Results of retrospectivity and Budget survey

Peter, Peter, Peter. everything you say sounds nice BUT, do you know how many Uber rich there actually are? I suggest not enough.

Malcolm Not in the Middle
I feel it is my civic duty to highlight the distortions surrounding the debate about taxation in Australia at the present time; May 2016. The middle class are being labelled as rich and are being asked to pay more and more tax whilst the uber rich people in society continue to amass huge fortunes without being taxed fairly and appropriately. I am really fed up to the back teeth with the hypocrisy shown by all sides of politics about this and other issues. No side of politics will address the issue of mounting debt and no side of politics will address the issue of excessive remuneration of company executives. Instead, all the politics revolves around confected concern about welfare dependent people and continual attacks on the reducing wealth of the middle class.
I am not a socialist and I do believe that people should be appropriately rewarded for their efforts. I don’t have any problem with people amassing large fortunes as long as they don’t force me to pay extra tax in order for them to do so; as is presently being suggested by the LNP. I also believe that responsible Trade Unions are essential in society in order to limit the rapacious attack on ordinary peoples’ entitlements and conditions, undertaken by a few irresponsible CEO’s, whilst they themselves increase their own remuneration to an obscene degree! I also detest the politics of envy practiced mainly by the ALP and the Greens and abhor the suggestion that because someone is middle class, they must be rich. When discussing who should pay extra tax and by how much, I believe it to be a good idea to quote a much admired late American President:
“Ask not what your country can do for you — ask what you can do for your country”- JFK.
During the following article I will make continued reference to what I describe as the uber rich. My definition for Uber Rich is anyone with in-excess of $30 million in assets. These people can withstand any major downturn in financial markets without a significant long term affect on their disposable income and asset base. Not only that, these people can take advantage of depressed asset prices to increase their level of wealth during such inevitable market downturns. This situation is NOT available to the middle class. The uber rich are not compelled to use borrowed funds unlike the middle class. When borrowed funds are used for investment, then the risk of investing is magnified significantly. It stands to reason, therefore, that the uber rich should be compelled to pay a wealth tax because they can easily afford to do so without any significant impact to themselves.
There has been a lot of talk and discussion about why members of superannuation funds should pay tax on earnings above $1.6 million in their superannuation pension accounts.
The reasons given by the Government for this draconian change revolve around the following misconceptions and deliberate distortion of the facts by the uber rich. People such as the Prime Minister of Australia for instance!
1. Members who have more than $1.6 million are considered to be rich. FACT; they are not rich they are almost entirely of the middle class. The uber rich don’t need superannuation but the middle class relies on it very heavily.
2. Members should not bequeath their super balances to dependants on the death of the member, but rather spend it all whilst they are alive. The government supports this idea because it maintains that it wants to stop inter-generational wealth transfer via superannuation. The FACT that no one knows when they are going to die seems to have escaped the attention of the advocates of this belief. The question must be asked; why is it OK to bequeath large capital amounts in the form of the family home tax free to one’s dependants, but not large capital amounts of superannuation? Furthermore, it’s highly unlikely that large sums would be bequeathed by superannuants because of the government’s minimum annual drawdown rules; so where’s the problem? Minimum drawdowns on reaching preservation age, starting at 4-5% and increasing roughly one percentage point every five years or so. This inevitably means that the vast majority of people will exhaust their superannuation savings before they die! As I said previously, where’s the problem?
3. Members who have more than $1.6 million in superannuation have somehow rorted the system to obtain large savings balances. This is despite the fact that the government has put in place legislation to encourage people to do exactly that. FACT; in order to achieve high balances, people deliberately forewent consumption in their earlier years in order to save for their future retirement and therefore, become proudly self-funded, rather than relying on the government age pension. That’s another way of channeling JFK isn’t it?
4. The Government has inexplicably decided what tax free amount of earnings is adequate for everyone; this is regardless of the differing prior earnings realities of individuals when those individuals were in paid employment. FACT; if someone has been earning $300,000/annum and paying tax as they go, no one can expect that person to live on 4% of $1.6 million which equates to $64,000/annum. It isn’t reflective of the lifestyle that particular individual has been accustomed to over the course of their working lives. Just because one is retired, doesn’t mean that the bills stop coming in the mail!
5. No thought has been given to one’s reasonable replacement rate (RRR) of earnings when retired. FACT; the RRR is approximately 65% of prior earnings which happens to be an OECD recommended figure. Take the example of the person earning $300,000 prior to retirement; 65% of that amount is equal to $195,000. A great deal more than $64,000!
6. The Government has stated that an account balance of $1.6 million in superannuation is equivalent to four times the earnings amount of someone on the age pension. FACT; an age pensioner would receive cash (pension payments) as well as a health care card and aged care assistance when needed. I would say that more than $1.6 million would be required to achieve the same result for a self-funded retiree. With cash at call interest rates at 2% or so and probably going lower, $1.6 million would yield $32,000 with no allowance for inflation. FACT; the aged pension is indexed. Self- funded retiree incomes are NOT indexed for inflation or for any other measure of the cost of living.
