Superannuation, the ultimate government cash cow?

[sydboy007]

Treasuries Main residence exemption estimate for 2013/14 was 30 Billion. Should this ‘Tax expenditure’ be quarantined to provide provision for retirement? The wealthier you are the more expensive your house the bigger your tax expenditure benefit. Not only do we not expect people receiving this tax expenditure to mandatorily fund their retirement with the tax expenditure benefit they received we actually exempt homes from the pension assets test. Why should the expectations for receiving tax expenditure for housing be different to receiving tax expenditure for saving?

Is super really that bad? If the super pool wasn’t there, most private savings (to the reduced extent that they would exist) would most likely be in housing, benefiting from main residence exemption or negative gearing and contributing less then what the government actually collects from taxing super at 15%.

Could we achieve the stated goal of decreasing the reliance on the aged pension cheaper? If deloitte are right and 75% of retirees will still receive at least a part pension in 20 years, what's the point of super? Is the reduction on pension payments in 20 years going to be less than if whatever level of savings without super would contribute in extra taxes?

Clamp down on negative gearing so it's forced into new construction. At least that way the private funds are actually helping to alleviate the housing shortages in most capital cities.

 

[sydboy007]

Isn't the $13billion more in tax revenue, that you are talking about, $13billion less in superannuation deposits. Won't this show up at a later date as a shortfall on the savings ledger, that may result in increased pension obligations?

A bit like your assumption that $1m in super is adequate, what happens if there is a period of high inflation and or a large currency correction.
The $1m could be rapidly devalued and the members may not be in a financial position to recover the capital base, or be too close retirement to recover. This then again loads up the Government pension costs as more qualify.
It is o.k looking at things in a simplistic manner, however things seldom pan out as we expect.

I'll ask you again, what level of income do you believe a person should be entitled to with Government support?

$50k a year puts a couple well above half of households.

As for $1M being adequate, there's nothing stopping that figure from begin increased by the CPI each year. Let people top up to the new amount to help keep the real purchasing power.

I would like the Govt to publish figures on the annual cost of super since 1994 which includes fees and tax foregone compared to annual reduction in pension entitlements. I'm pretty confident the accumulated balance would be a very large 3 figure billions in the negative for savings. Will the system actually ever save more than it costs? I'm sceptical. It would be interesting to see if there has been any forecasting done by treasury on this.

 

[sydboy007]

You could make the top marginal tax rate 15% and then there would be no problem.

Funny thing is that is ok to expect high income earners to pay approx 50% tax to fund socialist's lifestyles, but then be highly critical of a scheme which helps fund their retirement, has limited ability to tax minimise within the vehicle and offers a very stable revenue stream for the government.

I'll take a flat 15% income tax for all Australians thankyou very much, as opposed to paying more than my fair share at times!

MW

Which is why I say changes to super need to be done along with meaningful tax reform. On the current political circus I think the chances of that happening are near nil.

The below chart shows how our current tax base is moving further and further away from efficient taxes to increasing reliance on corporate and income taxes. Way to go in slugging hard work and rewarding speculation.

 

[Wysiwyg]

Superannuation unit prices for the Australian Shares option in my superfund have remained at all time highs although the Aussie market has been trending sideways/down since the peak two months ago. Although invested in top 20 blue chippers which have all come off their highs as they weight the market, the unit price is apparently immune to any downside.

 

[medicowallet]

So why are we redistributing from the bottom 10% to the top 10% and 1%?

If we cut back on the assistance going to the top, we could either lower income and corporate taxes and / or increase spending on services. The $ figures are in the billions. This is not small change semantics.

The problem with making such a poor statement like the above Sydboy is that you do not understand the absolute basics.

The person in the bottom 10% pays no tax, and is in fact the recipient of govt assistance.

The person who is in the top 10% pays net tax.

How is the person who can sacrifice $30kish and still pays net tax of 15% being subsidised by the person who is receiving a net benefit from the government?????

MW

 

[Junior]

Just wanted to address a previous post by Junior that I was reluctant to respond to for want of keeping the thread on topic, but that I think shouldn't be left where it was.

SPOILER: THIS IS LONG AND NOT ON-TOPIC.

Hi Vixs, I won't go into detail and address all of your points. As you said it's off-topic.

