18 February 2016
Speech - #2016001, 2016

Address to the SMSF 2016 National Conference, Adelaide

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Slide Presentation [PDF 358KB]

Australia’s economy is transitioning and transitioning successfully. Australians know that that transition is not simple. They know the volatility that they see beyond our shores and even here on our own shores but Australian’s are not intimidated out of their future or out of their prosperity. We have always been a very adaptive people. That sense of adaptation and that sense of securing one’s own future is very much alive in the work of the self-managed super funds, and those who advise them and those who support them. Accountants, planners, advisers – it is with your expertise that Australians are better able to plan and save, and to achieve higher living standards in their retirement.

That is what the Turnbull Government – that I am part of – wants, for as many Australians as is possible to be able to achieve their independence, and it’s pleasing to see how this sector is performing. Self-managed super funds now hold 29 per cent of Australia’s $2 trillion in super assets – 29 per cent of those $2 trillion in super assets. It is helping Australians become independent. There are many economic goals you can have in life; to own your home, to ensure you are educated, to educate your children, to give them the best opportunity you can hope to give them. But to be independent in ones retirement I think is an incredible goal for us all to set ourselves. To be able to work hard over one’s life and to be able to put yourself in a situation where you have not only been independent through the course of your working life but when you have moved into the retirement phase you are independent then. That is a great achievement that anyone can aspire to and it should be part of Australians’ aspiration – to be independent, to not be dependent. It is becoming, sadly, increasingly a factor in this country that transfer payments and welfare is becoming normalised as part of the income of Australians. I don’t think that is the future for the country. The future for the country is to be more independent and less dependent – because as a nation that is the best way for us to become competitive. As a nation as we become more innovative, as the Prime Minister says, and take these opportunities then we become more independent and we become stronger as a result. It is that strength that gives us the resilience to deal with all of the things that come our way. So, it is very important that we continue to have this as a goal.

In the last five years, SMSF assets grew by around $230 billion and we’re seeing around 2,500 new SMSFs pop up each month. This sector, and in particular the SMSF Association, deserves credit for these numbers and for your dedication to excellence,  ingenuity and the determination to help Australians achieve a better standard of living and independence in retirement. Australia’s super system of the future must be one that works for all Australians. A system that provides opportunity. A system that is fit for purpose. As a Government, we want to see greater choice, stronger governance, better information, better support — all principles I’m sure you’d enthusiastically embrace and live out in each of your own business and own investments practices. We’d also like to see more targeted incentives.

This is a vision for superannuation, this is an objective of superannuation that I’ve spoken about on many occasions now since coming into the role. It is important today that I outline a few more principles on these issues. I should be upfront and say that today is not the Budget, yesterday was not the Budget and for those media in the room the Budget is still in May, it hasn’t changed, it is always in May. But we are getting now very, very close to the landing point on some decisions on superannuation and we will be working continually with Peter and Andrea as we work through these final details as finalise our views on not just the taxation arrangements on superannuation but the way we can support superannuation to deliver on its purpose and to be more about choice, more about flexibility and to deal with the fairness issues that are associated with all of these things.

Today is an opportunity to give you an insight into some of the considerations the Government has embarked on, together with myself, the Assistant Treasurer Kelly O’Dwyer, who I know has given you a video message here and a super system that is fit for the 21st century. Super concessions — or more targeted incentives are something I want to particularly focus on today.  Now it is difficult fiscally at the moment. There isn’t a lot of head room in terms of our ability to move when it comes to tax or when it comes to other issues on expenditure and so on.  As a Government, we are taking a fresh look at how we can lessen the pressure on spending and on revenue. The best way to have lower taxes is to have lower spending. The best way to have lower taxes is to ensure the tax measures you have are best targets and fit for purpose as you can possibly have them and the same is true of expenditure. That is the way that we can ensure that the Government is best able to provide the tax system and other supports that are necessary to help Australians transition in the economy.

