Superannuation, the ultimate government cash cow?

[McLovin]

If I was a younger person I would think long and hard before I put anything extra into super, you might not be able to get it until 70........

I have hardly anything in super and intend to keep it that way. I've long thought this was on the cards, or at least the rules and tax around super would be changed well before I reach retirement.

 

[pinkboy]

Yeah I have to admit this has me a little concerned. I'm a 30yo business owner making the maximum 25k contribution each year for tax purposes. I think he mentioned a 5 year differential between the pension age and accessing super which would mean 65 for accessing super down the track. I'll certainly be frustrated if I have a nest egg saved up which I can't access because the goal posts have been shifted after I have made my contributions. Long live the baby boomers..

Don't be so naïve then. There is a full 2 generations of governments between now and when you retire, so plenty of scope for Superannuation rules to change.

Better off paying a little more tax and putting that extra cash to good use outside of Super, knowing full well there is much more flexibility of its use.

Ive been in business 9yrs now (Im 31), and have only been putting the bare minimum in for myself, and putting any extra cash back into the business, or paying the extra tax and putting it to good use.

Why let others control what you cant control for 40yrs?


pinkboy

 

[CanOz]

I have hardly anything in super and intend to keep it that way. I've long thought this was on the cards, or at least the rules and tax around super would be changed well before I reach retirement.

Agree, i have a little over 150k invested in emerging markets equities. Once i move back to Australia I'll buy property with whatever is left and sit on it until i need it, contributing the minimum to it until then.

 

[sptrawler]

The last few comments are exactly what I've been explaining to Sydboy, there will be a loss of confidence in the super sytem and people will not put extra in.

Therefore more people will rely on a pension as they will have inadequate super.

This in turn will force the government to force a higher contribution which is an impost on business, or co contribution which is an impost on the wage earner.

People really need to be carefull what they wish for with super, it is a double edged sword.IMO

Tax it, hammer it as hard as you like, it's your money, you'll wear it, one way or another.

 

[McLovin]

The last few comments are exactly what I've been explaining to Sydboy, there will be a loss of confidence in the super sytem and people will not put extra in.

I'd fall backwards off my chair if younger people <40 as a group were putting that much additional into super. There must be a report about that somewhere.

I'd rather keep my money outside of super where I'm free to do with it as I want.

 

[sptrawler]

I'd fall backwards off my chair if younger people <40 as a group were putting that much additional into super. There must be a report about that somewhere.

I'd rather keep my money outside of super where I'm free to do with it as I want.

Absolutely.
I'm in my late 50's and it wasn't untill ill health in the last few years, that I sold investments to put money in super.
I've just commenced an account based pension and there is no way I would recomend younger people put extra in.
The ever increasing call to tax it harder, why would you lock your money away for 20 - 30 years. Far better off waiting till closer to your retirement and see what the tax treatment is.
The existing super sytem was never intended to be a complete pension replacement for the baby boomers, very few have much in there.

 

[FxTrader]

Better off paying a little more tax and putting that extra cash to good use outside of Super, knowing full well there is much more flexibility of its use.

How much more flexibility do you want? With SMSF I can invest in shares, property, CFDs, Options, Forex, Warrants, Collectibles etc.

Ive been in business 9yrs now (Im 31), and have only been putting the bare minimum in for myself, and putting any extra cash back into the business, or paying the extra tax and putting it to good use.

If your business provides a good return on your equity then this may make sense as long as this situation lasts. However, paying the extra tax to make the same investments outside of super can easily add up to tens of thousands of dollars every year. Super is easily the most tax advantaged structure currently available. Don't believe me? Talk to an accountant.

Why let others control what you cant control for 40yrs?

Nobody has control over taxation concession policy except government. There is sufficient motivation for government to maintain the tax advantaged status of super indefinitely. The older the population becomes, the more government will need to incentivize self-funded retirement.

Unforutnately for Hockey and future governments, over 50s actually vote in this country and our numbers are growing rapidly. We shall see the ballot box verdict on any proposal to change the super access age soon enough.

 

[craft]

Yeah I have to admit this has me a little concerned. I'm a 30yo business owner making the maximum 25k contribution each year for tax purposes. I think he mentioned a 5 year differential between the pension age and accessing super which would mean 65 for accessing super down the track. I'll certainly be frustrated if I have a nest egg saved up which I can't access because the goal posts have been shifted after I have made my contributions. Long live the baby boomers..

The moving of the preservation age certainly seems to be on their minds.

