Will super funds be capped?

As a new year starts there is a lot of speculation swirling around potential changes to the so called “top end” of the superannuation system.

Specifically, around the concept of capping super accounts for individuals to prevent what has become something of an epidemic of massive super balances being used to reduce tax and transfer wealth between generations.

Last August it was revealed that there are at least 32 self-managed super funds (SMSFs) with more than $100 million in them led to a rash of calls to limit the amount that can be stashed in a super fund and perhaps introduce a hard limit on the amount that an individual can have within superannuation.

No limit on super funds – for now

The reason is that while there is a limit on how much an individual can roll over into a superannuation pension – currently a transfer balance cap of $1.7 million that is indexed – there is no limit on how much can remain in a fund while it is in the accumulation mode.

With quite a bit of flexibility about when or if you convert a super account into a super pension, that can literally leave massive amounts of money sitting in the tax advantaged super environment, potentially “saving” many thousands of dollars a year in tax and potentially millions over the life of the investment.

Those big tax savings can potentially also be passed down to future generations, either directly as members of a self-managed scheme or through bequests – either tax free or lowly taxed – at the time of death of a fund member.

Some giant funds out there

At the time the three largest SMSFs stood at a hefty $401 million, $371.4 million and $273.2 million – with 32 SMSFs having more than $100 million.

Given that most SMSFs have just one or two members and the maximum number is six, there are some absolutely huge sums set aside in a low tax environment, generating huge government concessions for very wealthy people.

Separate figures drawn from Australian Tax Office statistics for the 2019-20 financial year showed about 600 super funds have more than $20 million, which using the average two members per fund adds up to $10 million each.

The maximum tax on such accumulation funds is 15% on deposit of funds, a possible extra tax of 15% on deposit of funds for very high-income earners (Division 293 tax) and 15% on earnings – a highly concessional percentage compared to the maximum personal tax rates and one of the reasons super tax concessions are seen as disproportionately favouring the wealthy.

Super groups calling for a cap

The size of some of these super funds has attracted the attention of superannuation groups with the Association of Superannuation Funds of Australia (ASFA) calling for member balances to be capped at $5 million and the removal of indexation on the current $1.7 million transfer balance cap for money transferred into a tax-free pension.

In a submission to the federal government’s first budget in October, ASFA argued that too many super concessions were going to individuals with high incomes and high super account balances.

Without any changes to the indexation of the transfer balance cap, it is likely to rise to around $1.9 million from the middle of 2023 due to the high rate of inflation unless the federal government changes the indexation arrangement.

The Australian Institute of Superannuation Trustees has also argued for a $5 million limit on the total amount that superannuation fund members can hold in the accumulation and pension phases of their accounts.

It says that higher income groups were getting a much greater amount of government support and were more likely be able to support themselves in retirement.

Safe political ground

Politically, the Labor Government probably feels on fairly safe ground to act on reducing concessions for larger super accounts but even so, winding back super balances could take some time and funds would probably need to be given some warning so they could start an orderly disposal of assets.

Even then, some self-managed funds might have a very large and highly illiquid investment that would be difficult to dispose of if super fund maximums were reduced to, say, a maximum or $5 million or even as low as $2 million.

Is a warning coming?

All of which has led to a flurry of rumours within super circles that there may be a “warning” announcement made early in 2023 forecasting the introduction of a super account maximum to give funds a chance to get cash up before a reduction in the account maximums is announced with the May 2023 budget.

Alternatively, a transition time might be announced with the budget itself.

While very wealthy people with high super balances are unlikely to elicit much sympathy from the wider public, any changes to the existing balance transfer cap or the introduction on a total super account cap would need to have some sort of transition arrangements built in to cover the sale of assets that would then re-enter the conventional tax system.