Part of this has involved looking at the effectiveness and sustainability of retirement income support. On the age pension side, the Government made significant changes in last year’s Budget. As the Social Services Minister I was responsible for bringing those measures up to the Cabinet and to see them implemented and they were passed through the Senate. We increased the taper rate in the assets test following the changes to the rates in 2007 when there was a $20 billion surplus and $40 billion in the bank. Those taper rates that were done on the eve of the 2007 election added a billion a year to the cost of the age pension. When you have $20 billion in the bank before the Global Financial Crisis these are arguably things you might have been able to afford but today they are not. We had to be very candid with Australians about that – we had to be extremely candid. That is the approach you are going to continue to get with myself and the Prime Minister and other members of the team. We know that Australians get it, that they understand the pressures and the challenges that are there. We are not going to try and blue sky things, we are not going to try and paper over them or, as I said earlier today, try and sell the Australian people a unicorn on these sorts of things. That is not what we are going to do – we are just going to be straight up about it. That is what last year’s Budget was about when it came to the part pension. The slide shows what had to be done. 

Australian’s are holding on to our wealth and capital in our latter years.  We can see that in the first five years people on the pension, 50 per cent are either increasing their asset holdings or they have about the same amount. Interestingly, in the last five years that they were on the pension, and these aren’t independent retirees, they are on the pension which is a welfare payment, they are still increasing their assets, 42 per cent of them, and almost 25 per cent of them have as much as they had before.

We limited also in addition to making those changes the eligibility for the part pension, we also made changes to limit the deductible amount of some of the government defined benefit pension schemes to 10 per cent so that their treatment under the age pension income test aligns with other income streams. This was also predominantly a fairness measures, if people are earning income in their retirement then their income should be assessed like others income is being assessed. It is very important when you are providing welfare payments that you seek to do so as fairly as possible.

This builds on the change announced in the 2014–15 Budget to increase the age pension eligibility age to 70 by 2035 — all of which will ensure our pension system is both fair and sustainable.  We have done a lot of work on the pension changes. That said, the age pension is just one arm of our retirement incomes the other, of course, is superannuation. Just as with the age pension, where we have made those changes, superannuation and the tax expenditures that are associated with that does hit the government’s budget. There is a big difference though; allowing people to keep their own money is always, I think, different to providing someone with a welfare payment. They are not the same thing. If you have earned something and you have got it in your account, you’ve earned it. It is then for the government to make decisions about how the tax system applies to that. But that is very different from taxing someone over here and taking a payment and giving it to someone over there. To equate the issue of welfare payments with tax incentives, I think, is fundamentally wrong. It is not the same thing, they are fundamentally different, and our political opponents always seek to equate these two things. Tax incentives on something you have earned are different to a welfare payment that someone else has paid for to give you.

But right now it’s clear that we are going to have to make some hard decisions when it comes to how we are going to address the targeting of these tax concessions going forward. The current approach that we have I think there is a reasonable and fair view about how these arrangements are loaded and how they deliver on the objectives that are there for superannuation.

Many of you know that there are different ways to measure the size of these concessions; I know ASPRA in particular take some exception to the way tax expenditures statements are used or, I should say, abused by some in this debate. Tax expenditure statements do not represent costings. They do not truly reflect what the cost to revenue actually is and the way they are combined also inappropriately by some advocates, particularly the Opposition, misrepresents the cost to the Government in what amounts to expenditures that are provided in tax concessions. I think this is an area that we can continue to refine and get right and ASPRA has some excellent suggestions about how we might achieve to do that, as does the SMSF Association. We hope to achieve that together with all of the organisations in the sector. They don’t, these tax expenditures statements, represent the potential revenue gain to the Government as many have claimed.

Some say these concessions are as high as $30 billion. Others believe it could be as low as $11 billion. The task is to weigh up the value of superannuation tax concessions against other uses for how that revenue might be applied. For instance, should we direct tax concessions to superannuation in the same way that we are doing it now or should we instead put more money towards reducing income tax or company tax? Particularly as we see the mounting cost of average tax on the average tax payer in this country. Is there a better balance that we can and should indeed strike? These are the questions the Government is wrestling with as part of its current deliberations which, as I said, are drawing quickly to a conclusion. As Treasurer, I’m interested in how we can reshape the tax system to support higher economic growth, job creation and better living standards and independence for all Australians.

