Like these kangaroos, the Australian Superannuation system is flying high.
The taxation of pension wealth in the UK is under review as the Treasury considers whether it needs to apply constraints on contributions (the annual and money purchase annual allowance) as well as on withdrawals from pension funds valued at over £1, (+ a few quid). Our debate should be informed by an equivalent debate in Australia, one that is much more straightforward.
In Australia, reports are of individual pots of up to Aus$100m which currently have no regressive tax treatment.
What I like about the Australian Government’s reaction to this is to appeal to those paying tax, as to whether they see the creation of wealth as part of the deal.
According to previous comments made by Australia’s Minister for Financial Services, Stephen Jones, there are some 32 self-managed super funds with more than $100 million in assets. The largest self-managed super fund is believed to hold over $400 million in assets. The tax concessions enjoyed by a $10 million self-managed super fund could fund 3.1 full age pensions (according to Mercer Australia). To be clear, these aren’t scheme full of small pots – these are single personal pots owned by individuals?
The Minister for Financial Services, Stephen Jones, has said that the objective of superannuation, as seen by the government, is to “provide retirement income for Australians” – an objective that funds boasting tens of millions of dollars fail to meet.
Speaking on ABC’s News Breakfast on Friday, Mr Jones said: “If people have got superannuation balances in excess of $100 million or even $50 million, I think it’s pretty hard to argue that that’s about retirement income”.
“It might be about estate management, it might be about tax management, but it’s not about retirement income. And that really is not the purpose of superannuation”.
Answering calls for superannuation to be capped at $5 million, Mr Jones said that while the upcoming consultation doesn’t have a “preconceived outcome”, “$5 million is a lot closer to the purpose of superannuation than $100 million”.
A system of tax breaks on savings that costs nearly as much as the Australian state pension needs to deliver to the Common Purpose , according to the Australian Institute of Superannuation Trustees
A number of organisations including the Australian Institute of Superannuation Trustees have previously urged for the introduction of a $5 million limit on super balances.
Research has shown that Australians with a balance at this level are able to achieve annual earnings tax concessions of around $70,000.
Tax concessions for superannuation have been a topic of discussion for some time, with think tank, the Australia Institute, revealing on Friday that these tax concessions could cost the budget $52.6 billion over the 2022-23 financial year.
According to the institute’s research, this puts super tax concessions in the top three expenditure programs by cost in this year’s federal budget, ahead of the NDIS at $35.5 billion and just behind the value of the entire age pension program at $55.3 billion.
Australian debates . like their marsupials – are robust
The situation reminds us of dates on the purpose of tax-relief in the UK, especially as it touches on what tax-relief is for. In Australia, the purpose of retirement saving is defined as “providing a dignified retirement for all Australians” , a phrase which is now integrated into these debates
“The current system is not taking pressure off the budget to provide a dignified retirement for all Australians, but it certainly is providing a lucrative tax avoidance facility for multimillionaires,” said Australia Institute executive director Richard Denniss.
“Reasonable people will disagree about the role of super in modern Australia, but this data shows an unsustainable system with a small number of account holders reaping the benefits. This was never the purpose of superannuation.”
According to previous comments made by Stephen Jones, there are some 32 self-managed super funds with more than $100 million in assets. The largest self-managed super fund is believed to hold over $400 million in assets. The tax concessions enjoyed by a $10 million self-managed super fund could fund 3.1 full age pensions (according to Mercer Australia)
Speaking to the AFR Super and Wealth Summit in November, Minister Stephen Jones made the choice facing Australia succinctly.
“If the objective of superannuation is to provide a tax preferred means for estate planning, then you could say it’s done its job pretty well. Don’t get me wrong, the government celebrates success but the concessional taxation of funds like these has a real cost to the budget,”
There are two lessons I think we can learn from this debate
- We need the clarity about what our pension saving system is about, present in the “dignity in retirement for all” – common purpose.
- We need to consider whether the tax incentives on pensions we have in this country align with the purpose we agree on.
This blog is not about whether LTA , AA and MPAA are doing the right job , nor about the wider debate over tax-relief on contributions, it’s about getting our thinking back to basics as the Australians are doing.
We need to think about our pension savings system’s common purpose and we then need to align our policy on incentives and disincentives to save – around that common purpose.
From the Australian Treasury. We need this clarity of purpose in the UK https://treasury.gov.au/superannuation-reforms
There are reasons why SMSF could get so big. Entrepreneurs decide to finance their businesses with their retirement provisions, taking huge risks. Not much information there is about those who fail, but in a law of large numbers some succeed and end up listing on stock exchanges as unicorns etc. Afterpay is an example where some Australian investors have received hundred of millions from the sale to Block.
There is some tax saved, but I do not think focusing on tax is what matters. People make Super contributions with 15% tax concession and higher tax payer with 30% tax concession, so they save around 15% in tax. The fund is taxed at concessional rates when there is income or gains, but usually this is not a benefit, as start-ups do not pay dividends.
The biggest tax advantage is when the shares are sold, there is a 10% tax rate instead of 22.5%. That’s it. There is now a A$1.7 million limit for allocated pensions, which benefit of no further taxation once a pension is started. The fund remaining outside would continue to be taxed at 15% and respective 10% rates on income and gains.