7. The LNP are saying that the revised superannuation rules are not retrospective. I believe I can torpedo that statement with the following simple example; FACT; consider the situation where a member has paid a deposit of say, $100,000 to purchase a commercial property for their super fund prior to budget night 2016. In order to complete the purchase the member was intending to borrow $400,000 outside of superannuation as well as using another $600,000 already in his superfund. If the member had, prior to budget night 2016, already exhausted the lifetime Non Concessional Cap (NCC) of $500,000, then he would not be able to transfer the borrowed funds ($400,000) into his super account to complete the purchase after budget night 2016! This would mean that the purchase of the property couldn’t be completed and the member would lose his deposit of $100,000! Who apart from the uber rich can afford to lose $100,000? If anyone from the government truly believes this scenario isn’t retrospective, then they must also believe in fairies at the bottom of the garden! In any event, it’s all extremely worrying for the continued safe stewardship of the nation.
The Prime Minister would do very much better in the Australian Electorate by showing true leadership and deciding not to tax the middle class, as he is presently proposing to do; but rather instead, to exercise his power to tax the uber rich; people such as himself for instance. Malcolm Turnbull is not in the middle class, he is in the class of the uber rich. Malcolm is NOT in the middle.
Please see the following before continuing:
http://www.domain.com.au/news/inside-malcolm-turnbulls-point-piper-mansion-20150206-137xhj/
Why is it that the PM can live in a Sydney-side mansion worth in the vicinity of $50 million or so and pay no tax on that residence? He can bequeath that property as his principle place of residence (PPR) to his dependants with no tax payable. Surely if middle class people have to pay tax on their retirement earnings above $1.6 million, why aren’t the uber rich, people such as the PM, paying tax on ALL of their assets? They are eminently capable of paying some kind of wealth tax and you would think in this era of exciting times, be happy to do so? Quite obviously the PPR is being used by the PM and others as a tax free vehicle to amass huge tax free fortunes. I would say that this activity is a rort and needs to be tackled. I am certain the PM would agree as he is always advocating that it is such an exciting time to be an Australian. Let’s all ramp up the excitement index by levying a wealth tax on the UBER RICH! That would make a lot of people really excited and gives the PM the opportunity, probably for the first time in his life, to truly contribute to his country instead of just selfishly following his self-interest. Remember what JFK so eloquently advocated, all those years ago.
I would suggest levying a tax on any Principle Place of Residence (PPR) whose value is calculated at more than $10 million. I am sure the PM would applaude this suggestion as it allows him to show true leadership in the area of tax reform. This figure should be indexed on a yearly basis to ensure that the middle class remain exempt and only the uber rich people such as the PM are captured in the uber rich persons’ tax net; as they should be. The tax levied on a yearly basis could be calculated as a percentage of the property’s worth in excess of $10 million. The figure that should be used to calculate the rate of tax, should be the State land tax revenue rates used by all state governments in Australia. Only the value above $10 million should be used for the calculation of the tax payable. If the PM’s PPR is worth in the order of $50 million dollars, this would mean that he would pay in the region of $780,000 NSW State land tax per year. Given that this State land tax is tax deductible, the PM would effectively only be paying 49% of that amount; loose change to the uber rich such as himself. According to the Domain website mentioned above, the compound rate of capital growth on his PPR over his 21 years of ownership, has been in the region of 11.2%/annum and the effective rate of land tax after the tax deduction is approximately 1%, then the PM is still 10.2 % ahead-go Malcolm! This rate of compounded return on his PPR is quite simply extraordinary and what’s more extraordinary, it’s totally tax free to the PM and others of the uber rich! Those that can afford to pay more tax without feeling the pinch, unlike the middle class.
I believe the $50 million capital value figure of the PM’s residence to be conservative as it doesn’t take into account the extra 600m carved out of the adjacent block and transferred on to Malcolm’s title. His house could be worth $70 million or more, but let’s assume a conservative $50 million!
The same CANNOT be said for people who are living off the meagre earnings on $1.6 million super pension for 30 years or so and forced by the government as they get older, to withdraw an increasing minimum percentage amount over their remaining lifetimes! It’s quite obvious that they will run out of money far too early because those savings can’t be replenished, unlike the uber rich.
If there is anyone living in a PPR which is worth more than $10 million dollars and who can show that they can’t afford the wealth tax, then the tax can be levied from the estate on the death of that person. This measure would protect the little old lady scenario who definitely should not be penalised by the excesses of the uber rich; people such as the PM using their PPR’s for excessive inter-generational wealth transfer. Something the government believes the middle class shouldn’t be allowed to do with their superannuation, but is apparently OK for the uber rich on their PPR! Quite simply mind blowing logic and something more akin to the spirit of George Orwell’s Animal Farm novel, rather than the late, great JFK!
To summarise the above;
1. True leadership starts at the top where the example must first be set. That is, FIRSTLY the PM, Company Executives and the uber rich; NOT the middle class.
2. Stop taxing the middle class and instead, focus on the uber rich.
3. Do not make the superannuation rules retrospective.
4. If the government insists on changing the rules for superannuation, then for heaven’s sake have some grandfathering provisions for people who have already started pensions etc.
5. If the government wants to tax peoples’ retirement savings, then it must tax the uber rich before they go after the middle class.
6. The uber rich don’t need superannuation-just ask Malcolm.
7. The middle class relies heavily on superannuation in retirement and quite often is the only asset they have, other than their PPR.
8. Show some true leadership Malcolm and start taxing all assets of the uber rich.
9. I never thought that I would see the day in Australia when the middle class are taxed more punitively than the uber rich.
I fear that if the information above is ignored by the PM, instead of channeling JFK, he will be condemned by history as channeling the leader Napoleon from George Orwell’s Animal Farm, when Napoleon says in all earnest; “all animals are equal, but some animals are more equal than others.”
It’s now up to you Malcolm to make an exciting announcement for the benefit of the middle class!
Regards
Peter Knight SaFin.
May 2016

