The Australian government has found itself in a dispute over whether last week’s state budget retrospectively penalised people who have paid additional contributions into their superannuation schemes.
The budget made some substantive changes to the superannuation framework, some of which have not been endorsed by industry practitioners. Measures chiefly aimed at women and those with disrupted work lives, aimed at helping them catch up with superannuation contributions later in life, have received broad support.
But the government has stirred up a fierce debate through its move to cap the amount that wealthy individuals can pump through the superanuation system. It is not so much the tax on the rich that is causing the controversy, but the government's insistence that its lifetime cap on additional – or ‘non-concessional’ contributions, as they are known – is not retrospective.
The budget imposed a A$1.6 million ($1.16 million) limit on savings in retirement and a A$500,000 lifetime limit on non-concessional contributions. The limits apply to existing super accounts and, in the case of the A$500,000 limit, apply to contributions dating back to 2007. This amounts to retrospective taxation, a highly controversial move in any budget, according to the parliamentary opposition leader, Labor's Bill Shorten.
Prime Minister Malcolm Turnbull insists the measures are not retrospective, but he has struggled to convince business leaders, and the government risks boxing itself into a corner with its firm stance.
The number of individuals affected by the A$1.6 million cap is difficult to determine accurately, as many people have multiple accounts. The government says the change will only affect 4% of people with superannuation savings. Figures from the Association of Superannuation Funds of Australia (Asfa) suggest that 110,000 accounts will be affected by this limit.
Industry experts told AsianInvestor they thought the aims of the budget were correct, but disagreed with the levels set for the various changes.
David Knox, Melbourne-based senior partner at investment consultancy Mercer, said: “Generally speaking, we believe the direction of the changes will produce a fairer system and provide greater flexibility for women and others with broken careers.”
However, he said the lower concessional contributions cap restricted the opportunity for individuals to catch up later in their working life.
“The introduction of a lifetime cap on non-concessional contributions is a reasonable step, although the level could be debated, as it also restricts the opportunity for some who can contribute later in life. Perhaps it should be half the pension cap [A$800,000].”
Asfa has long advocated that the super system is potentially being abused by wealthy people using additional contributions as a tax dodge.
The association’s outgoing chief executive, Pauline Vamos, told AsianInvestor: “The purpose of the super system is to provide income in retirement. In line with this, we believe it is appropriate to have a lifetime cap, because the accumulation of very large balances is inconsistent with this purpose.”
She added that the budget changes setting limits on additional contributions was important for the long-term sustainability of superannuation. However, Asfa had proposed a ceiling of A$2.5 million and a higher lifetime non-concessional cap of A$1 million, which it said would allow greater flexibility, given the volatility of markets.
“The reduction in the annual concessional caps [to A$25,000] will have a negative impact on older workers with low balances seeking to catch up,” added Vamos.
Their ability to boost contributions close to retirement will be severely hampered by this, she said. “There needs to be a policy that allows those with low balances over a certain age to make larger contributions. We are disappointed with the lowering of the annual concessional caps because we believe this removes some flexibility and limits the ability of those with broken work patterns to catch up.”
In 2013/14, total employer contributions in excess of A$25,000 were around A$1.7 billion and 254,000 employees made an average contribution of A$31,800. Of these, 42% earned less than A$100,000, 62% were aged 55 years or older and 21% had super account balances of less than A$200,000.
The super account cap and the lifetime contribition limit are budgeted to save A$2.5 billion, which will be ploughed back into the system in favour of lower paid workers and those, particularly women, who have had their working lives disrupted.
Vamos said women were retiring with less than half the super savings of men and one in three women were retiring with no super at all. "So the proposed measures to increase flexibility for those with low account balances, as well as the proposed Low Income Super Tax Offset, are very welcome."
The Low Income Superannuation Tax Offset (LISTO) would substantially increase the amount of tax assistance for people earning less than A$37,000 a year. For a person earning A$37,000 a year, aged 30 and retiring at aged 65, if the LISTO applied over their working life it would boost their superannuation balance, in today’s money, by around 20%, from A$200,000 to A$240,000.
Vamos would not be drawn on whether the government had boxed itself into a corner on the question of retrospective assessment of contributions.
“The question posed should be whether this is good public policy, and, broadly speaking, we think it is,” she said. Some of the caps proposed are too low, she noted, but the concepts serve to ensure the system delivers on its objective of providing income in retirement while ensuring the stability of the economy.