We've clearly had very different experiences in the industry, which has led to different points of view. The FPs I've worked with don't fit the mould you describe (ie. formally educated). The MIS clients I dealt with also don't fit into the high income earning category.

I agree that the changes which have been implemented are important (removal of upfront commission on investment products, and asset based fees on geared portfolios), but more changes need to be made in my opinion. Dodgy operators have found other areas to make a quick buck.

 

[Junior]

It was the poor and average Bob & Jane that were hit hardest by forestry schemes, was it? Were they the ideal candidates for being sold upfront tax deductions to the tune of millions of dollars, with loans paid for using borrowed funds? It was those that needed the tax relief? What absolute garbage. The investors burned were the lawyers, the doctors, successful investors and the rest of the high income earners that were seeking relief from high income tax bills with a sweetener of a 'high performing' investment.

The only thing I agree with is that it was a wealth transfer to those involved in the manufacture and distribution of the schemes, and some did very well out of the sale of those investments.

You completely missed my point here. I was referring to the fact that the failed schemes were a drain on the federal budget due to the tax deductions claimed by investors......upfront tax deductions were claimed by growers, in the expectation that harvest income would be taxed at some point in the future. Schemes never turned a profit and therefore grower/investors never incurred income tax on harvest proceeds.

 

[Vixs]

@Sydboy007:
From the Treasury, 2009-2010:
"Personal income tax distribution
The personal income tax system is progressive ”” the tax share increases for those who earn more, while those individuals who have limited means bear relatively little or no tax liability (Chart 11).

For the 2009-10 income year (the latest year for which tax return data is available from the ATO), 57.5 per cent of personal income tax was collected from the 17.4 per cent of taxpayers earning more than $80,000 (with around 24.0 per cent of personal income tax coming from the 2.3 per cent of taxpayers earning over $180,000).

In comparison, the 30.5 per cent of taxpayers who earned less than $35,000 in taxable income paid only 4.0 per cent of the total net tax payable on income.

The 52.1 per cent of taxpayers in the $35,001 to $80,000 income range paid 38.6 per cent of total net tax payable on income.
"

You've got two trains of thought on the go - the first is that we need any changes made to the current system to be part of an overall tax reform. I agree with this.

The other, however, is that the current system is overly generous to the top end of the spectrum and that it is the people at the bottom that miss out. I don't think you can justify that by looking at who is actually contributing the tax revenue in the first place. When you add on consumption taxes like the GST, the top end contribution is even greater than the bottom end again, increasing the gap. Saying they can afford it is not justification in and of itself. The concessions to superannuation are limited by the caps, the concessions on earnings are of course not limited once they're in there.

The discussion as to how many of these massive funds are out there has been had earlier in the thread. There are very few funds with $5-$10m+ in them, and those that are there largely came about as a result of systems that have now been changed. The only way to get those kinds of balances in super now is through loan arrangements, and this is an area where I think HNW individuals that utilise these strategies are taking the piss and some action should be considered to close loopholes that allow super to be used in such a way. The number of instances where this is occurring, however, is likely to be even smaller again than the large funds referred to above. Not everyone wants to be on the cutting edge of what is acceptable and what isn't in the eyes of the ATO.

There are areas that should be addressed, but your focus should instead be 'What is going on that contravenes the purpose of superannuation and is being used to exploit the tax concessions?' rather than shaking your first in the air and demanding more from those that already give the most.

@Wysiwyg:
What fund has the Australian share option that isn't being repriced, out of interest? I know the ones in my super are repriced daily and reflect yesterday's close. Is it an Industry Super Fund by any chance?

@Junior:
I see your point about the wealth transfer occurring through the tax deductions that were claimed upfront for the earnings that never eventuated. I wasn't looking at it from that perspective and I agree that it was a shocking outcome.

The fact that your experience with MIS scheme exposure has been from everyday people that aren't high income earners is another appalling indictment of all involved and the misselling that was going on. Perhaps it was being used differently to the strategies I have seen that have fallen apart over the last 7 years, or perhaps it was simply smaller amounts per investor.