Peter all pensions and lump sum drawdowns from non-defined benefit Superannuation schemes are tax free in the hands of the recepient if over 60 years of age. There has been no change to those rules and you would not expect the fact sheets to list every rule that has not been changed.

The new limits only apply to the $1.6m transfer limit in pension at 0% and the excess held in accumulation accounts at 15% and not of the amounts taken out of either phase via an income stream or lump sum

Most will choose to take the minimum from their pension and supplement the rest of their needs from drawdowns from the accumulation phase tax free or from wealth in their personal names which will have tax free earnings on approximately the first $28500 per individual

Peter,

Given the limited detail in what are merely proposals from one political party facing an election (subject to legislation and possible drafting changes), the $56,000 can be taken taxfree as a lump sum by someone who under the current system can so access it (basically those in taxed - other than exempt public sector - super funds aged 60 or above). The taxed untaxed proportion you refer to would only be relevant if it is passed on member's death to a non-tax dependent (basically a non-spouse or adult offspring). So Glenda is right.

Also, the intervening period till 1 July 2017 lends scope to manipulate accounts, as people will and are (legally) entitled to do. The game of advisory gaming will be on.

I subscribe to Cuffelinks and appreciate the thought and exposition that goes into the articles. I gather you receive many suggestions, comments, queries or raves, so here is another one.

So far I have not seen any discussion (anywhere) on the withdrawal consequences of moving balances above the proposed $1.6m cap on amounts in pension accounts back into "accumulation".

What I am getting at is this--

1. Assume an existing pension account of say $3m supporting a pension to a member over 60. Earnings are now tax free. The pension (minimum of 4% or $120,000) is also tax free.

2. The cap means that the pension account has to be capped at $1.6m, and earnings on that are tax free. I assume a 4% minimum pension ($64,000) would apply and still be tax free.

3. The excess over $1.6m ($1.4m) has to either a) be withdrawn (I assume tax free under existing law if withdrawn before 1 July 2017) or b) be transferred within the fund but out of the pension account, I assume to an accumulation account, either an existing one, or a new form of "pension accumulation account" if these funds are to be distinguished from a pre-existing accumulation account.

4. But say you want to continue receiving $120,000 pa (or more) from the super fund. This is an extra $56,000 pa. The issue is "how is this taxed?" ( assuming that lump sum concessions, which I recall are also capped, have been exhausted).

