The days of massive super fund balances are numbered

Australians with massive super balances should start making early plans for how they are going to shrink them after confirmation that the Federal Government is set to cap balances.

There has been a lot of speculation that superannuation funds will be capped, following revelations that at least 11,000 Australians have more than $5 million stashed away in their super account.

Such large account balances generate annual tax concessions of around $70,000 and cost the Budget about $1.5 billion a year but are self-evidently only helping very wealthy people who already have more than enough saved up for a luxurious retirement.

Assistant Treasurer Stephen Jones revealed the looming crackdown recently, although he was vague on when and how it would be implemented, saying that the government would first legislate an objective for superannuation.

“One of the things that does stick out is incredibly high balances that just don’t seem to have any bearing or relationship with retirement income,’’ Mr Jones stated.

“That’s where my mind is focused at the moment,” he said.

Changes could bring in an extra $3 billion in tax revenue

The Grattan Institute has pointed out that if super balances were limited to a maximum of $2 million, that would raise about $3 billion a year in extra tax revenue.

As I pointed out in an earlier story, reducing existing super balances will be quite difficult because many large self-managed super funds include assets that are difficult to sell quickly such as properties and unlisted funds.

That means the government will probably need to announce some sort of graduated plan to reduce these balances over time, possibly at the same time or shortly after it passes the new law to create an objective for superannuation.

Details still to come but higher taxes unlikely

Mr Jones’ comments have also started a new round of speculation including what the new maximum super balance will be, how it will be calculated in self-managed funds with more than one member and, most importantly, whether the new maximum balance will be indexed so that it increases over time.

Mr Jones did pour cold water on one speculated change, saying he was not in favour of raising superannuation taxes on high-income earners, with one suggestion being a lowering of the annual salary threshold for paying the extra 15% Division 293 contribution tax from $250,000 to $180,000.

Instead, he suggested that once the issue of very large balances is dealt with “maybe the Division 293 stuff fades away’’.

Once a simple objective purpose for superannuation has been legislated, all future super changes should consistently reflect that purpose, making knee-jerk changes such as the emergency pandemic withdrawals and proposed withdrawals to pay for housing more difficult to achieve.

Buy now, pay later and crypto also face regulation

Regulation of buy now, pay later companies such as Afterpay (ASX: SQ2) and Zip (ASX: ZIP) is also on the cards this year, with the 7 million accounts held by the sector set to be dragged into the Credit Act, and the companies issuing products required to hold an Australian Credit Licence and follow responsible lending obligations.

Tighter laws on cryptocurrencies are also possible.

Big super funds want more help for carers

Introducing caps is not the end of the pressures for change within the $3.3 trillion superannuation industry with the chief executive officer of $70 billion fund HESTA, Debby Blakey, leading a push to pay superannuation on paid parental leave to help close the super gender gap.

That is in line with a policy Labor took to the 2019 election under then-leader Bill Shorten but it has since indicated this policy is still an aim but might not be achieved until a second term.

HESTA and some other super funds are also trying to boost the low-income super tax offset up to $45,000 so it is aligned with the tax thresholds and to introduce a carer’s credit – a system used in the United Kingdom, to provide paid superannuation for those out of the workforce to look after small children.

HESTA and other large industry funds have also been pushing to cap large super balances, saying the tax concessions of around $70,000 or more a year are larger than many of their members’ annual salaries.