Collateral damage – $3m super cap risks creating retiree renters
The Government’s proposal to reduce the tax concessionality of superannuation balances over $3 million could end up reducing the ability of people to pay down their mortgages when they retire.
At the same time that the Treasury has opened up consultations around the $3 million super cap proposal, major accounting group, CPA Australia has pointed out the degree to which it risks creating unintended consequences, including a decline in retiree home ownership.
“As the $3 million threshold is not indexed, more people will be captured and impacted over time,” CPA Australia said in a submission on the objective of superannuation which has acted as a foretaste of its approach to consultation around the $3 million cap.
The big accounting group is arguing that a superannuation balance of $3 million may not be considered excessive in the following contexts:
- An increasing number of Australians are carrying housing debt into retirement and using their superannuation to pay off the debt, leaving little remaining from $3 million.
- The continuing decline in home ownership means that more people will be renting in retirement requiring larger superannuation balances to continue paying housing costs, as well as maintaining their stand of living, in retirement.
- The gender superannuation gap continues to exist. On partner of a couple commonly has less superannuation than their partner due to taking on caring commitments throughout their working life and then relying on their partner’s superannuation for retirement. $3 million may seem an excessive superannuation balance for an individual but it is not necessarily so for a couple.
The CPA Australia submission said that, further, small business owners including farmers, are encouraged to hold their business property within their SMSF (Self-managed Superannuation Fund) due to the business real property exemption provided from the in-house asset rules.
“As these assets are often larger and illiquid, these individuals may be unduly disadvantaged and taxed excessively, particularly if the value of the business asset varies due to economic factors outside of their control which results in their superannuation balances fluctuating above and below the $3 million threshold from one financial year to the next.”
“Superannuation tax concessions are designed to encourage and compensate for forced long-term saving and preservation of benefits to retirement age. People Contribute to superannuation in good faith expecting that their superannuation will be treated consistently on the rules of the day. Constant changes undermine confidence in the superannuation system.”
I’ve heard of clutching at straws….but this is next level. How many people will have a $3M mortgage at retirement??
I’ve seen some with close to $1M and I’m not based in Sydney. It is however a very weak argument.
Regardless if someone come retirement has a multi-million dollar mortgage – the real point is that Labor always tinker with stuff and ultimately screw things up…
This is out of touch. $3m for each member of a couple, will pay off a pretty decent mortgage. Super was setup as a tax effective saving system to take pressure off the public purse at retirement. Rationalisation of legislation is needed to reign in the wealthy elite using the super rules as a tax dodge. These are the same people who will complain about the state of the roads, they had to wait too long at the emergency department at their hospital and their house was broken in to!
Interestingly the $3,000,000 cap could be reached in 6 years (by 1/7/2029) and a joint cap of say $6,000,000 by 2038 assuming an indexed rate of 8% per annum. Given that property escalates on average by 8-9% per annum (looking back at 80 years of data) the probelm is real.
This is effectively the government changing the 15% to 30% on all excess capital invested in an SMSF. And, if the income you were expecting to live off in retirement is being derived by the property…oh dear…just didn’t think that one through did they!
Further, if 8% inflation becomes the new norm and fund managers consistently aim at CPI plus 5% performance (and achieve it), then the figure touted by ASFA of $224,161 being the balance a 45 year old should have in their super for a decent retirement will magically grow (at 13% pa) to $3,298,267 in the year that our retiree turns 67! Can’t make this stuff up…or should that be stuff-up??
Common now if 1 partner has $3 mill and the other has nothing then they should sue their adviser .. Haven’t they heard about Super contribution splitting. ALSO I have little sympathy for those “encouraged to hold their business property within their SMSF” as whilst this may be a tax minimisation approach it is a RISK maximation approach (If the business goes down you lose your business AND your Super – very poor retirement savings design).
There are MANY advantages to the approach of an SMSF owning the property your business operates in.
Subject to NALI and NALE…you are able to invest more funds into your super where these funds have protection and a significantly lower tax rate than a profitable business. No CGT or CGT at 10% depending when you dispose of it.
You are paying off your own mortgage rather than someone elses so the equity in your property becomes an asset rather than an expense on your company balance sheet. You can control the rent you pay to some degree too as well as the outgoings plus you might have a seat at the Strata table to influence decisions.
Your property could be an active asset and apart from generating tax free rental income for you in retirement could also provide a CGT free lump sum if you sold it at that stage…and don’t forget your returns are geared…
Now, if your business goes under, you could sell the property – rather than be faced with the added personal cost of paying out the remaining term of your lease agreement after restoring the property to its original condition…which restoration in itself would be a cost even if you can find a tenant acceptable to your landlord…