Are caps on super redundant?

Debate is raging about a proposal to increase taxation for Australians with superannuation balances over $3 million. With this in mind, it’s worth taking a look at the measures that were put in place to prevent large balances arising in the first place and examine whether the policy rationale for these measures is now redundant.

Various caps and limits have been a fixture of the superannuation system for the past decade and a half. They were designed to limit the amount of money flowing into super accounts. This, in turn, was intended to prevent high-income earners from using their superannuation accounts as a tax shelter.

All of which was aimed at ensuring superannuation is used for its intended purpose – to provide benefits in retirement.

In 2007, the government introduced superannuation contribution caps as part of the Simpler Super reforms. The aim was to limit the amount of money individuals could contribute to their super accounts per year. They applied to concessional and non-concessional contributions.

Prior to the reforms, there was no limit on the amount of money that could be contributed to super. There were, however, restrictions in the form of reasonable benefit limits (RBL) on the amount able to be taken as a superannuation benefit at a concessionally taxed rate.

RBLs were introduced in the 1980s. They were designed to limit the tax concessions individuals could receive in benefits from their superannuation accounts.

Lump sums above the RBL were taxed at a higher rate, while pensions above the pension RBL did not receive the 15 per cent rebate. The Simpler Super reforms saw an end to RBLs.

The abolition of RBLs meant individuals could receive unlimited concessionally taxed lump sum payments from super. Had contribution caps not been subsequently legislated, this may have led to a huge increase in the amount of money channelled into superannuation.

The superannuation contributions caps operating on a per-year basis since 2007 vary depending on the type of contribution. For example, the 2023 financial year sees concessional and non-concessional contributions capped at $27,500 and $110,000, respectively. Additional tax applies to breaches of these caps.

Contributions caps have taken up the role of limiting money flowing into superannuation since RBLs were abolished. This is particularly the case for highincome earners. Prior to May 2006, it was theoretically possible for individuals to contribute unlimited amounts of money to super, subject to the RBLs.

In 2017, the government introduced the transfer balance cap (TBC) and the total superannuation balance (TSB) restrict. These measures are designed to further limit the amount of money that can be held in super accounts.

The TBC curbs the amount of money that can be transferred into retirement-phase accounts. The TSB, meanwhile, controls the total amount of money that can be held in a person’s superannuation accounts by restricting additional contributions.

For 2022/23, the general TBC and the TSB limit is $1.7 million.

The introduction of the TBC and TSB limit has had a significant impact on the way individuals can use their superannuation accounts. Before the TBC it was possible for high-income earners to accumulate significant wealth in the tax-free pension phase of super.

Additionally, while contribution caps restricted the amount people could put into superannuation annually, the TSB now places an additional lifetime limit on non-concessional contributions.

The introduction of these boundaries means high-income earners would be more likely to consider alternative investment strategies to accumulate wealth.

As this summary shows, there are a variety of measures in place that limit large super balances. Hence, the proposed tax on super balances over $3 million raises difficult questions about the current restrictions on superannuation.

For example, there is now very clear messaging balances over $3 million are acceptable. This should mean the total superannuation balance limit on contributions is redundant and should be repealed.

Likewise, the role of contributions caps needs to be questioned. If high, yet still concessionally taxed, balances are allowed in superannuation, why should taxpayers be penalised for taking advantage of this?

Arguably, contributions caps are also redundant.

The $3 million super balance tax proposal is still subject to debate and discussion. However, it represents a potential shift towards a system where higher rates of taxation could be enabled. One where additional tax is the trade-off for people who wish to accumulate larger super balances.