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Any government must retain the right to change policies as circumstances change over time. Policy change always poses two questions: Is the change an improvement? And is it properly implemented? This article focusses on implementation issues, which are particularly important when changing super laws. (In an article to appear in the June 2017 edition of the SuperGuide newsletter, Jack and Terry will evaluate whether the July 2017 changes constitute an improvement.)
Since the income tax law first specified taxation of superannuation in 1915, it has always legislated taxation treatment over the contribution, accumulation and drawdown phases of this uniquely long-lived financial product. Unless the law included specification of how superannuation will be taxed on withdrawal, no one would accept the restrictions and uncertainties from long-term saving in super, even if contributions and accumulation were favourably treated.
The legally specified tax treatment affects three generations:
- young workers seldom contributing more than the Superannuation Guarantee minimum
- mid-career savers maximising super contributions after managing the expenses of family formation, housing and education
- retirees expecting the living standards they saved for.
Young workers are compelled through the Superannuation Guarantee to contribute to super as soon as they first earn $450 (gross) in a month – a trigger that has never been increased since its introduction in 1992 and is now lower than the dole. Drawdown of funds is prohibited (save in limited circumstances) over a working life which can exceed 40 years, and then superannuation savings have to last a retirement which may be a further 30 years or more.
These extremely long commitments by savers make superannuation policy change particularly sensitive.
What is grandfathering, and why is it so important for retirement planning?
‘Grandfathering’ means that transitional provisions continue to apply an old rule to certain existing scenarios, or certain individuals. ‘Grandfathering’ provisions continue to apply an old rule to some existing situations while a new rule will apply to all future cases. Frequently, the grandfathering exemption is limited; it may extend for a set time, or it may be lost under certain circumstances.
A retired Treasury officer, Terrence O’Brien, had written to The Australian newspaper on 11 May 2016 about the 2016 Budget’s superannuation measures. He said:
Past increases in superannuation taxation used to be grandfathered, so as not to disadvantage those who had responded in good faith to previous incentives to save for their retirement income. Grandfathering reflected the commitments that governments encouraged or compelled workers to undertake when locking their savings away for 40 or 50 years…
Jack contacted Terry to seek elaboration of those claims. The conversations gave rise to an article for the Centre for Independent Studies titled Grandfathering super tax increases, and a series of submissions by Save Our Super to Treasury on exposure drafts of the legislation, and to Ministers, backbenchers, and the Senate committee that examined the Bills that have now become law.
Grandfathering has been used frequently, often for the purely pragmatic reason of gaining democratic support for a change that might otherwise be defeated.
In applications such as superannuation law, grandfathering gains an important moral dimension, and a further practical dimension. Morally, it honours legal commitments governments have made to citizens and on which citizens have lawfully based their affairs, while applying the new rules prospectively to citizens who have the flexibility to adapt to them. Practically, it is ideal for addressing fiscal or demographic challenges that are developing slowly. It can permit early action to prevent a problem worsening, without reducing the living standards of current retirees.
Save Our Super submissions noted that people had lawfully saved, planned and retired on the basis of legislated super rules introduced only a decade earlier, in the Costello Simplified Superannuation System reforms of 2007. They had been encouraged into depositing funds into super under the legislation of one set of rules, only to have those rules changed to their disadvantage after placing their funds irrevocably into the super system, and indeed after retirement in many cases.
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Justice Asprey on grandfathering superannuation law changes
Although contemporary politicians seem to have forgotten, grandfathering significantly adverse changes in superannuation law has a valuable 40-year history in Australia. Prime Minister Whitlam commissioned Justice Kenneth Asprey to propose tax reform through a Taxation Review Committee that reported in 1975. One important focus of Justice Asprey was exploring how to make superannuation serve retirement income objectives more effectively, with minimum disruption to life savings plans. He offered five timeless insights in Chapter 21 of the Asprey Report, officially titled the Taxation Review Committee Full Report (released on 31 January 1975):
- 21.9. Finally, and most importantly, it must be borne in mind that the matters with which the Committee is here dealing involve long-term commitments entered into by taxpayers on the basis of the existing taxation structure. It would be unfair to such persons if a significantly different taxation structure were to be introduced without adequate and reasonable transitional arrangements. . . .
