Retrospectivity is the new black

I spent the weekend in Sydney at the 4th Annual Friedman Conference talking to a lot people – but mostly about just one thing. Just how bad the Turnbull government’s retrospective superannuation changes were.

Opinion varied from: “Yes, it is retrospective but Super is still a good thing” to “It is retrospective, but the government should get away with because Labor’s negative gearing policy is even worse for the economy”. Nobody I spoke to denied the retrospectivity, or claimed it to be a good policy.

Now there are two issues here:

  1. Is the policy retrospective: Yes? or No?
  2. Is the policy good: Yes? or No?

The government has to mount an argument as to why changing the Super rules may be good policy. Apart from needing the money now – which is NOT a good argument – I haven’t seen or heard that argument (I have an idea what that argument might be and hopefully will have time to write that up in the next few days). The government cannot credibly claim that the policy is not retrospective – because nobody believes them – so they need to argue why the policy can only be good if it is retrospective. I cannot imagine how such an argument would play out, but let’s rather hear that argument than the flat out denials.

That simply doesn’t work. See, for example, our fellow Cat contributor Henry Ergas in the Australian this morning:

The government’s changes to superannuation, whatever one may think of them, are not retroactive: they do not seek to alter the state of the law at a time prior to their announcement.

Rather, what the superannuation changes have is an element of retrospectivity: that is, although they only operate prospectively, they alter the future consequences of events that took place in the past.

So they’re not retrospective, they just have an element of retrospectivity.

It is true that the tax rate will be imposed going forward, but it will be imposed on a tax base that has been defined backwards.

Where I do agree with Henry is his view that we deserve better than this – the Turnbull government is engaged in a tax grab and hopes that fiscal illusion and rational ignorance will let them get away with it.

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23 Responses to Retrospectivity is the new black

  1. Leigh Lowe says:

    There’s never been a more exciting time to steal people’s savings.

  2. Bruce of Newcastle says:

    The third and biggest question is this:

    3. Are voters pants scared off by the changes?

    I think the answer is a big yes irrespective of whether it is retrospective or good policy (which it clearly isn’t). Any person considering to put money into super now has to ask themselves ‘will it still be there in 20 years when I retire?’ Then they have to also ask ‘will I be allowed to collect the money when I’m 60, or will some other government raise the age?’

    Rapidly you come to the conclusion that any money into super is put down a black hole. All because Canberra can’t stop meddling with it and stealing it.

  3. Snoopy says:

    Love comes crashing down.

  4. Mr Skeletor says:

    Opinion varied from: “Yes, it is retrospective but Super is still a good thing” to “It is retrospective, but the government should get away with because Labor’s negative gearing policy is even worse for the economy”.

    You should try getting out in the real world for a bit.

  5. Joe says:

    Superannuation – The TAX that does not dare say it’s name.

  6. Rabz says:

    Why would anyone who wasn’t stark raving mad vote for the liberals, labor or the greenfilth?

    None of them deserve any votes at all, quite frankly.

    This current level of political debate and the policies being proposed by the attendant bunch of preposterous brain damaged kakistocrats are simply not good enough.

    Vote 1: Informal

  7. Rabz says:

    Rapidly you come to the conclusion that any money into super is put down a black hole.

    Came to that conclusion decades ago.

    The nuclear option of leaving the country and grabbing the lump sum may be the only way I can actually stick it to the stupid thieving bastards.

  8. Botswana O'Hooligan says:

    Be thankful that they haven’t yet reintroduced a watch tax, window tax, hearth tax, brick tax, and various taxes the Poms have tried from time to time, but given mr turnbull’s erratic style we just don’t know do we, and if he is allowed to get away with this novel form of robbery on our super, who knows what is coming next. It’s not this election we should be worrying about because he is basically locked in to the Abbott policies, but give him a mandate and watch what happens.

  9. Slayer of Memes says:

    I am SO glad we replaced that awful Mr Rabbit with this wonderful Mr Turnbull.

