The return of reasonable benefit limits?

I’m not a fan of politicians’ speeches to industry events, which despite the ideal setting for a content discussion, tend to be long on political shots and short on policy discussion.

But sometimes there are some pointers to decisions to come, which make the text worth reading. A good example of this was Ken Henry’s speeches leading up to the Future Tax System Review, which clearly signaled the Resources Super Profits Tax.

Our Minister’s speech to last week’s CMSF has been mostly reported for off-the-cuff comments about the Coalition’s policy for independent trustees. But there are much more interesting comments in the text, which hint at future revenue measures in the coming Budget and beyond.

Much of the speech is a parade of the Labor record in superannuation, and some triumphalism is fair enough. What is very interesting is that it twice refers to super as being something for the middle class (in the official text it is actually italicized for emphasis). In other words, super is not for everyone. His argument goes like this:

– Super is not designed for low income earners – this is the role of the age pension.

– Super is intended for the middle classes with a goal of 70% of pre-retirement income. Middle class is not clearly defined, but there is a reference to “multiples of average earnings”.

– Those with the means (which presumably means Australians with income beyond the vague reference above), are intended to use voluntary savings above and beyond super, with concessional taxes within a reasonable benefit limit (RBL).

I haven’t heard a reference to RBLs in some time. But this wasn’t the only instance it came up at CMSF – Nick Sherry also referred to the return of RBLs in a future of super discussion. Quite a coincidence.

RBLs were a mechanism introduced by the Hawke-Keating governments to limit the balance which could be accrued within super and still attract concessional tax treatment. Larger balances could be built but were subject to higher taxes.

It was a horrendously complicated system which was scrapped by the Howard Coaliation government, in favour of limiting what you could contribute to super on a concessional basis ($50,000 indexed).

The Rudd-Gillard governments significantly reduced those contribution limits ($25,000 with constant delays to indexation), particularly for higher income earners. However cuts in contribution limits have still allowed some multi-million dollar super balances to be accrued via transfers of assets from outside super, benefiting from the concessional earnings rate.

The Minister’s speech hints at some possible measures in the forthcoming budget:

– Further reductions in contributions tax concessions for high income earners. Currently reduced at $300,000, we think this could be brought down to the top marginal tax rate which kicks in at $180,000. This is about 2.5x average earnings, which would align with the reference to super being a middle class construct.

– A reintroduction of RBLs in some form. This could be done in a number of ways. There have been hints in the financial media of new taxes on balances above figures ranging from $800,000 – $1m, which have been attacked for being arbitrary. But the argument is being developed that super should not be a place where multi-million dollar balances (beyond what would be considered adequate for a comfortable retirement) can be accumulated in a tax concessional environment.

Expect some interesting (and probably unpleasant) surprises for super in the Budget. These may never come to pass, of course, if we get a change of Government later this year, but some of it will probably stick.