- 21.61. . . . Many people, particularly those nearing retirement, have made their plans for the future on the assumption that the amounts they receive on retirement would continue to be taxed on the present basis. The legitimate expectations of such people deserve the utmost consideration. To change suddenly to a harsher basis of taxing such receipts would generate justifiable complaints that the legislation was retrospective in nature, since the amounts concerned would normally have accrued over a considerable period—possibly over the entire working life of the person concerned. . . .
- 21.64. There is nonetheless a limit to the extent to which concern over such retrospectivity can be allowed to influence recommendations for a fundamental change in the tax structure. Pushed to its extreme such an argument leads to a legislative straitjacket where it is impossible to make changes to any revenue law for fear of disadvantaging those who have made their plans on the basis of the existing legislation. . . .
- 21.81. . . . [I]t is necessary to distinguish legitimate expectations from mere hopes. A person who is one day from retirement obviously has a legitimate expectation that his retiring allowance or superannuation benefit which may have accrued over forty years or more will be accorded the present treatment. On the other hand, it is unrealistic and unnecessary to give much weight to the expectations of the twenty-year-old as to the tax treatment of his ultimate retirement benefits.
- 21.82. In theory the approach might be that only amounts which can be regarded as accruing after the date of the legislation should be subject to the new treatment. This would prevent radically different treatment of the man who retires one day after that date and the man who retires one day before. It would also largely remove any complaints about retroactivity in the new legislation. . . .
Source: The Taxation Review Committee Full Report (31 January 1975), Chapter 21: Income Taxation in Relation to Superannuation and Life Insurance.
While there was little immediate application of the recommendations from the Asprey Report, it subsequently steered Australian tax reform for some 30 years in several key areas. When Treasurer Keating radically increased the tax on superannuation lump sum payments in 1983, he succeeded by applying the Asprey principles exactly: he ensured the ten-fold increase in tax on a lump sum benefit applied only to those dollars of the lump sum saved after the change; any savings pre-dating the change and the earnings on them continued to be taxed under the more concessional rules applying when they were saved. There have since been many other examples of the use of the Asprey grandfathering principles to adverse changes in both superannuation and the Age Pension (for details of these examples, see Terry O’Brien’s article, Grandfathering super tax increases.
The frequent recourse to grandfathering significantly adverse policy changes, over more than 40 years, has set the reasonable expectations of citizens for how any necessary changes should be made. It is the violation of those expectations that helps explain the vociferous opposition many super savers have expressed to the Coalition Government, and to Save Our Super.
Certain July 2017 super changes are retrospective
As recently as February 2016, Treasurer Morrison seemed to understand the importance of grandfathering and the detrimental effect of retrospective changes. In his speech to the SMSF Association 2016 National Conference in February 2016, he said:
One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me?
If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment.
That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way.
It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.
Source: Address to the SMSF 2016 National Conference, Adelaide, 18 February 2016 (emphasis added).
In Save Our Super’s view, the five Asprey principles remain the best practical guide to how to introduce any necessary adverse changes in superannuation law while avoiding ‘effective retrospectivity’. They should have been used for the adverse measures in the 2016 Budget (with those changes taking effect from 1 July 2017), as Save Our Super submitted at the time. Even now, they should be applied to mitigate the destruction of trust and confidence in superannuation arising from those measures.
Jack Hammond, QC, founder of Save Our Super
Terrence O’Brien, B Econ (Hons), M Econ, former Treasury official
About the authors
Jack Hammond: Save Our Super’s founder is Jack Hammond QC, a Victorian barrister for more than three decades. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne. During his time at the Victorian Bar, Jack became the inaugural President of the Melbourne community town planning group Save Our Suburbs.
Terrence O’Brien: Terrence O’Brien is a retired senior Commonwealth public servant. He is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation policy, fiscal policy and international economic issues. His most senior positions have also included several years in the Office of National Assessments, as senior resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and at the Productivity Commission.
For more information about Save Our Super, see the advocacy group’s website Save Our Super.
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Non payment of the Anti Detriment Payment from 1st July 2017 is a retrospective tax. Having chosen this strategy years ago rather than using the Re- contribution strategy I believe Grandfathering should be made applicable.
Phil
I am a part aged pensioner who also has a defined benefit pension.