    Why, just imagine if Mr Rabbit was still PM at this election… not only would we still be asking for S18C to be repealed, but think of all the tax increases (including retrospective ones) we’d be facing too!!

    (do I really need to….)

  10. Geoffrey Luck says:

    Henry Ergas is the only person who (as usual) has talked sense on this issue. When I retired, and cashed out my superannuation balance (because I didn’t trust what governments would do in the future) I paid tax on the lump sum at THREE different rates. These represented the changes various governments had made to the super rules during my term of employment. Each of the changes applied only to the tax regime from that point on, but collectively, they amounted to a retrospective hit on our savings.

  11. ianl8888 says:

    @ Geoffrey Luck

    > When I retired, and cashed out my superannuation balance (because I didn’t trust what governments would do in the future) …

    Yep. Exactly what I did and why I did it. I realized from about 2008 that under the existing super rules, a normal-type person with only a modicum of ambition could, over a working life of 45 years, easily accumulate over $1m in super from compulsory SGC deposits, salary sacrifice later in life and compound interest.

    $1m for ordinary people ? Not allowed in this country …

  12. MareeS says:

    Spouse and I both come in under the $1.6m cap in our SMSF, and being over 60 we aren’t facing any immediate tax issues. However, our youngsters are also members of our fund, and the new rules have just added a whole new level of complexity (ie, fees and costs of administering the fund), not to mention curtailing their future options for contributing.

    We are staying with our long-term strategy, as nothing has changed for the spouse & me (yet), but have told the kids to forget about further non-compulsory contributions as the future of super is murky and riskier than ever.

    I admit there has been an element of estate planning in our SMSF structure, but it’s our money from a life of hard work and tax paying to do with as we please, not the government’s gift. At the first sign of a limit or tax on withdrawals we are out of there.

  13. Leo G says:

    It seems retrospective changes to superannuation savings have something in common with parts of Telstra’s twisted-pair copper wire telecom network:-

    ” … undoubtedly very good in parts, very poor in parts, and probably very adequate for most of it. But it is like any linear network: it will have good bits and bad bits … It’s like the Curate’s egg; it’s good in parts.” – Malcolm Turnbull on August 25th last year.

    The description pays homage to the servile optimism of the English Victorian-era middle class.
    Australian superannuants in the present era aren’t nearly so polite.
    I expect that very soon, they will throw the bad bits of policy back in the PM’s face.
    They won’t be thinking that parts of the government are excellent.
    You’d have to be a complete bootlick to swallow that argument.

  14. Joe says:

    MareeS:

    At the first sign of a limit or tax on withdrawals we are out of there.

    Get it OUT. GET IT OUT NOW!

  15. Ez says:

    While I am 100% against the proposed changes, I am picturing the strategy of The Turnbull Coalition Team™ to have considered:

    * 32.32% of voter-aged Australians are 18-35 (source). This block has a lot less invested in super, with median super balances of: $4,981 (20-24), $16,168 (25-29) and $27,772 (30-34) and could be expected to either view super as (a) something well down on their list of concerns, (b) something they’re expecting to lose by retirement anyway, or c) they’re not effected by the changes so won’t care.
    * The unemployed won’t care.
    * Any migrants/new arrivals (of any ages) will have nil or nominal super balances. They’re also likely new to the scheme so may be less concerned with the retrospectivity of the policy.
    * “At least they’re not Labor” is still alive and well.

    The rest? Well, as one chap once famously put it, The qualitative evidence is they don’t matter.

  16. gbees says:

    So Sinc, I’m still confused. Let’s say I have more than $1.6m in the super fund (SMSF) and I’ve retired. What does it mean that I am not allowed to have more than $1.6m in my super account backdated to 2007? I’m confused. Does it mean I have to withdraw the amount above $1.6m? Is there a tax liability? Or does it mean that when I pull out funds over and above the $1.6m those are no longer tax free but taxed at 15%? And is this tax retrospective for amounts over and above $1.6m withdrawn back to 2007?