The dodgy operators have of course, as they always will, found another way to make a quick buck. How many times this week have you seen advertisements related to investing in geared property through super, or the establishment of SMSFs in general? It's everywhere. CPA Australia said in 09 that their survey found 49% of SMSF trustees weren't even aware they were trustees, yet 69% said they had a good understanding of their responsibility as trustees. These people should not be running their own funds, and the removal of the accountant's exemption should help on that front by reducing the flogging of SMSF establishment as a service in its own right. We have shut down more SMSFs in the last 2 years than we have established - all funds set up by accountants that then provided no investment advice, and no referral to a planner to get any. The trustees had no interest or capacity to make investment decisions, and the responsibilities of a trustee and the consequences for failing them actually scared the clients when they were told what they were.

Our individual experiences of the consequences of all the agribusiness projects may have led us to different conclusions on that front, but I still think the fundamental issue is that you can't educate ethics, you just need to enforce the rules in place so that those that lack them lose their ability to practice.

I agree there is more work to be done, but is it not time to shift the spotlight and let the changes that have been enacted get put to work? It was the bashing of the industry that we're all so used to reading by now that frustrated me, particularly for someone who opens with the fact that they work in it themselves. It's time for the politicians, the press and the regulator to move the spotlight, and start looking at property spruikers and inappropriate SMSF establishment practices. After 5 years of being hung up to dry, I would think that the cockroaches in planning have long been out of that spotlight and into the darkness.

Apologies Junior for some of the tone, but I stand by the content if not the wording.

 

[Julia]

Vixs, thanks for your comments. I think I've been somewhat guilty of generalising when discussing financial planners. That's unfair to people like yourself who are obviously not part of the overtly self interested group.

May I ask a question? If someone contacted you and asked if you'd make a 15 minute consultation available without a fee, so that they can understand how you work, would that be acceptable to you?

 

[sydboy007]

@Sydboy007:
From the Treasury, 2009-2010:
"Personal income tax distribution
The personal income tax system is progressive — the tax share increases for those who earn more, while those individuals who have limited means bear relatively little or no tax liability (Chart 11).

For the 2009-10 income year (the latest year for which tax return data is available from the ATO), 57.5 per cent of personal income tax was collected from the 17.4 per cent of taxpayers earning more than $80,000 (with around 24.0 per cent of personal income tax coming from the 2.3 per cent of taxpayers earning over $180,000).

In comparison, the 30.5 per cent of taxpayers who earned less than $35,000 in taxable income paid only 4.0 per cent of the total net tax payable on income.

The 52.1 per cent of taxpayers in the $35,001 to $80,000 income range paid 38.6 per cent of total net tax payable on income.

You've got two trains of thought on the go - the first is that we need any changes made to the current system to be part of an overall tax reform. I agree with this.

The other, however, is that the current system is overly generous to the top end of the spectrum and that it is the people at the bottom that miss out. I don't think you can justify that by looking at who is actually contributing the tax revenue in the first place. When you add on consumption taxes like the GST, the top end contribution is even greater than the bottom end again, increasing the gap. Saying they can afford it is not justification in and of itself. The concessions to superannuation are limited by the caps, the concessions on earnings are of course not limited once they're in there.

The discussion as to how many of these massive funds are out there has been had earlier in the thread. There are very few funds with $5-$10m+ in them, and those that are there largely came about as a result of systems that have now been changed. The only way to get those kinds of balances in super now is through loan arrangements, and this is an area where I think HNW individuals that utilise these strategies are taking the piss and some action should be considered to close loopholes that allow super to be used in such a way. The number of instances where this is occurring, however, is likely to be even smaller again than the large funds referred to above. Not everyone wants to be on the cutting edge of what is acceptable and what isn't in the eyes of the ATO.

There are areas that should be addressed, but your focus should instead be 'What is going on that contravenes the purpose of superannuation and is being used to exploit the tax concessions?' rather than shaking your first in the air and demanding more from those that already give the most.

It would be good to know the level of wealth for each income group as well. If say the level of taxation support provided by those in the top rate is roughly equivalent to the level of wealth they own within the economy, I'd argue they are paying a reasonable level of tax since it's roughly equal to their benefit within the economy. See below ABS graph to get an idea of what I mean. The top 10% income earners have roughly 56% of the wealth of the country. Seems there's a reasonable balance between wealth and level of taxation.