We carefully structured our retirement income based on TRUST of the Government to do as all governments had done since 2007 to leave things as they were when we retired. Defined benefit pensions cannot be cashed in or drawn down after you reach 65 years of age and expire on death of both the recipient and their partner, nothing is left for the estate. In our case this was over 5 years prior to drawing a Centrelink part aged pension at 70 years of age. 18 months later this was cut by over $7000.00 a year
You also conveniently forget that in our case as taxpayers for over 50 years we have contributed towards social welfare, including aged pensions, for generations of Australians. You are in no position to generalize as to whether or not people like us can afford pension cuts, simply because you don’t want to pay your share as we have done
Mike
Michael I am in a position to generalise that you can afford the pension cuts, as I understand exactly how they work, that it means that you can afford the reduction, it’s a simple mathematical equation. If your pension was reduced it’s because you have sufficient resources at this point in time, as you utilise them, this will increase your pension rate.
I’m also more than happy to pay my share of taxation as I currently do, I’d happily pay more tax to live in a more civil, fair, safe and responsible society. I’m a capitalist but I accept that adequate taxes need to be collected to live in an organised, fair and safe society, to assist this I’m happy to pay more.
As stated I’m happy to pay my share, I just want it to go to the right places and the right people, to those that need it and not to those that don’t.
Your taxes, my taxes, our taxes don’t just go to Centrelink, your not paying taxes solely to get a future age pension, they also have provided the roads, schools, police/emergency services, public services and the basic essentials of the civil society that you’ve been afforded all your life.
Michael you said we, so I’m taking it that your a member of a couple, if your pension dropped by $7K pa combined from 1 January 2017, presuming that you own your own home this means that your Age Pension Assessable Assets apart from your home were worth over $1,000,000- = you can afford the change, if not you need to spend less on beer, smokes and pokies (joke).
If the reduction was $7K each, it means that your Age Pension Assessable Assets apart from your home were worth over $875,000 = you can still afford the change.
The maths proves that I am in a position to determine that you can afford it. If you have low or non income producing assets then you need to consider your options about what you do with these, sell them etc. and invest elsewhere, choices are good.
Agree with Kevin that part pension taper rates rule changes from Jan 2017 should have been grandfathered. The 320,000 odd people severely affected will never vote for LNP again. Basically they are called (expendable ) middle road kill group and Hockey knew it knowing his job was secure in Washington.
For sure “the age of entitlement is over” but not for politicians and Govt workers on unchanged defined benefits Super schemes.
The group 320,000 affected based their affairs on hard saving for over 10-15 years allowing for their part pensions which have been destroyed overnight with the stroke of a pen – so I ask you where is the incentive? What Phil is saying is don’t work hard to save and get a pension so that is exactly what the 320,000 will probably do – spend spend spend and get it down to minimum asset level and ALL get the full pension.
The Govt and Phil are dreaming and delusional if they don’t think they should have grandfathered pension asset taper rates. In short The Govt will pay and pay dearly on two fronts i.e. votes and LARGER age pension payouts when the numbers come out for our grandchildren.
Ray I’m certainly not advocating don’t work hard and simply get a pension, as by being solely reliant on the pension you can live but as it’s a ‘safety net’ it rightly doesn’t allow you to make lifestyle choices, for that you need your own savings either inside or outside the superannuation environment.
Most of the 320,000 people impacted understand that this change needed to occur, that the system was unaffordable, they accepted that it had gone past the ‘safety net’ principal and they don’t wish to leave a financial burden for their children and grandchildren. I accept that some others aren’t happy about it, usually though their individual ‘hip pocket impact’ and simply don’t concern themselves about the dire financial situation this will leave their grandchildren in, a sad reality of some members of the ‘entitlement generation’ and that ‘it’s all about me’……
It’s basically reversed the 2007 Assets Test Changes that this change proved should never have occurred and that some referred to it as ‘an unaffordable and unsuccessful vote buying exercise’.
People won’t simply spend their money to get more or a pension, yes some will but you legislate for the majority not the minority. They will save for their future as they have always done and be content that they are self funding.
The new cap of $1.6M has a dramatic effect on estate planning & the wishes in your will. After 40 years of building our super balances & leaving Reversionary Pensions to our spouse, we don’t mind having to pay the 15% tax on earnings outside of the cap while we both live. But the amounts over the cap go back into accumulative will be put into a Testamentary Trust in the name of the deceased spouse when this occurs and the income earned will be taxed at the highest rate as amounts will be added to that spouse’s ordinary income. As most of the Superfund’s assets are in leased commercial property the spouse’s share of the superfund properties will be transferred to the Testamentary Trust on the death of either spouse causing difficult administration and extra 30% more tax ( 45%-15% ).
