We need super to be flexible
Treasurer Scott Morrison needs to tread warily in evaluating Treasury's proposals for super tax reform to avoid throwing out the baby with the bathwater.
Already speculation about tax and rule changes is deterring voluntary super contributions by younger and middle-aged Australians uncertain about what the rules will be when they need to access their savings. Who would want to tie up money in super untouchable until at least age 60 when they have a mortgage and other financial commitments?
Without substantial tax concessions, the investment returns and financial security offered by paying off a mortgage will far exceed the benefits of making voluntary contributions to super.
Now that compulsory employer contributions have increased the budgetary costs dramatically, the Treasury is focusing on reducing super tax concessions. Already, compared with negative gearing, making voluntary super contributions is unattractive for high-income earners who face a penalty 15 per cent contributions surcharge and an annual contributions cap inadequate to fund a comfortable replacement retirement income.
Self-employed people not covered by the compulsory super arrangements have been voting with their feet, with voluntary super contributions falling sharply. Without the special concession allowing SMSF borrowing to buy real property for use as a business premises, their voluntary super contributions would be even lower.
Super assets are now largely untouchable until preservation age, 60 for most people, creating major problems for small businesses and workers unemployed before then. Having money untouchable in super when there's a mortgage and other commitments just adds to their financial woes.
This risk can only be reduced by minimising super contributions and saving, by paying off a mortgage or business debts.
The attractions of voluntary super contributions will be reduced further if the Treasurer changes the special transition to retirement pension arrangements. Far from being a tax rort, transition to retirement pensions allows taxpayers to access between 4 and 10 per cent of their super annually from preservation age.
Without transition to retirement pensions, retirement as soon as possible after reaching 60 would be a much more attractive proposition for those wanting to access part or their entire super after age 60.
A government concerned about encouraging super savings could even extend transitional pension arrangements to people needing to access their super while they are unemployed before they reach their preservation age. This would be an improvement on the current arrangement allowing access to a maximum of $10,000 on compassionate grounds.