  17. dalai lama says:

    Gbees, in simplified terms it means that the treatment of your super money is changing as follows:

    – Currently: You could start a pension with the entire amount, and if you are over 60, the earnings on the assets supporting the pension within the super fund will be tax-free, as well as the pension payment to you being non-assessable for income tax purposes.
    So in other words, if you have $2 million and it earns 6% for the FY, the $120,000 in earnings will not be taxed in the fund, and the minimum pension of $80,000 (assuming you are between 60 & 65) will be tax-free to you.

    – Going forward: Of the $2 million, earnings on the $400K over the new $1.6M threshold will be taxed at 15%. Hence assuming the above, the super fund trustee (in other words you) will be up for $3,600 worth of tax.
    Your pension payment will still be tax-free to you personally.

    Under Labor’s ‘alternative’ tax grab, of the $120K in fund earnings, $75K would be tax-free and the rest taxed at 15% – i.e. a tax bill of $18K.

    The backdating to 2007 relates to new after-tax personal contributions, so does not affect money already in your super fund.

    There are some other issues to consider (like the taxable/tax-free proportions of your super benefit), but the above is enough to give you the idea.

  18. dalai lama says:

    I should also add that with several financial analysts’ predicting zero to even negative interest rate policy for Australia within the next 12-18 months, self-funded retirees are getting smashed from all directions.

    So much easier just to cash out, buy a $3 million home and happily draw the full Age Pension!

    Sack.Them.All!

  19. notafan says:

    So much easier just to cash out, buy a $3 million home and happily draw the full Age Pension!

    Okay though I imagine the rates would be pretty hefty and you would have to find money for repairs and maintenance.

    Do retirees really rely only on bank interest on their savings?

  20. dalai lama says:

    Notafan, some do, because the bank interest (i.e. term deposit) is considered risk-free (rightly or wrongly, and in my opinion rather wrongly, as evidenced by Cyprus or Greece).

    Regardless, as official interest rates drop, so does the so-called ‘risk-free frontier’, which is essentially the term deposit rate plus a margin.

    Some 4-5 years ago, when TDs were earning 7-8%, you only needed to add 3% on top and you had a pretty solid return. In other words, you did not need to take a lot of additional risks.

    These days, if you add the same 3%, you’ll barely get to 5% overall, so you need a lot more money saved up to cover your normal lifestyle expenses for whatever you estimate may be your remaining longevity.

    If that’s not enough, you need to invest in riskier assets, where of course the end game will be the next stock market crash.

  21. BH says:

    The issues are
    a) is it good policy
    b) what should the transitional measures be

    On the policy front clearly they want to limit the amount people can have in Super. So why not simply state what the limit is (we used to have a reasonable benefits limit) rather than restricting contributions. The restrictions to contributions ignore the fact that people earn different amounts at different times in their lives and spend different amounts at different times. Most pay of the house, educate the kids and then put money into super later in their lives. This policy ignores how families live leading to the second problem – the absence of any transitional measures.

    Surely the Government could recognise that older people (say above 40) who may not have contributed as much in the past should have higher limits to get a reasonable balance. Many will not be able to get close to the 1.6m the Government seem to think is a fair amount. In my case having a severely disabled adult child means I need a lot more than that as I have care for him for his entire life.

    If you don’t think the rules are retrospective consider the position of someone who just before the Budget bought an investment property in their SMSF aiming to contribute to super to fund the purchase or to repay any loan that was required. A reasonable thing to do given the Coalition’s promise not to make any adverse changes to Super. However, post Budget they would be in the position of being committed to buying the property but unable to put enough money into Super to pay for it.

  22. gbees says:

    Thanks Dalai Lama

  23. dalai lama says:

    Correction: In my above post, I said Labor’s tax take on the excess earnings within a super fund above $75K would be $18K.
    Obviously this is not right; the correct amount is $6,750, being 15% of 45,000.

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