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'Tax leakage': Multimillionaires exploiting super

The Age logo The Age 22/05/2014 Agnes King
a © Roslan Rahman/AFP/Getty Images a

Accountants and tax advisers have blown the whistle on multimillionaire clients exploiting tax concessions in self-managed superannuation funds, urging the federal government to act against "tax leakage".

Analysis by Fairfax Media of Australian Taxation Office statistics shows almost 9200 self-managed super funds have a balance of more than $5 million, a rise of 76 per cent in the past three years, and the number of funds with over $10 million has doubled.

Treasury Secretary Martin ­Parkinson said that there should be a debate about whether the super system was creating incentives for people to ­manage their retirement incomes or whether it was being used as a wealth creation tool.

"The issue is whether the existing super system actually is a retirement incomes system . . . or is it a wealth creation tool? If it's a wealth creation tool, who is ultimately benefiting from this?" Dr Parkinson said.

Tax advisers have raised the alarm on the number of super-wealthy clients able to have incomes taxed at zero to 15 per cent, instead of the current top rate of 46.5 per cent, by using generous concessions and "cracks" in the superannuation system.

"These are people with $10 million to $20 million in self-managed super. They've funded their retirement several times over. They don't need concessions," said a tax lawyer who asked not to be named for fear of a backlash from his wealthy clients. The number, which ignores money parked in industry funds, is rising.

Advisers are wary of discussing the concessions enjoyed by some of their wealthiest clients. "I don't want to poo in my own nest," said one adviser.

But the fierce backlash against the Abbott government's first budget, handed down last week, is leading to increasingly vocal criticisms of the taxation of superannuation.

"There are probably 30 different strategies motivated by tax minimisation rather than a desire to self-fund one's retirement," one superannuation specialist told Fairfax Media.

A lot of these strategies involve "shuffling money" in and out of super funds to trigger a lower tax rate or glean tax deductions on personal expenses.

The most popular is 55-year-old executives who start drawing a tax-free pension from their fund, while tipping their entire salary into it and effectively reducing their taxable income from 46.5 per cent to about 15 per cent.

Another common strategy is to put money into super to get a tax deduction, then pull the money straight back out tax free.

'Material leakage to Commonwealth revenue'

Advisers say the sheer volume of this behaviour is causing "material leakage" to the nation's revenue position.

Others say these are "marginal" tactics and that the main game is in making voluntary contributions of up to $350,000 a year as a couple or paying inter-family loans through the super fund. These strategies can up to halve the amount of tax high-income earners would otherwise pay.

"It does need to be looked at," said one big four accounting firm's superannuation partner.

But advisers caution against turning the debate over superannuation concessions into a witch hunt against the wealthy, who they say continue to pay "plenty of tax". Some advisers also suggest their clients believe the concessions available to them are excessive.

"Some of my clients think the profits they earn in these entities that aren't taxed are too generous," said one Melbourne adviser.

In his speech, Treasury's Dr Parkinson said the distribution of the tax benefits of superannuation should be sensibly debated.

"I think the sorts of discussion that was in the Henry tax review will ­inevitably come back on to the table, and that will go to the distribution of the benefits of the tax incentives, and the issue of the preservation age will I think eventually have to come into play," Dr Parkinson said.

The 2011 Henry review found that while superannuation should continue to receive tax assistance, "there is a case for distributing assistance more equitably between high and low income individuals, including by limiting generous salary-sacrifice concessions".

The Abbott government made an explicit promise it would make no "adverse" changes to super in this term of government.

The tax review white paper process will start soon and is expected to include views on superannuation

Maintaining confidence in super

Others say an attack on a few high net individuals "at the fringes" could undermine confidence in the entire superannuation system.

"There's no doubt there are some very high net-worth individuals who are using super concessions to pay less," said ICAA superannuation expert Liz Westover.

"But introducing thresholds can make it so complex and expensive to administer. It defeats the overall ­purpose. You don't want to make it more difficult for those that could self-fund retirement to do so," she added. "Sometimes simplicity is the answer. And, yes, a few people will get through the cracks."

Others are worried the government will go too far with any tweaks to the system.

Nexia's Ian Stone said most of the self-managed super funds he sees have between $500,000 and $2 million in them and are being used by aspirational middle-class workers who are still in wealth creation mode.

With a government asking people to self-fund more aspects of their lives, Mr Stone said people are already nervous about putting too much of their savings into super out of fear governments will fiddle with policy settings.

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