Money | Association of Super Funds of Australia makes 'unrealistic' recommendations to superannuation system

Superannuation has now topped $3 trillion, making Australia the fourth-largest holder of pension fund assets in the world. Picture: Shutterstock.
Superannuation has now topped $3 trillion, making Australia the fourth-largest holder of pension fund assets in the world. Picture: Shutterstock.

The amount of money held in superannuation has now topped $3 trillion, making Australia the fourth-largest holder of pension fund assets in the world.

Sadly, when this amount of money is mentioned, all the vested interests come out of the woodwork to suggest ways to "improve the system".

Last week the Association of Super Funds of Australia (ASFA), who represent some of Australia's biggest funds, made several recommendations.

One of them was that if a person had a balance of more than $5 million the surplus should be removed from the superannuation system.

Another was that indexation should be abolished for both the non-concessional contribution cap, and the transfer balance cap. Both are currently $1.6 million and which, due to indexation, will rise to $1.7 million on July 1.

These recommendations are not unexpected, because ASFA is not a fan of self-managed superannuation funds. But they are unrealistic and unworkable.

For starters, less than 1 per cent of self-managed funds have balances of more than $10 million, and the assets of these funds are usually in big, illiquid assets. Let's work through a hypothetical example to see how it may work.

Jack and Jill are both aged 75, and have an SMSF with a balance of $16 million. Apart from some listed shares, the principal asset is a large industrial building from which they have been running their business for more than 30 years, and which is now worth $15 million.

Thanks to improvements and renovations over time the cost base is $10 million. ASFA argues that this is not fair, as they are taking advantage of the 15 per cent tax environment, but the bulk of the value is in unrealised capital gain which will contribute nothing to government coffers until the property is sold.

Admittedly, when they do dispose of the asset the capital gains will be taxed at 10 per cent instead of the 22.5 per cent that would apply if the asset was held in their own names. But the tax saved is only $625,000.

These continual attacks on the relative few with large balances miss a major point: within two decades almost all these funds will be gone. Jack and Jill, like most trustees of large self-managed funds, are in their senior years - their life expectancy is likely to be about 15 years.

When they die, the most they can leave to a dependent within superannuation would be $1.7 million. Any remaining funds have to be removed from the system. So the bottom line is that within 15-20 years almost all the big funds will be a thing of the past.

I also fail to see the reasoning in ASFA's suggestion that indexation of the superannuation caps be abolished. The purpose of indexation is to preserve the status quo in real terms; in a perfect world, income tax rates, payroll tax and stamp duty thresholds would all be indexed.

The reality is that governments are quick to index items that produce revenue, such as fines, but slow to use indexation in tax areas, because this would benefit taxpayers and not the government.

The classic example in Queensland is the land tax thresholds, which have not been indexed for 13 years. This has hit landlords hard, as land tax bills have been increasing in line with their assessed site value.

Superannuation should be the cornerstone of Australia's retirement system. Leave it alone, and let people accumulate money for a welfare-free future, free from continual tinkering.

Continual changes to the system lead to distrust in it.

Did I mention that we have the fourth-biggest system in the world? That's a major achievement!

Noel answers your money questions

Question

I am aged 78, and have long been a self-funded retiree. Then the coronavirus hit and my superannuation balance fell - taking me under the assets test cut-off point. I started to receive a part pension.

Then the market recovered and my super went back over the threshold. I have received no pension for the last five month but during those five months I spent $70,000 on home improvements and now I find I'm back under the threshold and will apply again for a part pension. Will Centrelink request receipts for the building work - I don't have any.

Answer

Services Australia General Manager Hank Jongen says that customers claiming the Age Pension will generally be asked to provide proof of their bank account balances and may also be asked to provide documents showing how a reduction in their financial investments occurred.

If receipts are not available, you may need to provide bank statements showing who you made bank transfers to, along with building quotes, or a letter from the builder confirming the amount spent. As you are asset tested, just make sure that items such as furniture and motor vehicles are shown at second hand value, not replacement value.

Question

We downsized last October so we could pay out all our debts, and put $300,000 into our self-managed super fund. I have $140,000 as a cash reserve but also have a line of credit loan with enough to cover the RAD of $550,000 which the nursing home wants upfront to secure a room for my wife.

Centrelink are paying just $168 a fortnight to her but we are submitting documents to Centrelink which may improve the position. To fund the RAD would it be more effective to use all the line of credit funds, or contribute as much cash as possible and fund the balance by drawing down on the line of credit. Looking at the means test component of the residential aged care site, a liability like a loan to fund the RAD can be used to offset assets and income. Your comments would be appreciated. I have not yet reached pensionable age.

Answer

Aged Care Guru Rachel Lane points out there's a number of issues here. Firstly, while the aged care facility may prefer that you pay some or all of the RAD it is really up to you how much, if any, you do pay. It basically works on a sliding scale, any amount you don't pay as a RAD attracts interest at a government set rate - currently 4.02%p.a - which may be more or less than the rate you can earn or would pay on your line of credit.

The second part of the equation is the treatment of the RAD for the aged care means test. It doesn't allow for monies borrowed to pay for the RAD to offset the value of the RAD (which is an assessable asset for the means tested care fee). Therefore using funds from your line of credit to pay some or all of the RAD would increase the means tested care fee.

The final issue is that as you are under age pension age your superannuation is exempt for both calculating pension entitlement for yourself and your wife and also for your wife's aged care means tested care fee. There's lots of moving parts here and getting the allocation of the right amount of funds into the right buckets requires specialist advice, it's also not just about what happens today but how you can best meet the costs ongoing.

Question

I purchased a unit for renting in September 1997, and in my will, the unit is to go to my three children. My understanding from the ATO is that if they sell the unit within three years of my death, they will not have to pay CGT. If after the three years they sell, they will have to pay CGT based on my purchase price. There is no time limit.

Answer

The concession you mention is for two years not three years, but keep in mind that It applies only if the property is the deceased's home at date of death. If not, capital gains tax will be based on your cost base which will start with the price paid back in 1997. Just keep in mind that CGT is not triggered by death, only when the asset is sold by the beneficiaries.