Background to Self-Managed Superannuation Funds
Self-Managed Superannuation Funds (SMSFs) were introduced in Australia in 1994, as part of the Superannuation Industry (Supervision) Act. SMSFs are a type of superannuation fund that allows members to manage their own retirement savings.
The purpose of SMSFs is to provide individuals with greater control and flexibility over their superannuation investments, allowing them to make investment decisions that align with their personal preferences and financial goals. SMSFs also offer tax advantages and can potentially result in lower fees than other types of superannuation funds.
SMSFs are regulated by the Australian Taxation Office (ATO) and must comply with strict rules and regulations governing their operation. These rules include requirements around investment diversification, trustee responsibilities, and reporting obligations.
Policy issues from 1994 onwards and why policies have changed since that time
Since the introduction of SMSFs in 1994, there have been several policy issues and changes that have impacted the regulation and operation of these funds.
One of the primary policy issues that emerged in the early years of SMSFs was a lack of regulation and oversight. In response, the government introduced a range of measures to improve the regulation of SMSFs, including the introduction of the Australian Prudential Regulation Authority (APRA) in 1998, which was tasked with overseeing the prudential regulation of all superannuation funds, including SMSFs. In 1999 oversight of the SMSF sector was transferred to the Australian Taxation Office.
Another key policy issue that emerged over time was the growing popularity of SMSFs among high-net-worth individuals, who were using the funds as a tax-minimisation strategy rather than for retirement savings. In response, the government introduced a range of measures to restrict access to tax concessions for SMSF members, including the introduction of a $1.6 million cap, now presently sitting at $1.7 million on the amount of money that can be transferred into a tax-free retirement account.
More recently, there has been growing concern around the use of SMSFs to invest in high-risk assets, such as property and exotic investments. This has led to increased scrutiny of SMSF compliance with investment rules and regulations, and the introduction of stricter penalties for non-compliance.
Overall, the policies governing SMSFs have evolved over time in response to emerging issues and concerns around the regulation and operation of these funds. While SMSFs continue to offer benefits in terms of flexibility and control over retirement savings, it is important for individuals to understand the rules and regulations governing these funds and seek professional advice to ensure that they are appropriate for their financial situation and investment goals.
Shifting the goal posts in taxing super funds from a 15per cent tax rate to a 30per cent tax rate
The federal government’s recent decision to increase the tax rate on superannuation earnings from 15 per cent to 30 per cent on taxable income and capital gains on that part of the members balance over $3 million. This will understandably be messy.
The change was driven by several policy reasons. Firstly, there was a concern around the fairness and equity of the superannuation and tax system. The government argued that individuals with very high superannuation balances were receiving significant tax concessions that were not available to the majority of Australians. By increasing the tax rate on superannuation earnings on balances above $3M, the government will reduce the level of tax concessions available to high-net-worth individuals and create a more equitable superannuation system.
Another reason for the tax increase was a concern around the long-term sustainability of the superannuation system. The government has projected that the cost of providing tax concessions for superannuation will continue to grow over time, as the population ages and more Australians retire. Already tax concessions for superannuation exceed the budget outlay for aged pensions. By increasing the tax rate on superannuation earnings for high-net-worth individuals, the government sought to reduce the cost of these tax concessions and ensure the long-term sustainability of the superannuation system.
The government also argued that the tax increase would have a relatively limited impact, as only a small proportion of superannuation account holders have balances over $3 million. The government estimated that the tax increase would affect around 1per cent of superannuation account holders and would generate around $3.8 billion in revenue.
The decision to increase the tax rate on superannuation earnings has been controversial, with some arguing that it could discourage individuals from saving for retirement and undermine the stability of the superannuation system. Others have argued that the tax increase is necessary to create a more equitable and sustainable superannuation system. There is also the warning from top SMSF expert Grant Abbott that governments never stick to a threshold very long so expect the $3M to become $2M and lower. Plus he says will those with sums above $3M be allowed to withdraw their surplus balances from super without penalty.
Overall, the decision to increase the tax rate on superannuation earnings reflects the government’s broader policy goals around fairness, equity, and sustainability in the superannuation system, and highlights the ongoing challenges and debates around the regulation and operation of superannuation funds in Australia.
Whether the federal should pursue such reforms considering that the whole purpose of superannuation is solely for retirement purposes and should not be taxed?
There is a valid argument that the superannuation system was established to encourage Australians to save for their retirement and that taxing superannuation earnings is inconsistent with this goal. Critics of the recent tax increase argue that it will reduce incentives for individuals to save for retirement and could undermine the stability of the superannuation system. In addition there have been hundreds of changes to the superannuation laws since 1994 and over 3,000 pages of laws and regulations mean superannuation can be confusing to experts and the public alike.
Proponents of the tax increase, however, argue that the superannuation system provides significant tax concessions to individuals and that these concessions disproportionately benefit high-net-worth individuals. They argue that the tax increase is necessary to create a more equitable and sustainable superannuation system.
There are a few points to consider when evaluating whether the federal government should pursue such reforms:
– Purpose of superannuation: Superannuation was established to provide income for Australians in retirement. However, it is important to recognise that the superannuation system also provides significant tax concessions to individuals, which are funded by taxpayers. As such, there is a legitimate question around whether these tax concessions should be available to all Australians, or whether they should be limited to those who are most in need. The government has been emphasising that part of superannuation is dignity – this seems very left field and may open up the system to pet investment projects of the government.
– Equity: The recent tax increase on superannuation earnings for individuals with balances over $3 million is designed to increase equity in the system. High-net-worth individuals have access to significant tax concessions, and there is a perception that this is unfair. By increasing the tax rate for these individuals, the government is seeking to create a more equitable superannuation system.
– Sustainability: The cost of providing tax concessions for superannuation is growing, and there are concerns around the long-term sustainability of the superannuation system. By reducing the cost of these tax concessions, the government is seeking to ensure the long-term sustainability of the system.
– Unintended consequences: It is important to consider the potential unintended consequences of the tax increase, such as reducing incentives for individuals to save for retirement or increasing the use of tax avoidance strategies. Policymakers must carefully evaluate the potential risks and benefits of any policy changes.
Overall, the decision to raise a surplus tax on the superannuation earnings of some is a complex and controversial issue, and there are valid arguments on both sides. However, policymakers must carefully evaluate the impact of any changes on the purpose of superannuation, equity, sustainability, and unintended consequences before pursuing reforms. Ultimately, any reforms to the superannuation system must balance the need for fiscal sustainability with the goal of ensuring that all Australians have access to a secure and comfortable retirement.