Another super fiddle

The Australian reported last week that the Federal government is expected to issue inflation-linked bonds specifically aimed at self-funded retirees. This initiative will form part of a package of retirement income reforms that will be announced in the budget next month in response to the Henry Tax Review.

Issuing inflation-linked bonds sounds like an excellent idea and no doubt they will be eagerly sought after, not just by self-funded retirees but also by those who have yet to reach retirement but are running their own self-managed superannuation funds. The initiative is consistent with the revival of the retail bond market that is currently under way and will provide some welcome diversity. The bonds would effectively provide an indexed annuity for 20 to 25 years.

However, another initiative that may form part of the package is unlikely to receive such a warm welcome from those who run their own SMSFs and/or hope to be self-funded retirees. The welfare lobby group, ACOSS, and others, are pushing for the 15 per cent contributions tax to be scrapped, with all voluntary contributions to be taxed at the taxpayer's marginal rate. The trade-off is that the government would match voluntary contributions up to a maximum of $7000.

At first glance, this proposal seems to be driven by misguided notions of equity and ignores economic reality and why the incentive was put in place originally. Very few taxpayers on a 15 per cent marginal tax rate or less, have any financial capacity to make voluntary contributions to superannuation. Generally, they would be struggling to deal with the day-to-day costs of living, and even if the government cut the contributions tax to nil for such taxpayers, it is unlikely to generate any significant increase in contributions.

It is only those taxpayers in the higher marginal tax brackets who have the capacity to make voluntary contributions and this capacity increases as taxpayers move into the higher brackets. The 15 per cent contributions tax was intended to provide an incentive to those who can afford to do so, to provide for their own retirement, ideally becoming self-funded retirees and removing the pension burden from the government.

Moreover, it is only since the relatively recent removal of the 15 per cent surcharge on those tax payers in the highest marginal tax brackets that voluntary contributions have been made in any reasonable volume. It is unfortunate that the arrival of the GFC in the interim has discouraged many from continuing to make voluntary contributions.

If in future voluntary contributions are to be taxed at the taxpayer's top marginal rate, it can be expected that voluntary contributions will fall away to insignificant levels. The additional taxes will not fill any holes in the government's budget.

In addition, the growth of superannuation in Australia will be driven almost solely by compulsory contributions made by employers. This will be to the disadvantage of our funds management industry, which largely owes its existence to superannuation, if the potential for above-system growth rates is removed.

It is also likely to halt the growth in SMSFs in its tracks, and maybe this is the real objective, given that along with ACOSS, it is the Industry Super Network and the ACTU that are pushing this line. SMSFs have become the largest sector of the superannuation industry, according to APRA data to September 2008, accounting for more than 30 per cent of total superannuation assets. Moreover APRA's report to December 2008 shows that SMSFs have outperformed all other superannuation fund types; but all this may be short lived.

If the real objective is to halt the growth of SMSFs, a lot of money will be lost to the superannuation system. SMSFs are run by people who have the capacity - and generally significant capacity - to save for their own retirement, given that the value of average assets held within SMSFs is around $1 million.

Those who run SMSFs know well that it is only the tax advantages that make running a SMSF worthwhile. An investment portfolio can be run outside of superannuation without the administrative and compliance burden imposed by the ATO, and the funds invested can be accessed at any time and not locked up until retirement.
It seems that once more the pollies and those who can influence them cannot be trusted not to fiddle with superannuation. There is simply too much money at stake.