It is also the moving of the goal posts after the contributions are made that would frustrate me if they don’t grandfather things adequately.

The die is cast for me. I was butt poor from a butt poor family and concluded early that the demographics didn’t look good for me to get a government pension, so I embraced super wholeheartedly. I concluded I would need additional savings over the then 3% super guarantee amount to have any sort of standard of living in retirement and I figured I needed to get compounding working for me which meant starting early and I also concluded that the most disposable income I would ever likely have would be pre family and kids.

So from the day I started work until I left employment at around 30 I salary sacrificed the maximum I could, which wasn’t that much because of the age based deductibility limits for under 35’s (around 10K pa) but it was a decent whack of my wage % wise and a big sacrifice at the time.

In calculating how much extra I needed to contribute in those early days two variables were critical to the calculation – time remaining (I used 55 – then preservation age) and investment return – (I used 3% after tax/inflation/fees.) Turns out I dramatically underestimated my investment return and it would seem now I dramatically underestimated the time remaining.

So now I sit here at age 43 with a super fund that could easily fund us for the rest of our lives but can’t utilise it. We are forced to keep it tax sheltered and growing for at least another 17 years and maybe more. That tax shelter is going to provide us many, many, millions that would otherwise be paid in tax but don’t blame me, I knew no better when I underestimated the investment return and time to preservation age is out of my hands.

We are not being forced to save for our retirement any more, We (or at least the kids if we don’t make it) are being forced to becoming stupidely rich. I guess any long run system is going to have unintended consequences and they need to think about them as they make changes.

 

[pinkboy]

How much more flexibility do you want? With SMSF I can invest in shares, property, CFDs, Options, Forex, Warrants, Collectibles etc.

But when you need to sell something, say in an emergency, you cant use the cash....it is in there for life until the rules allow you to access. I know if I have to lend my company a couple hundred thousand $$$ to tie over wages for a couple weeks on a large project, I know I can can....where as had I punched it into Super, it would not be able to be used.


If your business provides a good return on your equity then this may make sense as long as this situation lasts. However, paying the extra tax to make the same investments outside of super can easily add up to tens of thousands of dollars every year. Super is easily the most tax advantaged structure currently available. Don't believe me? Talk to an accountant.

Super is I agree is tax effective, but as previously said, if I lock away too much funds in this investment vehicle, what happens when I want to retire at 32? I wont be able to access any cashflow from those investments, where as I can live off rent/dividends/cash interest tomorrow if I chose to using investment outside Superannuation. I refuse to work any longer than I have to - the last 9yrs have been tough on me physically and mentally.....and I don't want to be worried about working another 30yrs I can tell you straight up.


Nobody has control over taxation concession policy except government. There is sufficient motivation for government to maintain the tax advantaged status of super indefinitely. The older the population becomes, the more government will need to incentivize self-funded retirement.

Exactly....then why lock away the funds you are not in control of? Agree regarding the motivation to maintain it, as not everyone has enjoyed the earning capacity of myself (and many on here - its why we invest isn't it?), so at least it is a 'forced savings' as such. Some young people these days wont even take on a mortgage for a house their whole lives and would rather pi$$ their cash up the wall week in week out. So no savings or nest egg to fall on there.

Unforutnately for Hockey and future governments, over 50s actually vote in this country and our numbers are growing rapidly. We shall see the ballot box verdict on any proposal to change the super access age soon enough.

Agree...50 is still young in my books no matter which way you look at it, and with increasing numbers, the Government now and future wont be able to keep everyone happy as even in that stage of life (50), the variance of financial capacity and stability is so wide still.

I do see your points loud and clear, however believe some flexibility is needed if someone is 40yrs from retirement age. 5-15yrs, not so much, but there is still an uncertainty cloud hanging over Superannuation which makes people nervous and think twice before contributing bulk funds there.

pinkboy

 

[McLovin]

So now I sit here at age 43 with a super fund that could easily fund us for the rest of our lives but can’t utilise it. We are forced to keep it tax sheltered and growing for at least another 17 years and maybe more. That tax shelter is going to provide us many, many, millions that would otherwise be paid in tax but don’t blame me, I knew no better when I underestimated the investment return and time to preservation age is out of my hands.

We are not being forced to save for our retirement any more, We (or at least the kids if we don’t make it) are being forced to becoming stupidely rich. I guess any long run system is going to have unintended consequences and they need to think about them as they make changes.

