Australia: Millionaires on pension row

By Duncan Hughes

December 20, 2003



Australia's wealthiest citizens are claiming the same government pension benefits as its poorest while harboring millions of dollars in assets for their estates - by using a loophole in the superannuation rules that financial services experts claim is a rort.

Millionaires can use the do-it-yourself pension funds to create structures that enable them to easily pass the means and assets tests and claim the full age pension.

At the same time, multimillionaires are using the self-managed pension to legally shelter large parts of their fortune in a pension reserve that can be used to provide for the next generation.

The size of the self-managed sector of Australia's $508 billion superannuation industry has more than quadrupled in recent years as dissatisfied investors have shifted their assets from the super funds to the DIY funds that have been strongly pushed by advisers and accountants for their tax breaks and control.

But, in a sign of the growing concern about the sector, the Government this week moved to tighten a main tax break by proposing to claw back superannuation contributions made before a member became bankrupt, amid growing concerns that the generous breaks are being used to hide assets from creditors.

Richard Gilbert, chief executive of the Investment and Financial Services Association, whose members manage about $600 billion, said: "There needs to be some finetuning to the system. There needs to be a level playing field. Clearly some have advantages over others."

This is how it works. As trustees of their own $1.2 million self-managed pension fund, John and Jenny have their actuary confirm that their assets are sufficient to pay an annual income of $40,000.

The money in the fund, their house and $200,000 in other assets do not reach the assets test threshold, and the pensionable income, after deductions, entitles them to a full state pension of around $20,000.

The accumulating assets in the fund become part of their estate for the next generation.

Another couple, Jack and Joyce, with assets of $2.4 million in their fund, have their actuary confirm their assets are sufficient to pay an income of $96,000, subject to a 15 per cent rebate, as a result of which they pay little tax.

All their income is flowing from their assets, but the earnings on their underlying assets will be free from tax.

Using existing, legal tax rules, they have also turned a $2.4 million lump sum into $1.05 million. Once again, fund assets become part of their estate.

The federal Assistant Treasurer, Senator Helen Coonan, said retirees would be better advised to focus on getting the best overall return for their investments, rather than simply structuring their affairs to maximise their entitlement to the age pension.

In doing so, retirees "would be forgoing access to the bulk of their capital in return for a non-commutable income stream and access to the age pension", she said.

"In practice, wealthy retirees would be reluctant to surrender control over the bulk of their liquid assets in return for this advantage."

Chris Connolly, a director of the Financial Services Consumer Policy Centre at the University of NSW, said the Government had been very generous in its assets and income tests.

"The Government is well aware that its policy is not well targeted at poorer people," he said. "It is seen as a rort."

Opposition spokesman Senator Nick Sherry said the Tax Office should be providing publicly available data on what was going on to allay fears of rorting.


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