Fact check: Are the Government's super changes 'not at all' retrospective?

Updated

The claim

As part of the 2016 budget, the Government announced some changes to the tax treatment of superannuation for those who have high account balances or who plan to make large after-tax contributions in the future.

Some sections of the community, and the Labor Opposition, have slammed the changes as "retrospective", something the Government denies.

"These changes are not retrospective. Very, very clear — it is not retrospective at all," Prime Minister Malcolm Turnbull said on May 11, 2016.

Is he correct? ABC Fact Check investigates.

The verdict

Mr Turnbull is close to the mark.

There are many different definitions of retrospectivity, ranging from a broad one that includes almost any change that affects people's lives to a narrow one that excludes nearly every change in the law.

Given the potential for different meanings, it may be a stretch to say the changes are not retrospective "at all".

At least one member of the Government called similar measures retrospective when in opposition.

On a broad reading, bringing in a $1.6 million cap on money transferred into a retirement phase account does retrospectively change the status of transfers previously made by those already in retirement: they will now count towards a cap, whereas they did not do so before.

But on this reading, almost every change to taxation law could be called retrospective.

On a narrower reading, the change is only prospective, given it targets only future earnings in retirement phase accounts. Prior earnings are not taxed.

Despite Labor's protestations, its $75,000 cap on tax free income is similar, and would also be retrospective on a broad definition.

Only on the broadest possible meaning could the lifetime cap on non-concessional contributions be described as retrospective.

Those who have already exceeded the cap will not have to transfer any money out: they are, in fact, advantaged over those who have not yet reached the cap.

Ultimately, using the "retrospective" label is a convenient way for those affected to criticise the changes when the underlying objection is based on the increased tax they will have to pay.

The changes

The Government has announced a number of changes that it says better target the tax concessions available through superannuation.

The argument over retrospectivity relates to two changes in particular.

The first is the introduction of a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free "retirement phase" account:

At the moment, once you have reached your "preservation age", you can make unlimited transfers into a retirement phase account from your "accumulation" account (where a 15 per cent tax applies to earnings).

Under the Government's changes, from July 1, 2017 there will be a lifetime limit on transfers of $1.6 million (indexed).

Because it is fundamentally a cap on transfers, balances can still exceed $1.6 million through investment growth.

However, people who already have accounts with more than $1.6 million at July 2017 will have to transfer the excess to their accumulation accounts or withdraw it from super altogether, even if the excess came from earnings.

A breach of the cap will result in the excess and the earnings on the excess being taxed.

The second major change is the introduction of a $500,000 lifetime cap on non-concessional (post-tax) contributions to superannuation:

There is already a cap on these sort of contributions (currently $180,000 per year or $540,000 over a three year period for those under 65).

These caps make it harder for people to put in large cash amounts as a way to minimise tax on investment earnings.

The Government's lifetime cap will take into account all non-concessional contributions made since July 1, 2007. But if a person has exceeded the cap prior to May 3, 2016, they will not have to take the excess out and will not suffer any penalty.

This means that a person who has made, for example, $1.6 million in non-concessional contributions since 2007, cannot make any more, but can still keep the full amount in their super account. By contrast, a person who has not yet made any non-concessional contributions can only ever contribute $500,000 in this way.

What is a retrospective law?

By describing the superannuation changes as retrospective, opponents of the measures tap into a long held concern about laws that seek to put new consequences on past actions. This debate usually concerns criminal law.

A number of countries ban retrospective criminal laws, but not other laws. Neither are banned in Australia.

Michael Kobetsky, an Associate Professor at University of Melbourne Law School and an Adjunct Professor at the Australian National University College of Law tells Fact Check: "The issue of retrospectivity turns on the definition as the Parliament has the power to amend the law prospectively and retrospectively."

Surprisingly, there is no settled definition on what a retrospective law actually is.

Professor Charles Sampford, Foundation Dean of the Griffith University Law School, has extensively studied retrospectivity and has published a book on the topic.

"There are many different definitions, ranging from the very broad that make almost every change to law retrospective to the narrow where virtually nothing is retrospective," he tells Fact Check.

"It is rare for someone to provide a definition when they criticise a law for being retrospective. If they did, they might realise that their definition is broad enough to encompass many unexceptional changes to laws."

One broad definition, dating back to 1874, sees a retrospective law "as one that takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability in respect to transactions or considerations already passed".

In a 1994 article, Professor Sampford and Associate Professor Andrew Palmer of the University of Melbourne suggested that "retrospective laws alter the direct legal consequences of past events or statuses".

However "if a law only alters the direct legal consequences of future events, actions or statuses, it is prospective, even if those future events are determined by past actions, events or statuses".

The Oxford Dictionary of Law defines "retrospective legislation" as:

"Legislation that operates on matters taking place before its enactment, e.g. by penalising conduct that was lawful when it occurred."

Professor Sampford tells Fact Check: "Earning income is not a crime. Taxing it does not make it unlawful and tax is not a penalty. Many laws have effects that are retrospective to some extent, but outside of the criminal law, the real question is whether the imposition of a new law offends against the legitimate expectations of the public."

Similarly, Associate Professor Kobetsky suggests that "the retrospectivity claim is a very effective distraction from an appropriate policy analysis".

In the past, at least one member of the Government appeared to adopt a broad meaning, suggesting any change to existing super accounts would be retrospective.

In April 2013, the former Gillard government announced a number of changes to superannuation including a $100,000 cap on tax free income streams, a similar measure to the $1.6 million cap that the Government has announced.

At the time, now Finance Minister Mathias Cormann posted on Twitter: "Lets be clear Labor's increased tax on super earnings IS retrospective as it applies to money already locked up into the system."

