Treasurer Scott Morrison is facing some tough choices in his forthcoming budget, with an election before the end of the year and a deficit that continues to blow out. He has ruled out the $35 billion item, increasing the GST to 15%, and he has to scrape around for dollars without offending too many people. His focus is likely to be expenditure cuts rather than significant new taxes.
At the SMSF Association National Conference in Adelaide today, he expressed a desire to fix some inefficiencies in the superannuation system, and then aim for a long period of stability.
He made one point firmly. He does not want to tax people in the retirement phase. Stability and certainly for people looking 30 years ahead is important. He said we should not penalise people who have put money into super using the current rules (cue lots of applause). This is retrospectivity, even if it is not called that. He was clear and he obviously criticised the Labor proposal to tax retirement incomes.
Morrison wants as many Australians as possible to achieve financial independence in retirement. It should be part of Australia’s long-term plan, with fewer people relying on transfer payments. His vision for super includes more targeted incentives.
(The previous day, Assistant Treasurer Kelly O’Dwyer announced a Productivity Commission review of the efficiency of the superannuation system, including, “This review is not about delaying change, it’s about making sure that the system is dynamic for the modern world.”)
Super concessions
There is not a lot of headroom due to fiscal problems, so the Government has looked at suitability and sustainability of retirement incomes. But using his new favourite expression, he does not want to “sell the Australian people a unicorn”. That is, something that does not exist.
Some changes are coming. He highlighted that 42% of people increase their assets in their last five years while on the pension, and another 25% remained the same. This money should be funding retirement and old age. He said that allowing people to keep their own money is different from giving them a pension. Welfare payments and tax incentives are fundamentally different. The welfare payment comes from someone else (more applause from audience).
He will be looking at a better balance between income tax and super incentives. He showed the oft-quoted chart from the Murray Inquiry on distribution of superannuation concessions by income level, where more than half the benefits go to the wealthiest 20%.
While “… saving for the future is tremendous, it’s not a bad thing at all”, he wondered whether savings would occur anyway without such incentives. Those on high incomes are unlikely to draw a pension regardless. It’s healthy that the majority of income in retirement in the future will come from super and not the age pension, and this should be encouraged, but are the incentives right?
Stability and certainty
Super is not an estate planning vehicle. Morrison said we all want to leave assets for our children, and the taxpayer should help independence in retirement, but not also increasing inheritances.
He said that superannuation is too rigid, and we should encourage flexibility and choice. Fees in APRA-regulated funds are falling too slowly compared with their asset growth, and this will be a focus of the Productivity Commission. Employees should choose where their money goes. Some people covered by enterprise bargain agreements are forced to go into certain funds. This can disadvantage people who work in multiple jobs, who end up with multiple funds.
Targetting incentives to those who need them
The Government is also looking at how changes can be made for people who have interrupted work careers. For example, it could increase the caps on contributions after a loss of work, to allow a catch up in super balances. This includes carers who have to leave the system to look after family members due to personal bad luck. They are also considering lifetime caps.
Every concession must carry its weight, so they are all being looked at. He wants to target incentives at those who are most likely rely on the age pension. But the system is a combination of concessions, and we cannot start again. We have to work with what we have. It’s a furphy that people spend their money so they can access the age pension.
Limits on negative gearing
Negative gearing has some excesses that should be curbed, and eligibility needs to be fair. But some 70% of people have a loss on their investment property of less than $10,000 a year and only one property. Nurses, teachers, police, they buy one property to provide for the future, they are doing it for security. They are not the problem, yet negative gearing is demonised. He said, "I won’t tax them more." (Cue more applause).
The value of superannuation
Super is the centrepiece of the retirement income system, other than the age pension safety net. Many people have not had the benefit of a full super system all their working lives and they rely on the welfare system through no fault of their own.
There are many other issues in super other than tax. Let’s have a super debate about governance and efficiency and targeting and not only tax.
He hoped that after some changes in the superannuation system, there would be a 'landing point' and a long period of stability. The super rules should not then be reviewed in every budget.
He also added that he is keen on the fintech opportunities, and he sees the service sector transformation replacing the mining boom. He hopes financial services will be part of this, including taking wealth management skills into the Asian region.
The full text of the Treasurer's speech is linked here.
Graham Hand is Editor of Cuffelinks and attended the SMSF Association Annual Conference courtesy of the Association.