Memo Treasurer: flying political kites can prove super dangerous

Treasurer Jim Chalmers. Picture: NCA NewsWire / Martin Ollman

Jim Chalmers, has been flying a few political kites this week in ­relation to changing the taxation and regulatory arrangements ­affecting superannuation.

This was done in the context of introducing a legislated purpose for superannuation.

Mind you, we have muddled on without a definition for more than three decades. In any case, the Treasurer’s preferred definition won’t overrule the sole-purpose test of super funds having to maximise the retirement incomes of members or prevent early withdrawal schemes being put forward in the future.

He has spoken of the high cost of the superannuation tax concessions without realising the arbitrary way in which the cost of these concessions is calculated. They are based on revenue forgone, but the point is that removing some or all of these concessions won’t generate anywhere near the same sum of ­revenue gained.

Fiddling – or transforming – the taxation and regulatory arrangements affecting super also undermines the public’s trust in a compulsory system that involves the holding of assets for long ­periods of time. It is the exact ­opposite of best practice policy.

The odds are shortening for caps to be imposed on superannuation funds, perhaps as low as $3m. The industry super funds don’t object because almost all the very large funds, which are historic relics by the way, are self-managed superannuation funds.

Here are some reasons why caps won’t work:

• Many large funds hold lumpy assets, often the result of a sale of business many years ago into the fund. It is simply not possible for these lumpy assets to be broken up in a fair and efficient way.

• These funds have been legitimately established based on the rules at the time; it would involve retrospective action by the government to impose a cap.

• Most of these large funds will disappear over time as the ­trustees die. It is now nigh on impossible to achieve large accounts because of the restrictions on concessional and non-concessional contributions.

• It’s not even clear how a cap would work as annual investment returns will often lead to the cap being exceeded. Would the trustees be expected to withdraw the excess every year?

• There is a large elephant in the room with retirees and would-be-retirees who are entitled to defined benefit pensions – think here public sector workers, politicians (albeit not recent federal politicians) and members of the judiciary.

• The implied caps of these beneficiaries will far exceed $3m in many cases, but will vary from individual to individual.

Will defined benefit pensions be reduced to the returns from a notional $3m fund? We know that this cannot apply to members of the judiciary because their remuneration, including in retirement, is protected by the Constitution. The different treatment of those with accumulated funds and defined benefit schemes would, quite rightly, be seen as extremely unfair.

• The amount of additional revenue that the government would receive by virtue of introducing a cap is trivial – less than $1bn a year in the context of ­annual government spending of over $650bn a year.

The Treasurer would be wise to think again and to understand that flying kites in the super­annuation space is itself very dangerous. The public get very twitchy about sentences that contain both super and tax or super and regulation changes. The proposed changes may not affect them directly but many will still become concerned.