This is retrospective taxation after 40 years and a lifestyle over the past 15 years after our sacrifices to be able to retire at the level we planned.
We would like to have your comments on this issue.
At the time that Peter Costello announced sweeping changes to the superannuation system, many people approaching retirement starting salivating at the prospect of taking advantage of significant tax concessions that could increase their nest egg almost immediately. From that moment, these concessions have been wittled away one Federal Budget at a time.
In 2007, the Government was acutely aware of the strain the baby boomers would place on the welfare system over the next 20 years and realised that there was no new pool of taxpayers coming through to fund the future welfare system. Clearly, the 2007 measures were prima facie designed to encourage the baby boomers to self-fund and move into pension mode when the timing was right. The thing that was apparent to me but didn’t seem to get the same media coverage was that the Government was setting out to create a monetary juggernaut that would be capable of serving their fiscal needs for the next 20-30 years (should the need arise) by (1) attracting vast sums of money, larger than at any time in history, into the system and (2) establishing long-dated incentives (e.g. tax exemptions for income streams) for these funds to remain in the system.
The cynic in me saw the potential for a more quantum shift in government policy in years to come (especially when a new generation of pollies entered Parliament). What if successive Governments were to “subtlely” dilute these taxpayer concessions over time as a means of funding their future fiscal commitments.
I had always anticipated a gradual lifting of the tax rates on super fund investment earnings as their modus operandi (not too bold as to raise the ire of the industry lobby group). Instead, it looks like it is the Coalition’s edict is to go after the most sacred cow of all, “grandfathering”. Ironically, the same political party that gave us the 2007 concessions with one hand is now looking to take it away (or at least dilute) with the other. I watch for more developments to come as the genie starts to free itself from the bottle.
The changes to part pension rules implemented on Jan 1 2017 should have been grandfathered. The LNP attacked their traditional supporter base with these changes, many of whom live in coastal marginals. If the Libs really believe that these people will come out and vote for the coalition ever again, after they took up to $278 per week away from them, then they’re delusional.
Kevin, your delusional if you think that we taxpayers, some of whom only earn $35K pa should essentially be paying for your Age Pension when you could of had had a house (unlimited value) plus $1.1M in Super/Bank Accounts.
Surely your just being greedy thinking that others have to pay for your retirement when you can afford to yourself at this point in time. As you utilise your own resources, you may again become eligible or eligible for a higher amount.
The Age Pension is a tax payer funded safety net.
You should be thankful that yours was either cancelled or reduced, as it means that you can make lifestyle choices with your accumulated savings (yes you’ve not doubt worked hard it) and the taxpayer funded safety net is always there should you require it.
Why are so many people so greedy, it’s all about me and I deserve more, actually no you don’t, YOU DON’T NEED IT.
I don’t expect to get a Pension, I want to be self sufficient and I’ll be content when I am and not complaining about what I’m not getting, but happy that I don’t need the assistance and happy that the safety net is there for those who do.
The Age Pension is not about leaving an inheritance for the next generation, but about providing for here and now, for those who really need it.
I am sick and tired of saying that Super should not be an estate vehicle, thus justifying tax theft fairness. Providing one doesn’t claim an aged care pension what you earn whether it is in your SMSF or outside is yours to decide. That means use it, burn it, donate it or give it to your children. Further estate transfers to adult children are taxed anyway, so please stop this nonsense of fair and limiting Super Accumulation,
Says Euan
Gotta agree with what you write Phil. A lot of people on here are over entitled whiners. I’m about to retire and will be self funded under the new rules and certainly don’t expect handouts.The pension is a safety net.
I am against grandfathering, why should ‘person A’ receive a financial advantage over ‘person B’ solely because they did something at times only ‘1 day prior’ to when person B did it.
The whole reason for these changes are to reduce budget deficits, shouldn’t we all pay for this, not just those that ‘didn’t get in before the changes’.
Rules change and at times they simply have to or we’ll become a financial basket case. Organise your affairs with flexibility, allow for legislative change, its a reality of life.
Don’t expect Grandfathering as we all have to ‘foot the bill’. There is no sound reason why those who did something early shouldn’t also make the same contribution to the deficit as those who didn’t, as you simply should of allowed for flexibility when you organised your affairs.
Great to read an article motivated by a sense of instability and injustice rather than selfish self interest