Super Objectives - What a difference a Consultation Paper makes!

On Monday 20 February 2023, the Government released a consultation paper legislating the objective of (private sector) superannuation. Within hours the criticism of the proposed objective had reached fever pitch.

The objective specified in the Paper is to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. (Emphasis is taken from the Paper).

By unpacking, decoding and deconstructing this text, we can make the following observations.

Why have an objective for super? To constrain and channel future changes to the purpose of private sector superannuation.

The problem is that even if legislated the objective cannot actually prevent a future government from subsequently repealing or changing the legislation. There is also the question as to whether the High Court would hold that a subsequent inconsistent act is invalid merely because it is inconsistent with the legislated superannuation objectives.

Given this, why have a legislative objective? Probably because it is likely to at least influence federal decision makers and the judicial interpretation of superannuation law.

Preserve Savings

What is preserving savings in this context? It means reducing or eliminating the ability of a super member to access their super savings before retirement. Access routes might include:

transition to retirement pensions;
accessing super on or after preservation age and being retired but before age 65;
first home super saver scheme;
member crisis (terminal illness, pandemic shutdown etc)

Given the wording of the “preserve savings” element of the proposed objective, allowing access to super (whether retired or not) before age 65 could be seen as being inconsistent with the “preserve savings” element.

Additionally, allowing access to super before the attaining the qualifying age for the pension age (being age 67 for those born on or after 1 July 1960) could also be seen as being inconsistent with the “preserve savings” element.

Deliver income

What is “delivering income” in this context? It could refer to how much super must be invested in income streams or to the type of income streams. Additionally it could refer to a prejudice to invest in income assets as opposed to growth assets.

Is it requiring superannuation benefits to be taken as income streams or at least some percentage (say 50%) of the super balance being taken as an income stream? In any event the income stream will have to be non-commutable otherwise the stated purpose could easily be defeated by commencing a pension and after three or four payments (for the sake of propriety or appearance) then commuting the pension.

Or does it mean that all or most of super must be invested in a closed investment pool where there are either no rights to exit the pool or only being able to exit the pool subject to very significant exit fees? Even worse where on death outside any guarantee period, the notional balance of the pension is forfeited to the pool?

Does this mean that superannuation could not be used to discharge the mortgage?

Dignified retirement

This element is rather vague from a legal viewpoint. Does the dignity of the retirement vary depending on your pre-retirement lifestyle or is it to be a single objective standard? Possibly it is about allowing super funds (ie industry super funds) to provide non-financial services to members such as financial advice services, aged care advising or aged care services? Or does it mean simply reducing the current legislative and regulatory obstacles to super funds providing financial advice to members in relation to their super?

Alongside Government Support

This is another legally nebulous concept. Does it mean that:

No tax deduction for contributions once total Super Balance reaches the transfer balance cap?
No earnings tax exemption on super in excess of the transfer balance cap?
Transfer balance cap is well in excess of the point at which the super balance alone excludes a member from the age pension on the assets means test
If the rationale for Government support for super is to reduce the age pension burden, then once the super account balance is sufficient to reduce any entitlement to nil, what policy justification is there for further government support.
Removal of the ability to make CGT non-concessional contributions (currently, the only means to make substantial transfers of wealth into super)

Equitable and sustainable way

The Consultation Paper states that the purpose of this phrase is to emphasize that government support for superannuation should be targeted to those in need. Presumably, ‘government support’ refers to the foregone tax arising from superannuation concessions (ie tax which would otherwise have been raised but for the concessions, which is stated to be around $53 billion for the current financial year).

The main tax expenditures arising in relation to super are the reduced earnings tax (15% rather than the average rate of tax) in accumulation phase and the earnings tax exemption in respect of retirement phase pensions (0% rather than the average rate of tax).

If this objective is to be taken as a serious statement of government policy, then should not the regulations:

Limit or prohibit CGT non-concessional contributions (while the CGT contribution can be large in value, there is a lifetime cap per individual of about $1.6m and very few individuals are qualified to make such contributions so that in the total super system, super tax concessions in respect of CGT non-concessional contributions are not significant)
Limit or prohibit ordinary (non-CGT) non-concessional contributions – the current cap on these contributions is $110,000 per financial year so while not having the attention-grabbing potential of CGT non-concessional contributions with their $1.6m cap, ordinary non-concessional contributions are more frequently made, resulting in the aggregate super tax concessions in respect of ordinary non-concessional contributions being greater than CGT non-concessional contributions
Increase the tax rate on super contributions and earnings to a point where it is still concessional and therefore attractive but not so that the cost to the federal budget is so high

The consultation paper is a Pandora’s Box of potential ways to re-structure the superannuation system. Only by setting clear objectives for superannuation (ie the destination) can you work out the necessary design changes (ie how to get there).

For any further information regarding this article please call SUPERCentral on 02 8296 6266 or email info@supercentral.com.au.