There should be an upper limit to super fund balances after which the remaining must be moved out of the fund or is taxed inside the fund at normal rates of tax. Much like the tax free status of super funds in pension phase there is a point at which the fund is no longer operating as intended (to provide an alternative to a state pension)

 

[Julia]

There should be an upper limit to super fund balances after which the remaining must be moved out of the fund or is taxed inside the fund at normal rates of tax. Much like the tax free status of super funds in pension phase there is a point at which the fund is no longer operating as intended (to provide an alternative to a state pension)

+1.

 

[sptrawler]

How much more flexibility do you want? With SMSF I can invest in shares, property, CFDs, Options, Forex, Warrants, Collectibles etc.
.

The problem is, it is basically a joint account with the government, with you being the minority holder.
They can tell you how and when you can draw on it.
How much they are going to tax it.
They can put limits on it.
They can decide what you can and can't invest in e.g residential property.
They can make you sell assets.
They can tell you to leave a certain amount unaccesible, to cover possible health and or longevety problems.
Really they can do just about anything they want, to it.

Currently it is tax advantageous, however if that changes, there is very little you can do to change your plan.

There are and allways will be tax advantaged investments outside super, that allow wealth creation without losing the ability to remove the capital.
Also with the increased burden on the welfare system, I would think it will become easier to put money into super as the governments increasingly want people to self fund.

 

[craft]

There should be an upper limit to super fund balances after which the remaining must be moved out of the fund or is taxed inside the fund at normal rates of tax. Much like the tax free status of super funds in pension phase there is a point at which the fund is no longer operating as intended (to provide an alternative to a state pension)

Agreed - I'd argue that moved out would be the equitable thing.

 

[sptrawler]

There should be an upper limit to super fund balances after which the remaining must be moved out of the fund or is taxed inside the fund at normal rates of tax. Much like the tax free status of super funds in pension phase there is a point at which the fund is no longer operating as intended (to provide an alternative to a state pension)

The second idea is probably better, tax funds when an upper level is reached. Or even as was sugested last year, tax earnings above a certain level. Both ways are flexible and taxing could be changed accordingly.

The problem with setting an upper limit, where funds have to be removed when reached, is it doesn't allow for the devaluation of the capital due to inflation.
It wasn't long ago that $500,000 was enough money to buy several houses, or see you through a comfortable retirement.

 

[craft]

The second idea is probably better, tax funds when an upper level is reached. Or even as was sugested last year, tax earnings above a certain level. Both ways are flexible and taxing could be changed accordingly.

The problem with setting an upper limit, where funds have to be removed when reached, is it doesn't allow for the devaluation of the capital due to inflation.
It wasn't long ago that $500,000 was enough money to buy several houses, or see you through a comfortable retirement.

Is it fair to have no access and no concessions?

 

[FxTrader]

The problem is, it is basically a joint account with the government, with you being the minority holder... Currently it is tax advantageous, however if that changes, there is very little you can do to change your plan... There are and allways will be tax advantaged investments outside super, that allow wealth creation without losing the ability to remove the capital.

But when you need to sell something, say in an emergency, you cant use the cash....it is in there for life until the rules allow you to access. I know if I have to lend my company a couple hundred thousand $$$ to tie over wages for a couple weeks on a large project, I know I can can....where as had I punched it into Super, it would not be able to be used.

It's not possible, but neither would it be practical nor prudent to place all of one's assets in super, including cash. The assumtpion here is that if I park all surplus discretionary cash in super I have stranded assets (if under 60). This would only make sense if you're nearing retirement and even so it's limited. Allocation to super is part of an investment strategy, excluding it can be a costly mistake once you reach retirement.

The restrictions placed on super access are obviously intended to preserve capital for retirement. If you want to retire at 32 and have the means to do this then you obviously don't need superannuation savings and you represent much less than 1% of the population.

 

[craft]

Allocation to super is part of an investment strategy, excluding it can be a costly mistake once your reach retirement.

I agree - just because it caries legislative risk doesn't mean you shouldn't utilise the benefits altogether. It works well(maybe too well for sustainability at current settings - allow for it) as part of a bigger picture.

 

[sptrawler]

Is it fair to have no access and no concessions?

No, I'm all for leaving super alone, I'm reliant on it.lol

I was meaning if they put a limit on how much you can have in super, it would have to be indexed to account for inflation.
However, it would be difficult for some people to put more in.
I would think it would be better to let people put as much as they can in.
But tax either the earnings or principle above a certain amount.
Like currently there is 15% during accumulation, it could be on anything above an arbitary amount that can be changed.
Or as was suggested earnings above an arbitary amount get taxed, again that amount could be changed as required.
Much like the changes to the drawdownrules, that applied post gfc.

