SELF-MANAGED super funds have slammed proposals to cap the amount wealthy investors can accumulate in the tax-advantaged funds at $2.5 million.

The funds warned that the proposals marked a return to the scrapped reasonable benefits limit and risked directing investors ­towards poorer performing ­investments.

As revealed this week in The Australian, the peak industry group, the Association of Superannuation Funds of Australia, has proposed the cap as a means to ensure those with the biggest funds — it says some have as much as $30m in assets — don’t claim the lion’s share of tax ­benefits.

It also produced research that counters claims that cutting the tax breaks at the accumulation or earnings phase could easily generate billions of dollars in revenue to lift the federal budget bottom line.

Duncan Fairweather, executive director of the SMSF Owners Alliance, said the amount of money flowing into super above the compulsory superannuation guarantee levy of 9.5 per cent of wages was already controlled by voluntary contribution caps on both concessional and after-tax contributions.

“The focus of (any superannuation) review should be how the superannuation system can be changed to make it more viable for everyone to be able to be financially independent in retirement and not have to rely on the age pension,’’ Mr Fairweather said.

He rejected claims people on higher incomes got a greater benefit from super tax concession than those on lower incomes.

“What’s often overlooked is that people on higher incomes pay more tax and pay for the social welfare benefits that allow many people to pay no net tax.’’

Income contributed to super is taxed at 15 per cent up to $25,000 a year for people under 50 and up to $35,000 for people over 50, while contributions from after-tax income is capped at $180,000 a year as of July 1.

Tax breaks on superannuation are estimated to cost the federal budget $32 billion a year and are coming under scrutiny as the government looks to rein in the deficit. The Coalition last year axed a Labor measure raising the tax on pension income paid from a super fund from 15 per cent to 30 per cent for amounts above $100,000.

Bill Shorten endorsed the ASFA proposal as “food for thought’’, but said it was not Labor Party policy.

“But it’s fair to say that our priority is for the 95-98 per cent of Australians who don’t have enough in their superannuation for their retirement yet, rather than worrying about the 1 or 2 per cent who are already well off,’’ the Opposition Leader said.

ACTU assistant secretary Tim Lyons has estimated that about 40 per cent of the tax breaks on super went to the top 5 per cent of ­income earners.

ASFA said its case for change was backed by finding that some personal super funds had swelled to $30m with no tax on earnings, with people using them as a form of estate planning to keep assets tax-free until they were passed on to heirs.

The ASFA report said about 75 per cent of the tax breaks on super contributions went to “middle-income earners” who are not on the top income bracket.

But Andrea Slattery, chief executive of the SMSF Professionals’ Association of Australia, said capping of the end benefit was akin to reintroducing the Reasonable Benefit Limit system, which was “an unmitigated disaster’’ and was abolished in 2007.

Contribution caps already controlled the cost to government of superannuation and were a “very effective method of ensuring abuse is minimised’’ Ms Slattery said.

She said placing a cap over the end benefit encouraged a lazy approach to funding for retirement and would lead to more conservative portfolios.

“The main benefit of controlling contributions is that the funds who invest the most ­efficiently are able to pass on the benefits of that good investment to members,’’ Ms Slattery said.

“An end benefit capping system does not encourage the better operating fund with good investment performance at the time members’ benefits are ­accumulating in super.’’

Adrian Raftery, a senior lecturer in Superannuation at Deakin University, said it would be wrong to penalise retirement savers who had been conservative with their asset strategy.

“For instance, if people had 100 per cent in a term deposit they’d be getting a lower return, so they shouldn’t also have to pay more in taxes,” Dr Raftery said.

A better system would be to have marginal tax based on the level of income earned by the fund.

“If that happened, it could mean that the taxation level of superannuation in the accumulation phase could be lowered below its current 15 per cent level,’’ he said.

Originally published here in The Australian on 5 July 2014.