To get a large balance into super is relatively easy if you run a business. You can transfer business assets into the fund. The latest non concessional contributions limit is now a bit over $150K a year, so it's possible to funnel over $185K a year into super with the right arrangements. The below CGT exemptions can also help to build up a decent super balance.

Small business 15-year exemption
If your business has owned an asset for 15 years and you are aged 55 years or over and are retiring, or if you are permanently incapacitated, you won’t have an assessable capital gain when you sell the asset.
Small business 50% active asset reduction
You can reduce the capital gain on a business (active) asset by 50%.
Small business retirement exemption
A capital gain from the sale of a business asset will be exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account to obtain the exemption.

Is there any point continuing to provide tax relief to someone to contribute more to super if they've reached a level where they would no longer receive the aged pension?

 

[Vixs]

To keep it brief, yes my firm offer initial consultations, usually an hour, at no cost to determine if we are a good fit for the potential client and possible scope of advice needed.

A lot of planners get paid a lot of money to do not a lot of work, and many planners deserve the reputations they've earned - there are sharks in the water and there was a disconnect between client and adviser interests for a long time. Moving forward however, I like the direction the industry is going and believe it will result in better outcomes for clients. Even the banks seem to have made genuine and significant changes, from management staff down to how bank planners are paid.

 

[Julia]

To keep it brief, yes my firm offer initial consultations, usually an hour, at no cost to determine if we are a good fit for the potential client and possible scope of advice needed.

A lot of planners get paid a lot of money to do not a lot of work, and many planners deserve the reputations they've earned - there are sharks in the water and there was a disconnect between client and adviser interests for a long time. Moving forward however, I like the direction the industry is going and believe it will result in better outcomes for clients. Even the banks seem to have made genuine and significant changes, from management staff down to how bank planners are paid.

Thank you, Vixs.
Just as a somewhat ironic side note to this issue, the Senate Committee which looked at the CBA 'rogue planners' and ASIC's role there today recommended a Royal Commission into it all.
The SP of CBA today rose $1.04, presumably just with the tide of the overall market, but darkly funny all the same.

I have a neighbour who has used a FP since retiring from the public service about 25 years ago. I asked him if he considered the FP to be good. Answer: "Yes, excellent. "
When enquiring about what it was about the person/service that made him happy, these were the reasons:

"He's based in Brisbane but still goes to the trouble of driving up here (about 4 hours drive) to see me once a year."

"His firm has a research division. That means they go out and visit and analyse all the funds and fund managers and pick the best ones."

He then disclosed that he has opted for the conservative option which means most of his funds are in cash and fixed interest, with smaller amounts in a couple of managed funds.

When I asked if they were actually achieving a positive return for him he hesitated and then said "well, it's going up a little bit".

On fees: He has around $1M invested. Pays 2% p.a.
That's $20,000 p.a. to an 'adviser' for doing almost nothing plus one pleasant sojourn up the coast per year.

But the client is happy because he doesn't know what he doesn't know. I expect there are thousands just like him.

 

[Ferret]

On fees: He has around $1M invested. Pays 2% p.a.

Goodness me, that sounds high! It's hard to imagine there are many financial planners who would consistently achieve more than 2% outperformance for their clients.

 

[sydboy007]

Goodness me, that sounds high! It's hard to imagine there are many financial planners who would consistently achieve more than 2% outperformance for their clients.

Even within good corporate bonds it would be hard to get 5% fixed yield these days, though if bought 4-6 years ago they could be sitting on a purchase yield of 8-10% with significant capital gains now as yields fell.

Still with inflation near 3%, much higher if you're not purchasing a lot of imports, another 2% in fees and any tax "leakage" it would be hard to see performance being any more than standing still.

Maybe the ACCC needs to step in like they did with the mobile carriers. Can you believe just 10 years ago there was a 21c / minute termination charge for calls to mobiles. The ACCC was eventually forced to act, and after a series of drops has been set to just 3.6c / minute since jan this year. At least make a person sign a page that shows the $ figures they will likely pay. Percentages are too easily dismissed as not much money.

 

[Vixs]

It would be good to know the level of wealth for each income group as well. If say the level of taxation support provided by those in the top rate is roughly equivalent to the level of wealth they own within the economy, I'd argue they are paying a reasonable level of tax since it's roughly equal to their benefit within the economy. See below ABS graph to get an idea of what I mean. The top 10% income earners have roughly 56% of the wealth of the country. Seems there's a reasonable balance between wealth and level of taxation.

