balance above $50,000.
The average superannuation balance for people retiring today is slightly more than $100,000 for women and just less than $200,000 for men.