Now, the second major issue that has been flagged is the distribution of concessions across different income groups. When you look at the average balances by taxable income and age you can clearly see how a large proportion of concessions can flow to high income earners – this is a fact. A substantial proportion of the superannuation tax concessions by value do go to the highest income earners. This applies in relation to both the contributions and earnings concessions. We know from the Murray Review, that very little of what the Government puts towards super concessions goes to the bottom 20 per cent of earners. By contrast, more than half goes to the top 20 per cent. You’re probably not surprised by these figures. You all know high-income earners generally have far more capacity, and inclination, to save for retirement. This is a good thing, this is a very good thing, it’s not something that should be demonised or seen as some sort of nefarious practise. Which is, I think, often a point that is implied when people make criticisms of these things. I think it is great that people are out there saving for their own future. I think it is tremendous. They do it in superannuation and they do it in many other forms, including amazingly negative gearing which I don’t think is a bad thing at all, that people would take those opportunities to provide for their future. But I believe they raise questions about the purpose of concessions, particularly as it relates to superannuation. Certainly they boost retirement incomes, to the extent that their absence would result in lower balances, arguably, and incomes. However, what is less clear is whether concessions for high income earners increase savings behaviour or relieve pressure on the age pension. By this, I mean a significant proportion of savings may occur in any instance. Just not necessarily in the form of superannuation. I should add, Australia’s highest 20 per cent of income earners are also unlikely to rely on the age pension.

The Murray Review said you must define the purpose of superannuation. We have great sympathy with the view put forward by Murray that in short it is to ensure that people are not reliant on a welfare payment in retirement in part or in whole. That’s the point. For those who are on high incomes the likelihood of them having to draw on a welfare payment and draw on the taxes paid by other Australians in their retirement to support themselves is far less of a likelihood. The purpose of the concession is to ensure that people are more independent in their retirement.

Indeed, recent analysis from ASFA highlighted that as the superannuation system has and continues to mature the 70:30 split of pensioners to self-funded retirees we had in 2000 has already rebalanced to be a 50:50 split. As the maturation continues ASFA projects the rebalance to be a 40:60 split in favour of self-funded retirees by 2023. I hope their estimates are accurate and their projections will be realised because that was the point of these changes many years ago – to ensure that people would be less dependent on the age pension into the future and with an aging population that is an important objective. This chart, again from ASFA, shows the stark projected shift in our retirement income sources as the superannuation system matures the largest source of retirement income is expected to come from superannuation income. The increase in the size of that blue bar there which shows the proportion of someone’s retirement income being generated by superannuation, this is a very healthy chart to be looking at. This is the product of your work. This is what you are achieving for people in your advice to them or if you are running your own fund creating that independence. This is what it is designed to achieve. So, when we come to try and define the purpose of superannuation and how we frame tax concessions we need to focus very much on that objective.

Our opponents stated policy is to tax superannuation earnings in the retirement phase. I just want to make a reference less about our opponents on this I suppose but more to highlight the Government’s own view, about our great sensitivity to changing arrangements in the retirement phase. One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment. That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way. It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk. Of course we want to deal with the excesses in the system and the Prime Minister and I have taken quite a lot of flak for not ruling things in or ruling things out. What I have tried to do in making those remarks is to indicate to you that we have great sensitivity about how you might move into the phase if that is indeed what one plans to do.

From the Opposition’s point of you I am surprised about the fact that they are clearly, and have announced, that they will tax earnings in the retirement phase. Changing the rules on people who are saving for their retirement and now when they are in that phase they decide to pull the rug. This is what the Leader of the Opposition said just the other day, in relation to another matter, he said, ‘I'm old school’-  he wasn’t from my school I can tell you I went to a public school he went to a private one. He says, ‘I’m old school, brought up with the principle that laws should not be retrospective. If you've entered into financial arrangements with Cleanevent,” no he didn’t say that.  “Financial arrangements and investments based on current tax law, I don't believe you should retrospectively change that law. In other words, when you make announcements in the future, it shouldn't change the circumstances of the people who are already invested under the old law’.

Now, they are his statements, they are not mine, and I think they do not accord with what Labor plans to do in the retirement phase of superannuation. The Government, however, understands that when you get into the retirement phase, that is, when you actually need to draw down on that income, that period is a very sensitive area for how people look at the stability of superannuation. There are other issues to do with the tax treatment of superannuation. But that said I think there is a strong case for examining the size and structure of the tax concessions and the treatment so that Australians can be confident that they are sustainable, well targeted and fair. And as I said, we are getting close but will continue to work with SMSF and the other organisation to bring this to a landing soon.

