Should our super be limited?

There has been an interesting debate being played out in various sectors of the superannuation industry in recent months.

While it will have very little impact on most Australians, it is worth touching on the interests of a wider debate.

As readers well know, superannuation is a very tax effective structure available to help people save for their retirement. However, because of its tax effectiveness, it has also been a very attractive structure for people to hold significant wealth, in addition to what many would regard as normal retirement savings.

In fact, the largest self-managed super fund (these are small superannuation funds with up to six members) is rumoured to have more than $500,000,000 in “retirement savings”.

Additionally, it is estimated that 11,000 Australians have superannuation balances of more than $5,000,000 each.

For some time now, governments, both past and present, have spoken about a need to enshrine the objective of superannuation into law.

Recently, the Minister for Financial Service, Stephen Jones suggested the objective of superannuation should be “to provide retirement income for Australians”^[1].

The Minister has announced the government will shortly release a paper and will consult with the community on developing an objective of superannuation.

It is apparent that a major part of the thinking may be directed towards placing a cap or limit on the amount of money Australians can hold in superannuation.

What any future change might look like, when it comes into effect, remains to be seen. Will people with more than a certain balance in super be required to withdraw excess funds?

To put this in context, when superannuation money is invested, the investment earnings are taxed at a maximum of 15%. And for super funds paying a pension to members, the investment earnings are taxed at 0%.

However, if those same investments were held in our personal name, the tax rate payable on investment earnings can be as high as 47%. If invested through a company or a family trust, the tax rate might be reduced but it is unlikely to be as low 15%.

Investing large amounts in super has resulted in much less tax being paid than might otherwise have been the case. The superannuation system, particularly for high-net-worth individuals, has resulted in significant tax leakage.  

To put this in context, superannuation experts^[2] have suggested the value of tax concessions available to self-managed super funds with balances exceeding $10,000,000 would be sufficient to fund 240,000 full age pensions each year.

Much of the discussion about limiting superannuation balances is coming from the superannuation industry itself.

Bodies like The Association of Superannuation Funds of Australia and the Australian Institute of Superannuation Trustees are advocating that individual superannuation member balances be capped at $5,000,000.

By contrast, Mercer (superannuation consultants) has suggested members of superannuation funds, once they turn 70, should reduce their account balance to no more than $3,400,000.

No matter which way you look at it, there is a groundswell of movement towards the idea of limiting the amount individuals can have in superannuation. However, in the main, any additional cap that is introduced is going to be far more than most Australians can ever dream of accumulating in their lifetime.

At this stage it is a matter of waiting for the government to release its discussion paper and then we can all watch the debate unfold.

I am sure the next few months are going to be interesting.

^[1] Interview with Michael Rowland, News Breakfast, ABC, 3 February 2023

^[2] Investor Daily, AIST reiterates calls for $5m super balance cap, 5 October 2022