To get a large balance into super is relatively easy if you run a business. You can transfer business assets into the fund. The latest non concessional contributions limit is now a bit over $150K a year, so it's possible to funnel over $185K a year into super with the right arrangements. The below CGT exemptions can also help to build up a decent super balance.

Small business 15-year exemption
If your business has owned an asset for 15 years and you are aged 55 years or over and are retiring, or if you are permanently incapacitated, you won’t have an assessable capital gain when you sell the asset.
Small business 50% active asset reduction
You can reduce the capital gain on a business (active) asset by 50%.
Small business retirement exemption
A capital gain from the sale of a business asset will be exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account to obtain the exemption.

Is there any point continuing to provide tax relief to someone to contribute more to super if they've reached a level where they would no longer receive the aged pension?

The tests to meet the Small business CGT exemption are rigid enough that they're challenging to meet in genuine circumstances - they're certainly not a loophole open for exploitation.

There is also the lifetime limit of ~$1.25m to consider - it's not open slather to get assets in, as they either fall under that lifetime limit or get counted as non-concessional contributions.

It's designed to allow small business owners to get the proceeds of a business sale into super to bring them onto a level playing field with lifetime PAYG employees. It's not unusual for business owners not to make any contributions to super throughout their lives, or certainly not to the level that employees would. They've gotta be in a pretty comfortable position to decide the best use of their money is locked up until the govt says they can spend it.

You're righr in that the purpose of tax relief to encourage people to take steps to be independent of the Age Pension loses some weight once they're well and truly beyond eligibility for the pension. With super fund assets being deemed for the Centrelink income test from January 1 on all new pensions, eligibility is already getting tightened.

With deemed income on pension accounts, plus actual income from compulsory minimum payments, the amount of cash rich Australians that could have received the pension just significantly reduced. No action has been taken to impact those with the 'valuable' PPRs yet, but it will happen in time, it's not an if, but a when.

 

[Vixs]

Still with inflation near 3%, much higher if you're not purchasing a lot of imports, another 2% in fees and any tax "leakage" it would be hard to see performance being any more than standing still.

... At least make a person sign a page that shows the $ figures they will likely pay. Percentages are too easily dismissed as not much money.

Everyone does sign off on the fees they pay as a % and as a $, that's already the way it's done and has been for years. Same with insurance commissions & home loan commissions. Every dollar a financial services provider is paid in Australia must be disclosed, unless it's a real estate related commission - which is why the property spruikers exist - they can still get paid by someone else and tell you they're the good guys just trying to help you out. He who pays the piper calls the tune - although I don't think disclosed commissions fall into that category as it is evident who is paying.

@Julia, re: fees. 2% is high if it's just for asset management, but it depends how they pay for their other services. It's a disgusting amount to charge for a portfolio of managed funds in a wrap account, but it's a more reasonable fee for managing a direct share portfolio, acting as the post-box and managing their tax and accounting needs as well. It would still be high for a % based fee at that level.

I'm a big fan of people asking their adviser how they calculate their fees - most people will just get a stunned look or some garbage explanation. It's not even the answer that's important but whether or not your adviser can look you in the eye and justify their fees. There is a big variance in the capability of, and services provided by, financial planners - especially considering that up until recently they were mostly charging the same amount. I think that asking the question "What do I get for the fees I pay, and how are they calculated?" Anyone embarrassed about what they get paid is being paid too much.

A lot of clients are happy paying fees because they have no idea and no interest in getting any idea, how to manage a portfolio themselves. This discussion has been had on the forums in a few different threads over the years, and it was pretty well agreed that the type of people on a forum like this are not the type of people happy paying someone else to make the decisions.

 

[Judd]

There is also another perspective on paying adviser fees, Vixs. I am aware of one person who essentially pays what could loosely be termed a stipend. Apparently, it's a very low amount in relation to the assets. One reason is the adviser has access to a dealer group and sometimes get a firm allocation of shares for a placement and makes an offer to clients. The other is the person wants occasional access to confirm technical aspects. Sure they generally know the ins and outs but likes the peace of mind by bouncing an idea off an independent person with qualifications in the area – and gets a quick turnaround from the adviser. From what I understand it is a pretty happy arrangement for both.