In my opinion picking a maximum amount would be quite difficult. I've seen the Aussie dollar at $1.25U.S and 50c, I've also seen great wages at $30k and $180k.
Just my humble opinion.

P.S
Just had a thought, in accumulation you could tax at 15% upto a certain balance, then say 30% above that, then 47% above a max.

In pension phase, the drawdown is taxed at varying rates at different levels. But the income is tax free, if the capital goes up the drawdown goes up which means the tax goes up.

 

[Ves]

I agree that placing limits (within reason) on the amount that can be placed into a tax haven like superannuation (and others like trusts, negative gearing etc.) should be considered.

The problem is the administration and application of these ideas in practice. And these aren't cheap, they add a lot of costs to the system. Anyone number an accountant has to calculate costs money for the end user - trust me I know.

For instance, how would these limits be enforced? Would they be on 30 June only? SMSFs for instance only report on that date. How strictly would valuations be enforced on assets that are not valued easily on a market? (property, collectibles, private unit trusts etc. all can be valued perhaps, but could potentially be valued in a contrived fashion in certain circumstances).

If there is an asset limit for super, and then you tax earnings on assets above this limit at a higher rate, how to do work out which assets are above the limit and which income relates to those assets? Is there a special formula that you had in mind? Is it the weighted return of all assets? Would this be similar to calculating the exempt pension income of a fund, in that you would be required to pay an actuary? Surely you could not pick and choose which assets (aka segregation methods).

It might be achievable for single member funds, and even then you need to figure out how to pro-rata the income (do you pick a set day 30 June to apply the "limit test" on the income?). But what about Funds with multiple members? What if some are under the limit and some are not? Makes it very tricky to work out the earnings and the extra tax for the affected accounts. What about individuals who have multiple superannuation accounts (yes - it is possible to have more than one SMSF even, as many as you want). These things make it very hard to track and apply. As far as I am aware, if I have multiple funds, the ATO / government has no bloody idea how much taxable income they generate in total. In fact they are not tracked on an individual basis, but a fund basis. All that is reported to the ATO is the net account movement (from market values + earnings).

It hurts my head thinking of how they'd do such a thing, after the ordeals and complications in the past with things like RBL limits and surcharge levies.

I can almost guess now that this won't happen - not because it's not a good idea, but because it's too hard to implement.

 

[sptrawler]

I agree that placing limits (within reason) on the amount that can be placed into a tax haven like superannuation (and others like trusts, negative gearing etc.) should be considered.

The problem is the administration and application of these ideas in practice. And these aren't cheap, they add a lot of costs to the system. Anyone number an accountant has to calculate costs money for the end user - trust me I know.

For instance, how would these limits be enforced? Would they be on 30 June only? SMSFs for instance only report on that date. How strictly would valuations be enforced on assets that are not valued easily on a market? (property, collectibles, private unit trusts etc. all can be valued perhaps, but could potentially be valued in a contrived fashion in certain circumstances).

If there is an asset limit for super, and then you tax earnings on assets above this limit at a higher rate, how to do work out which assets are above the limit and which income relates to those assets? Is there a special formula that you had in mind? Is it the weighted return of all assets? Would this be similar to calculating the exempt pension income of a fund, in that you would be required to pay an actuary? Surely you could not pick and choose which assets (aka segregation methods).

It might be achievable for single member funds, and even then you need to figure out how to pro-rata the income (do you pick a set day 30 June to apply the "limit test" on the income?). But what about Funds with multiple members? What if some are under the limit and some are not? Makes it very tricky to work out the earnings and the extra tax for the affected accounts. What about individuals who have multiple superannuation accounts (yes - it is possible to have more than one SMSF even, as many as you want). These things make it very hard to track and apply. As far as I am aware, if I have multiple funds, the ATO / government has no bloody idea how much taxable income they generate in total. In fact they are not tracked on an individual basis, but a fund basis. All that is reported to the ATO is the net account movement (from market values + earnings).

It hurts my head thinking of how they'd do such a thing, after the ordeals and complications in the past with things like RBL limits and surcharge levies.

I can almost guess now that this won't happen - not because it's not a good idea, but because it's too hard to implement.

Yes, good points Ves, I was thinking from a two member fund, the problems would be enormous for large retail and industry funds.
Oh well, maybe best to leave it to the Government.lol