The 1.1 million members of around 605,000 SMSFs and their advisers will have plenty to say about the government’s plan to legislate a purpose of superannuation.
Specifically, they’re going to have a lot to say about the possible introduction of account balance caps. They don’t like caps, especially what they call “hard caps”.
The SMSF Association National Conference in Melbourne this week – the SMSF industry’s showpiece event – has been abuzz with speculation about the possibility of a limit being imposed on SMSF account balances, in the wake of the government’s release this week of a consultation paper on the purpose of super.
To recap (no pun intended), the government’s draft purpose-of-super statement read: “The objective of superannuation is to preserve savings and deliver income for a dignified retirement, alongside Government support, in an equitable and sustainable way”.
It’s the words “equitable” and “sustainable” that seem to have set the rabbits running among SMSF advisers. The wording is being widely interpreted as meaning there could be a move afoot to limit the amount an individual can accumulate in the tax-advantaged environment of superannuation.
Setting aside for one moment the highly subjective issue of what “high” or “excessive” account balances actually are, it’s been instructive to hear some of the thinking behind the cap objections.
One objection is that there’s already a cap on tax-advantaged superannuation account balances. It’s called the transfer balance cap (TBC). The TBC is the total amount of super that an individual can transfer into a tax-free retirement account. It currently stands at $1.7 million and from July 1 this year is expected to increase, through inflation indexation, to $1.9 million.
Secondly, these so-called high account balances are largely a legacy issue, created when superannuation rules looked quite different from today, and generally the members who have these high account balances are quite elderly. There will be a “natural reduction” of the high account balance issue because, put brutally, these people will eventually die, and the issue will die with them.
The argument is that there’s a cap already, the “excessive” account balance problem will fade over time and, in addition, there are now limits to how much an individual can put into superannuation on a tax-advantaged basis to mitigate against the problem rearing up again at some point in future.
The association finds itself in an interesting position – its official stance is that it does not like caps, especially what it describes as “hard caps” (which in the case of account balance caps it fears could force the removal of money from super funds). On the other hand, it’s a strong advocate for fairness and equity in superannuation.
But there’s no cognitive dissonance in these two apparently contradictory positions, outgoing CEO John Moroney told the national conference. In the association’s view there are already mechanisms in place to address the issue the government sees as a problem.
Whether the SMSF sector’s concerns are well-founded or not, the government shouldn’t dismiss out of hand the perception that the draft purpose of super statement contains a Trojan horse. SMSFs control about $860 billion of capital, or about 26 per cent of the total superannuation pool. The 1.1 million members of SMSFs are typically quite highly engaged with super – more highly than, for example, the typical industry fund member – and want greater control over their own retirement destiny than they can have elsewhere. They typically set up their own super fund for exactly that reason.
Putting this constituency offside – even unintentionally – makes no sense. It would be counterproductive: of all super fund members, it’s SMSF members who are most keen to fund their own retirement, thereby relieving pressure on the age pension.
It would also not be smart politics. The campaign waged successfully against the proposed removal of excess franking credits two elections ago should be fresh in the current government’s memory.