The $1.6 million cap

The question of whether the $1.6 million cap is "retrospective" will depend on how it is analysed.

The proposal refers to a cap on transfers, not future earnings.

It could be argued that the cap has the effect of changing the legal consequence of past transfers, as they now prevent any future transfers.

From public statements, it appears the Government takes the view that the measure is prospective because it limits tax free earnings in the future.

What do the courts say? It is legal in Australia to make a retrospective law.

Cases from the USA give us another view on what retrospectivity is.

An old US Supreme Court case of Griswold v Helvering looks at tax applied on an past investment.

A couple jointly purchased a property in 1909.

In 1921 a law came in that imposed inheritance tax on the whole value of the property.

The husband died in 1923, and it was argued that the tax should only be levied on his half because otherwise the law would apply retrospectively to an event in 1909.

The court found the claim of retrospectivity to be "obviously...without substance."

"Under the statute the death of the decedent is the event in respect of which the tax is laid. It is the existence of the joint tenancy at that time, and not its creation at the earlier date, which furnishes the basis for the tax...The statute as applied does not lay a tax in respect of an event already past, but in respect of one yet to happen."

In a press conference on May 11, 2016, Senator Cormann said "Only earnings on the back of savings in excess of $1.6 million will be taxed at the concessional rate of 15 per cent if people choose to leave that capital in the superannuation settings in the accumulation account. That is manifestly a prospective change."

Labor argues that the budget measure is retrospective because it penalises people for decisions they made before the cap was introduced.

This argument appears to be based on the requirement under the Government's policy that assets over $1.6 million that had previously been transferred into the retirement phase account will now have to be moved out of that account. If the money is not moved, tax will be payable on both the excess capital and earnings.

John Roskam, executive director of the Institute of Public Affairs, a conservative think tank and opponent of the changes, has said that the Government's "draconian" proposals "threw into turmoil the financial plans of potentially hundreds of thousands of Australians."

Those who have benefited from lucrative tax concessions may be understandably upset that the benefit will be taken away, but that does not in itself mean the change is retrospective.

Associate Professor Kobetsky tells Fact Check:

"I regard the changes in the budget as being prospective as they are changing the taxation of future superannuation earnings and providing measures for transition for taxpayers who have exceeded the new thresholds. The measures would be retrospective if they changed the superannuation rules for previous income years and imposed a new charge."

Professor Sampford tells Fact Check:

"If the analysis focuses on the income being taxed, it can be clearly seen that the change affects future income only. On a very broad definition of retrospectivity it could be seen as affecting past investments because an increase in the tax in the future income of those past investments affects the value of that investment after the change is announced. But that would be the case with just about every change in tax law, including tax reductions."

If the broader view were taken, an investor could equally say that increased capital requirements for banks are retrospective if they reduce bank dividends per share or the removal of the first homebuyer grant reduces the price for which existing property investments can be sold.

Professor Sampford suggests that rather than focusing on semantic arguments over the definition of retrospectivity, the key question is whether the investor has a "legitimate expectation" that such changes would not happen.

"It would be absurd to expect that the superannuation tax laws would never change. I suggest that the more generous the tax break the less sustainable it is likely to be and the less reasonable it is to expect that it will continue" he tells Fact Check.

Similarly, Associate Professor Kobetsky says: "The current superannuation system was excessively generous to high income earners and only the most optimistic taxpayers could have expected it to remain unchanged forever."

Non-concessional contributions

Fact Check finds that the Government is on stronger ground when it comes to the lifetime non-concessional cap.

Shadow treasurer Chris Bowen told the National Press Club a week after the 2016 Budget that "when a budget measure introduced in the 2016 budget mentions that it applies from 2007, it's clearly retrospective".

"Withdrawing amounts from your super Before you can withdraw super, you must meet a "condition of release", which can include: if you are 60 or over and leave your current job if you have permanently retired and are older than your "preservation age" if you have reached your preservation age but are still working, you can set up a "transition to retirement" pension to withdraw up to 10 per cent of the account balance each year.

The preservation age is the standard minimum age at which you can access your super benefits. It varies depending on your date of birth. For instance if you were born before July 1, 1960, it is 55 and if you were born from July 1, 1964 it is 60.

Similarly, the IPA's Chris Berg, writing on ABC's The Drum, said that people were suddenly being informed that "the law was, in retrospect, different, and that they were working towards a contributions cap that they never knew existed".

It is the case that the lifetime cap is calculated from July 1, 2007. But those who have already exceeded it through past contributions will not suffer any direct adverse consequences, irrespective of the size of the excess.

They simply will not be able to make any additional contributions in the future.

In fact, these people are in a better position than those who have not yet exceeded the $500,000 cap or do not yet have a super account. The latter group will never be able to exceed the cap.

This measure could only be retrospective if the chosen definition is so broad that it encompasses every policy change that applies to existing superannuation accounts.

Potentially, some super account holders who assumed the law would never change may have their arrangements disrupted. But this alone does not make a change retrospective.

What about Labor's policy?

Given that Labor has not been shy about criticising the Government's policy, Fact Check has taken a look at that proposal as well.

Labor says its policy aims to crack down on tax concessions for "high income earners".

The largest of these measures is its own version of the cap on tax-free income in "retirement phase" accounts.

Unlike the Government, it does not put a cap on the amount that can be transferred into a "retirement phase" account, but instead will limit tax free earnings to $75,000 per year. On Labor's own statements, it expects an impact on balances greater than $1.5 million.

These measures are broadly similar, although because Labor's policy is based on income not assets, it will result in less tax in years when investment returns are low.

Labor has not announced any additional limit on non-concessional contributions.

Sources

Topics: superannuation, tax, liberals, turnbull-malcolm, australia

First posted