Sometimes there is joy in the world in regard to adviser fees. I was informed the other day where a client had substantial assets in superannuation, a high income and was claiming the adviser fee as a personal tax deduction. All cooked up by this advisory firm. Tax stepped in, had a look and went Oh no you don't. The assets outside superannuation were say a 50 CBA shares compared with substantial assets in superannuation. Apportion the fee between both thank you according to assets under advice and by the way we're doing an audit of your previous year's tax returns. Laugh! Never had such a good laugh for ages.

 

[Junior]

I'm a big fan of people asking their adviser how they calculate their fees - most people will just get a stunned look or some garbage explanation. It's not even the answer that's important but whether or not your adviser can look you in the eye and justify their fees. There is a big variance in the capability of, and services provided by, financial planners - especially considering that up until recently they were mostly charging the same amount. I think that asking the question "What do I get for the fees I pay, and how are they calculated?" Anyone embarrassed about what they get paid is being paid too much.

Hi Vixs, out of interest how do you calculate fees and how do you present this to clients? Is it only when they ask or do you include a calculation in the Statement of Advice?

 

[sptrawler]

I'll ask you again, what level of income do you believe a person should be entitled to with Government support?.

$50k a year puts a couple well above half of households. .

Firstly, I pay tax on the taxable component of my SMSF pension as I am under 60, it does qualify for a 15% offset.
I don't pay any tax on the taxfree component of my pension, as the funds were put in as after tax contributions.
So it is a furphy saying after $50k, you should pay tax. What if all the pension comes from after tax contributions, as opposed to concessionally treated contributions.

As for $1M being adequate, there's nothing stopping that figure from begin increased by the CPI each year. Let people top up to the new amount to help keep the real purchasing power..

That's all well and good if the person is working, and can add extra to it, what if they are drawing a pension?

If currently the cap was $1m giving a return of 3.6%, that would mean $36k income, as opposed to a Government pension of $32k.
The only way the majority of "normal" people, can get sort of money into super, is by putting in after tax dollars. This could be done by downsizing, selling investments or just doing without and putting as much cash as you can in.
If the result was going to be the above example, why would anyone bother?
Especially as it could get taxed higher, at any time, if the Government decides to.

I would like the Govt to publish figures on the annual cost of super since 1994 which includes fees and tax foregone compared to annual reduction in pension entitlements. I'm pretty confident the accumulated balance would be a very large 3 figure billions in the negative for savings. Will the system actually ever save more than it costs? I'm sceptical. It would be interesting to see if there has been any forecasting done by treasury on this.

As Keating said, it is a national savings pool, which allows us to be less exposed to overseas money markets. It isn't all about the pension.

Applogies for the late reply, been away from the internet for awhile.lol

 

[Vixs]

Hi Vixs, out of interest how do you calculate fees and how do you present this to clients? Is it only when they ask or do you include a calculation in the Statement of Advice?

Had the response typed out the other day but closed the tab by accident and haven't had the opportunity to retype it. Busy EOFY.

Can elaborate on the components later, but we explain and disclose the fees as a single establishment fee, and an ongoing asset management fee that is fixed annually in advance. Scope of advice, complexity of strategies being used, amount of work in implementation and risk to the business are all factored in. No one has ever asked for a full breakdown of the fee, but it's their if they want to see it. The reason the fee methodology is so important to me is the same as the reason an insurance needs analysis methodology is so important - when prompted, you can easily articulate why you've said what you said, and know it is based on actual work done or actual needs. It's a lot easier for both parties to understand than having plucked a number out of the air for insurance or used an arbitrary % just because that's what always been done.

The only reason I raised the matter of fees was that you and I have both likely seen people that are not looking after their clients as much as they're looking after themselves. Some of these people are not deserving of the trust vested in them or the fees they collect. A simple question as to how their fees are calculated can help people smell a rat, because again, if someone is embarrassed about how much they're being paid when quizzed on it, it's likely because they know they're being paid too much.

This is all well and truly off topic now, so if anyone would like clarification I will respond by PM, or if there was a separate thread I'd contribute to that.

Back to your regularly scheduled class warfare.