working for Australians in retirement

Superannuation Reform Package
Public Consultation on the Second Tranche of Exposure
Draft Legislation
[Issued on 28 September 2016]

The release for public consultation of the second round of Exposure Draft Legislation for the superannuation reforms first announced in the 2016-17 Budget covers legislative amendments to:

1. Introduce a $1.6 million transfer balance cap and transitional arrangements for individuals who already have retirement phase balances above $1.6m. Included also is detail on amendments to provide commensurate treatment for defined benefit and constitutionally protected funds;
2. Reform the taxation of concessional contributions (i.e. lower the Division 293 tax income threshold to $250,000 and reduce the concessional contributions cap to $25,000);
3. Allow catch-up concessional contributions for those with balances less than $500,000;
4. Remove regulatory barriers to innovation in the creation of retirement income stream products;
5. Improve the integrity of transition to retirement income streams; and
6. Remove the anti-detriment provision.

Whilst there are issues associated with items 2, 3, 4, 5 and 6 the available time has not permitted us to examine this in any detail and make comment.

A.I.R. supports the introduction of a cap on income stream retirement products as proposed in the Draft Legislation. However we consider there is discrimination against account-based retirement income stream pensions when compared to the proposed method of emulating this cap for the defined benefit retirement income stream pension products and constitutionally protected retirement income stream pension products.

In simple terms we have, we believe, two caps:
1. a $1.6m assets cap for account based pensions; and
2. a $100,000 income cap per annum for defined benefits, annuities and constitutionally protected pensions where there is an additional 15% tax on the income received above this “cap” to be paid in any financial year.

Where is the discrimination?

Account based retirement income stream pension holders carry all the investment risks and impact of market fluctuations along with a requirement to be in a conservative retirement investment phase (quite different from the accumulation phase) and earnings over the next 10 years; with 2% to 2.5 % inflation these people may struggle to return more than 5% per annum (with a 3% earning above inflation). At $1.6m this equates to just $80,000 per annum whilst the non-risk account based pension and annuities are assessed on $100,000 per annum.

This is clearly discriminatory and it would a valid assumption that over time there will be additional enforced service asset and income tested user-pays fees. It may be further assumed that for self-funded retirees the resulting 20% assessment difference will also discriminate against account based retirement income stream pensioners.

A.I.R. therefore recommends that the Cap for account based pensions be raised to $1.8m and that the proposed treatment of defined benefits plans, annuities and constitutionally protected plans be reduced to $90,000 per annum in the final legislation.

In addition, A.I.R. believes there is further discrimination against account based income stream pension assets with the cap being adjusted for CPI but in $100,000 increments.

Implementation

The draft legislation anticipates that on or before 1 July 2017, people will know their
superannuation balance down to the last dollar. However, for self-managed superannuation funds in particular, it can take months for the trustees and the fund’s accountant to assess the value of the assets in the fund, identify the earnings, calculate the tax due and prepare tax returns.


Another complication is that people with self-managed superannuation funds may also have superannuation accounts with APRA funds and/or be members of defined benefit schemes.

We recommend that a period of at least 12 months be allowed for implementation of the new measures. During this period there should be no penalties applied for holding an amount in excess of the transfer balance cap in a pension account.

Retrospectivity

The $1.6m transfer balance cap is just as retrospective as the proposed $500,000 nonconcessional cap that was withdrawn by the Government largely because of widespread concerns about its retrospectivity.

The Tranche 2 draft legislation is similarly retrospective as it catches people who had already moved their superannuation into pension mode and will require these people to re-engineer their superannuation, and pay tax for which they were not previously liable.

The right thing to do would be for the Government to ‘grandfather’ the existing rules under which people have saved for their retirement and apply the new measures prospectively.

SEE FULL DOCUMENT HERE