Thanks for the post Ves - great insight. Do you see any obvious or easy solutions?
Nope - but I will say that any proposed changes will be ruthlessly opposed by the vested interests in the industry (the big funds, investment institutions, the superannuation bodies ie. SPAA, the accounting bodies). They lobby fairly hard obviously because big swathes of funds in super benefits them, but so does clarity of purpose of governments in terms of superannuation. So much relies on a system that is easy to understand, with a long-term view towards legislation. Whilst they do have vested interests they are correct in saying that there can be a big hit to people's confidence in the system if the goal posts are constantly moved (especially if they contributed to superannuation on the basis that such and such would still be in place when they reach retirement).
I don't think it could be easily implemented on the basis of market values - they by their very nature fluctuate too much, and it would be much harder to enforce the rules on this basis. And you do not want big amounts of money bouncing out of Funds and back into individual's hands - it creates a mess and more potential for mistakes to be made by trustees. It also seems to contradict the "early release" and "preservation rules." Is it fair that you suddenly get to access your excess super before you have attained age 60 just because you have too much in there? Don't think that sends a good message.
Life-time superannuation contribution limits for non-concessional contributions could be considered, rather than yearly or rolling 3 year period caps. Much like they do for Business CGT Retirement Rollovers etc.
Arguably the biggest drag on the government coffers is the tax concessions which come from paying very little or no tax on high income within superannuation so it makes sense to target higher taxable incomes within superannuation if something must be done. There is also no tax on withdrawals post 60 to consider too.
Taxing withdrawals is relatively straight forward - and would have to be tracked on the individual's tax return as the super fund itself would not know the marginal tax rates, and indeed, if there were other funds involved. It would obviously increase paperwork. But these kinds of withdrawals were taxed at far less generous rates pre-1 July 2007. Please, whatever the government does, do not install a complicated tax system based on life time withdrawal limits. It's too hard to track. Doable, but would definitely need to be streamlined very well.
Earnings are much harder to tax for the reasons stated in my previous post, but probably easier than market values to address. My personal opinion is that it should be an average of the last 3-5 years. Earnings as we know can get lumpy, especially when capital gains are involved. You do not want those paying higher tax rates due to lumpy asset sales, when normally they would have much lower taxable income in their superannuation funds.
It's hard to track taxable earnings allocated to a member within the Fund with multiple members, let alone for an individual who has memberships in multiple funds. Accounting software and systems could obviously begin to track this if the ATO / government provided a reasonable basis for doing so. They need to pick a single method and enforce it - too much choice would mean more opportunities to shark the system. I suppose it would need to be done on a weighted average balanced basis over the year to calculate the member's proportion of the taxable income. This would need to be reported to the ATO on the Fund's return. In the same way that excess contributions tax (ECT) is paid - the excess income would be need to be added the individual's taxable income for that financial year. I suppose it would be a separate assessment notice like ECT... due to timing of reporting for superannuation funds and lodgment dates for individual tax returns it would be hard for it to be included in the member's individual tax return. Perhaps the individual would get to choose whether they paid this amount from their own personal savings or from their nominated superannuation account (again similar to ECT).
Hmm sounds like a massive headache, both in planning and in on-going administration.
I don't know what limits should be imposed, all that I know is that the practical methods for enforcement are not as easy as they first appear. Any requirements of superannuation fund trustees in terms of reporting will come with associated costs, so they cannot do this lightly... whatever benefits to the budget must heavily outweigh the costs of implementation.