5. I assume there will be nothing preventing withdrawal, even though it may sit in some kind of accum account. Of course, it could be withdrawn from the pension account, but eventually that $1.6m would be exhausted and the $1.4m would need to be accessed, so the same issue arises.

6. Would this $56,000 be tax free as at present, or would the untaxed/concessional component be taxed at marginal rates with a 15% rebate, or would there be some other treatment?

7. Some commentators (eg Glenda Korporal) have suggested it remains tax free. I cant see anything in Morrison's statements or the Fact Sheets that confirms this.

8. If it is taxed in some way, then the budget proposals have a far wider impact than currently discussed, ie the $1.6m cap does not just introduce 15% tax on earnings on amounts above the cap (which I think is fair), but also introduces marginal tax rates on "pensions" (ie amounts withdrawn) to the extent sourced from funds in excess of the cap. This would be a major change and goes far beyond anything suggested by Labour.

Maybe this is a non issue because it is so obvious that all withdrawals are tax free, but who knows what devilish consequences will be revealed in the details.

I would be happy to hear your thoughts, or to discuss it.

I would like a better understanding of the words 'transfer cap' as it relates to the $1.6M. Does this mean that once the $1.6 has been transferred from accumulation (15%0 to Pension (0%) that it is capped.

" Transfer cap" meaning if the 0% pension fund falls below $1.6M it is not possible to top it up from the accumulation account.

Drew, you have it, spot on. We'd be quite happy to pay (just) 15% for >$3.2M if we ever get there - it's STILL very generous.

Well said. The few thousand in tax to be paid is unlikely to stop a retiree with 1.6 to $3.2m (couple) from going out to lunch a few times a year. Just think of what your kids will spend it on.

If $3.2 M between a couple with over $150,000 of tax free income is not generous then greed has got in the way of reality. Both major parties and the greens are in agreement no matter what is said on the evening news bursts by each party.

Add to this, amounts over $3.2m can still be held in super at only 15% tax on income is again a huge benefit. Those well off Australians who are in this position should be thankful for the very low tax position of the past and be pleased that much of the benefits they had are still enjoyed. The younger people will struggle to get to these larger balances like you are enjoying and complaining about.

I agree that these changes have been sold poorly by the politicians but in my view are not unexpected by those in the planning field who have seen how generous the exiting rules were on practice. My clients and myself were expecting these changes or more for several years. Interestingly I have found clients understand and accept the changes when emotions and self interest are put to one side. Maybe some should take a cold shower before making emotive comments that are not well founded.

I agree with Rory, a flat tax across accumulation and pension phases would be far easier to implement than the reintroduction of RBL's which were in the past and will be in the future an administrative nightmare.

Totally agree Sandgroper, I think people need to get over it.
We all know (and probably have since Howard made the changes in 2007) that the current system is unsustainable. Tinkering does nothing for the confidence of the system but long term viability will afford certainty. I would have done it differently and imposed a flat rate of tax across the board rather than complicate it as they have.

Whilst tinkering is less than ideal and should be avoided to the extent possible - it cuts both ways. I'm curious as to whether the abolition of RBL's and fully exempting retirement income from tax in Costello's 2006 budget was also regarded as retrospective by people such as James and Peter? Or are only detrimental policy decisions regarded as so?

Zero tax in the pension phase on an unlimited basis is fiscally irresponsible, no reasonable person would dispute that. The pre 2006 rules were very fair and should, in a similar vein, never have been tinkered with.

Hello, I would like to add my voice to the growing number of self funded retirees opposing the Superannuation changes in the Budget. I am neither rich or poor but have based my retirement on the rules which applied before the Budget. I am happy to pay some tax but surely the $1.6M is far too low a tax free limit. Worse still, this government told us that there would be no detrimental changes to taxation of super funds during the life of this parliament. I have voted Liberal all my life but will not be this time!

I agree with James Rowe completely.
It is absolutely pathetic for the LNP and the ALP to both want to tax super pensions. We have all paid tax on the contributions into super, paid tax on earnings during accumulation phase and now will be paying tax on some earnings during the pension phase. As far as I know, no other country does this? Please let us not forget that many of us have also paid the Super Surcharge Tax in the past; in my case over $50,000! In any event, if the rules are to be changed, they should NOT affect those that have already started pensions. I too will not be voting Liberal in the Senate this time around! As far as I am concerned, the LNP under Malcolm Turnbull have lied to the electorate and are treating us all like mugs!