Now I know this probably isn’t what you want to hear. You value stability and certainty. I understand and can appreciate that but the Coalition has always believed that and I should also say, again, that nothing has been decided but that point is fast approaching. It is important that we remember why superannuation exists. It’s there to assist those with the means to do so to achieve a better retirement income and, at the same time, reduce pressure on the age pension. It’s not, as I’ve said before, an estate-planning vehicle.  This is a very important point. It’s not there to be a tax incentivised estate planning vehicle. We all want to leave things for our kids; we all want to do that. That is great, that is also a great achievement to be able to say as a family you have built something up over your life whether it is a business or a home or you have done whatever it is over the course of your life and to try and give the next generation a head start. That is a great thing that is something we choose to do. The taxpayer has said we will try and help you to make sure you are independent in your retirement; it is not a tax incentive for estate planning.

With a back-to-basics approach now, we can deliver the stability and certainty this sector craves, and needs. A system that is actually reflective of the modern working lives of Australians and a system that, if the balance is right, will be tinker-free, I hope, for a very long time to come. We have not made any changes to superannuation in the course of this Parliamentary term to date; we did think it was important to actually give those issues a breather. But the way the debate has bubbled up again in recent times means that there are still issues that need to be resolved and we wish to resolve them. It is vital for every Australian who is approaching or currently enjoying, retirement that we try and get these things settled and in place so they are sustainable. It’s important that we look at all these issues with an open mind and without prejudice, and make the right call for the system as a whole.

Now, before I finish, let me just briefly turn to what I’m sure we also can agree on that superannuation is a system that could do with some refining. Aspects of the system are too rigid. It’s part of the reason why more and more Australians are turning to the SMSF sector. We want the flexibility and the choice that is part-and-parcel with this sector to be available across the board. We want to see the industry on that front deliver more options for Australians as they save for their retirement. 

Yesterday I released, together with the Assistant Treasurer, we announced the Terms of Reference for a review of competition and efficiency across the superannuation industry. This was prompted by the recent Murray Inquiry, which told us that, between 2004 and 2013, fees in APRA-regulated funds only fell 20 basis points and yet the size of the average fund increased more than twelve-fold. The APRA-regulated sector, frankly, I think, can do a lot better that that. We have asked the Productivity Commission to develop benchmarks for measuring efficiency and competitiveness in the industry. We’re also asking them to develop a possible alternative model for allocating members to default funds. It will be a staged process and the Commission will consult widely before presenting reports sometime before July 2017. While that review is taking place, there will be no moratorium on superannuation policy. We will continue to look at improvements so we have a system for the future one that is stable and provides a certain outlook.  On the matter of choice, we believe wholeheartedly that employees should ideally be able to choose the superannuation fund that receives their hard-earned money. Not a union boss, but them, it’s their money they should decide where it is invested and indeed if they are in the position to set up their own self-managed super fund then that is a choice that is available to them also. Right now, we have situations where people covered by some enterprise bargaining agreements are denied choice and it is unacceptable. An enterprise bargaining agreement determines the fund into which their contributions must be paid. That just can’t be on. As a result, some Australians are being forced to save money in superannuation, but key decisions about how it is managed are taken from them. This can disadvantage people with multiple jobs, who jump between jobs, by requiring them to maintain multiple accounts with multiple fees and charges.  That simply isn’t fair, and that’s why in December the Government released exposure draft legislation to expand choice of funds and we’ll be pursuing this in the coming months.

Lastly, on the matter of flexibility, the Government will continue to explore how we can help those who take time out of the workforce to build their super. This is not a simple issue, it really isn’t, but it’s a pressing issue. Right now, the average super balance for women, who are usually the primary caregiver, is $52,000 less than men.

This is why the Government is examining how we can tackle such deficiencies, how we can, in effect, have a superannuation system that reflects changes in people’s lives. Many ideas have already been floated. To give you one example, we could potentially lift the cap on superannuation contributions for those who experience lengthy disruptions in their working life. That is not just for women who are giving birth and being at home for that period of time or the father on those occasions, it could also be for carers. When I was Social Services Minister this was an issue that came up a lot. Carers who may have been in a very high income earning capacity but because of the terrible change in life found themselves caring for  a loved one for a protracted period of time and then the catch up afterwards is just very, very difficult. Such an approach, as suggested, could give people more opportunity to top up their super, and introduce more flexibility to the system. I know that won’t work for everyone but why would you deny it for someone? In short, a system that reflects changing lifestyles in a modern world.

So in conclusion, the Government wants a superannuation system of the future that works for Australians. A system that offers opportunity that is fit for purpose, and offers stability and certainty and choice. That is our commitment, and we’re working through all of those options. I look forward to continuing working with you to get us there. In closing, let me wish you all the best for the rest of this conference, and I am now happy to join you for questions.

Thank you very much.