Stupidity and Confusion Over New $1.6M Tax-Free Superannuation Cap

Another week of claims, counterclaims and counter-counterclaims.

Such is life in Canberra and the media commentary that accompanies the goings-on in our political capital.

For those outside the political bubble, it’s a full-time job searching for the kernels of truth buried beneath the multitude of half-truths and lies. Which is why most people tune out, picking up the occasional soundbites that shape their world view…one that usually accords with how they see the world in the first place.

As a baby boomer (who is closer to 60 than 50) and former financial planner, superannuation is a topic that’s near and dear to me.

I’m a huge fan of self-managed super funds (SMSFs) — being able to control the investment process, reducing expenses to a wafer thin margin, and having the ability to personally manage the fund’s CGT and income tax liabilities to minimise my contribution to Canberra’s wastefulness.

The government’s (still to be legislated) limit on how much can be transferred or retained in the tax-free retirement phase caught my attention, as you might imagine.

Apparently, $1.6 million per person is the magic number the government is prepared to fund as a concession — anything above that figure will no longer enjoy tax-free earnings.

The $1.6 million cap (if legislated) will apply from 1 July 2017, irrespective of whether your existing superannuation account-based pension balance is higher than this figure.

Under the proposed legislation, someone with $5 million in an account-based pension has to shift at least $3.4 million before 30 June 2017. If funds aren’t transferred, the excess is taxed at the top marginal tax rate of 45%. Now that’s a pretty powerful incentive to act.

It’s this measure that has many accusing the Treasurer of applying a retrospective tax.

As I see it, there’s a case of ‘yes and no’ over the retrospectivity allegation.

Yes, people who were fortunate enough to squirrel away and/or invest astutely to accumulate a significant amount under the old rules can feel somewhat duped by the proposed legislation.

However, the ‘no’ case is the generous tax-free arrangement on superannuation pensions was not sustainable. It was literally too good to be true and always had a limited shelf life…especially with governments in desperate need of dollars.

Making people move money (above the $1.6 million cap) out of the tax-free retirement phase to a taxed environment — back into the accumulation phase and/or outside of super altogether — is just another way of skinning the tax cat.

I understand the theory of capped concessional limits — provide enough incentive, but not too much to deny Canberra its much needed dollars.

But, as always, theory and reality rarely mix.

And this is where it gets stupid…from both sides.

How do you manage the $1.6 million cap?

If your $1.6 million is invested entirely in cash and term deposits, and you draw the interest out as a tax free pension, then you’re fine. The pension account value never changes.

But what about those with shareholdings and direct property investments? The values of these assets rise and fall. One year you may be over the cap…another year you might be under it.

I can see an accounting nightmare in the making.

If you don’t have a SMSF, how will the public-offer fund keep you informed should you exceed the $1.6 million cap; will they be compelled to withdraw some form of withholding tax if you do?

The introduction of the cap just adds another layer of complexity, while adding costs to superannuation as well.

Surely there is an easier way to reduce the generosity in the tax free retirement phase?

According to the Budget Papers, the introduction of the $1.6 million cap is expected to raise $2 billion over three years.

Here’s a thought: until they work out a simpler and less costly method to raise the $2 billion, why don’t they revisit the decision to build overpriced submarines in South Australia? Surely there’s at least $2 billion (and a whole lot more) that could be saved by not trying to placate South Australian voters.

This is not to pick on South Australians; I would express the same point of view if the subs were being built in Queensland. It is an absolute insult, in these times of increasing government debt, for such extravagant and blatant vote buying to be taking place. It’s yet another demonstration of crass stupidity.

Now for the non-government stupidity.

I read the front page of The Australian on Thursday morning. In bold type the headlines shouts at me ‘Super shake-up to shift $3bn into other assets’.


According to the article: ‘Based on previous research more than $3bn a year may now be diverted out of super to be invested elsewhere or spent.

Now, I get the ‘spent’ bit, but the ‘invested elsewhere’ has me stumped? How is this possible?

But my confusion didn’t let up as I read on: ‘…the Government on Tuesday unveiled a raft of reforms for the $2 trillion superannuation system that is set to see billions of dollars flood out of personal, tax-free pensions into new investments.

And my confusion reached another level altogether when I read this gem: ‘Economists expect these excess billions to flow into the stockmarket or back into accumulation funds, but for retirees who desire a similarly friendly tax arrangement, the reforms mean negatively geared property is now a more attractive investment.

This utter rubbish passes as front page news.

First, let’s debunk the negative gearing fantasy as an attractive investment for retirees. The definition of negative gearing is the rental income IS NOT sufficient to meet the property’s expenses — interest payments, rates, insurances, etc. In other words, you are losing money each year.

How does the retiree make up the shortfall? Out of their retirement income. Are you kidding? How many retirees do you know that could afford to fund a lossmaking property out of their retirement earnings? My guess is something like 99% of retirees need every red cent they can get their hands. They can ill-afford to throw money at a negatively geared property.

Secondly, where do these economists and researchers think superannuation funds invest money?

Why will money suddenly flow into ‘new investments’ or into the share market?

Let’s say I have $5 million in super and I have to withdraw $3.4 million by 1 July 2017.

For the purpose of the exercise we’ll say the $3.4 million is invested in a handful of blue-chip shares. The owner of the shares is ‘Vern Gowdie Super Fund’.

To transfer these shares out of the fund, I simply complete an off-market share transfer form that changes the owner from ‘Vern Gowdie Super Fund’ to Vern Gowdie.

There has been no flood of money into the share market. All that’s changed is the ownership structure. Instead of the shares being owned by the super fund, and dividends being taxed at the rate applicable to a super fund, the dividends are taxed in my name.

I would love to know where these ‘elsewhere’ and ‘new investments’ are.

As far as I am aware, the mainstream asset classes are — shares, property, fixed interest, cash and precious metals.

When I last looked, these were the same asset classes that super funds invested in to generate a return for members.

If someone sells out of a super fund that has a mix of these investments and buys into a fund, in their own name, with the same mix of investments — other than the tax treatment — nothing’s changed.

Finally, I have not read or heard a peep from the self interest groups about the Seniors and Pensioners Tax Offset (SAPTO).

SAPTO enables a single person, over the age of 65, to earn up to $32,279 tax free in their own name. This means that, outside of super, you can invest $1 million at 3%, with the earnings on that remaining tax free.

For couples, the SAPTO limit is $28,974 EACH — a combined total of nearly $58,000 tax free.

Why wouldn’t the superannuation industry be disclosing this fact? Why would others be talking about negatively geared property?

As always, the vested interests muddy the waters. Sometimes the simple is often the best, the most cost effective, and least hazardous for your wealth.

However, in a world where stupidity and confusion reign supreme, finding the simple is not always that simple.


Vern Gowdie,

Editor, Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money