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Tax changes to superannuation are on the cards

strategy
By Reece Agland
August 06 2014
3 minute read
23 View Comments

While the government is likely to avoid changes to super in the immediate future, tax changes to superannuation may not be that far off.

The superannuation system was saved from radical overhaul in the May 2014 Federal Budget, but it is becoming increasingly apparent that the tax concessions to the wealthy are unsustainable in the long run. A number of people, including Liberal heavyweight Malcolm Turnbull and Treasury Secretary Dr Martin Parkinson, have intimated that the excessively generous deductions in superannuation available to the wealthy are unsustainable and need to be considered in any genuine tax reform process.

The government’s promised review of the tax system is the most likely conduit for any changes, although in order to maintain its pre-election promises (to not make adverse changes to superannuation in its first term) the government will most likely put off implementation of any changes until after the next election.

 
 

Taxpayers Australia is of the view that the superannuation system should be designed to get as many people into self-funded retirement as possible. The reality is the superannuation guarantee (SG) rate (even at its eventual 12 per cent) will be insufficient to meet most people’s needs. People will need to make personal contributions to their superannuation and this should attract concessional tax treatment to make up for the money foregone through doing so.

This means we need to keep the tax-effective nature of contributions to encourage personal contributions above the SG rate.

While most of us will need superannuation to provide for our retirement, the wealthy do not. Without it they would still be able to make adequate preparations for their retirement years. The question then becomes do they need, and should the system continue to provide them, generous tax concessions. With some studies concluding that 40 per cent of the available tax concessions go to the top 5 per cent of Australians, this is a fair argument.

The difficulty is how do you create a system that encourages those who can (and need) to contribute more, while ensuring the already wealthy are not able to minimise tax through abuse of the system.

The solution in our minds is to have lifetime contribution caps and tax on earnings of funds over certain thresholds.

The first step is to determine what is an adequate level of superannuation savings needed to pay for a reasonable retirement. The Association of Superannuation Funds of Australia’s (ASFA's) Retirement Standard is often seen as the benchmark. It says a modest retirement will require an average couple to have $33,509 in income a year, and for a comfortable lifestyle the annual income required is $57,817. If we assume an annuity returns 6 per cent per annum this would require an annuity of around $1 million.

Taxpayers Australia proposes that along with the current annual limit there should be a lifetime limit on concessional and non-concessional contributions and tax on the income earned by funds with large assets. We propose:

• a concessional lifetime limit of $600,000 indexed each year to CPI in $5,000 increments

• a non-concessional limit of $1.8 million (total contribution limit of $2.4 million) indexed each year to CPI in $5,000 increments

• any concessional contributions over the indexed $600,000 would be taxed at the top marginal rate and count towards the non-concessional lifetime cap

• non-concessional contributions in excess of the lifetime non-concessional contribution cap would be returned to the individual

• individuals in retirement phase with $1 million or more (indexed each year to CPI in $5,000 increments) in assets at the start of the financial year have all their income taxed at 15 per cent, and rebate up to the first $15,000 in tax

• superannuation accounts with $2.5 million or more (indexed each year to CPI in $5,000 increments) in assets in accumulation phase should also be taxed at 30 per cent on their income earned.

Such proposals will ensure that people have an opportunity to grow their superannuation balance, but that the very wealthy cannot park their assets so as to have a tax-free retirement income stream. It will reduce the costs of the superannuation tax concessions to the very wealthy and discourage excess amounts of money being put into superannuation.

We believe our proposals will provide billions in savings from superannuation concessions while making the system more equitable without discouraging middle income earners from topping up their superannuation with personal contributions. This should negate the debate that superannuation concessions are too skewed to the already wealthy.

Reece Agland, superannuation products and services manager, Taxpayers Australia

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Comments (23)

  • avatar
    What a pile of rubbish! How will stopping the rich "encourage" the average Australian? Tall poppy syndrome on the grand scale.
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  • avatar
    Dr Terry Dwyer, Dwyer Lawyers Wednesday, 04 February 2015
    One could go the whole hog, have a 40-50% GST and abolish income tax altogether. But it's still a tax on working. It is also a tax which exempts foreigners drawing income from Australian real estate etc and spending it back home. Google and Apple etc would love it.

    GST raises old problems in new guises.
    0
  • avatar
    Increase the GST rate to 12.5% on everything and this discussion will be terminated - even on cold roast chooks.
    0
  • avatar
    I always feel much happier when I hear the word 'Simple' (Simple Super). Anything that a Government Member, Government Committee - or a Bureaucrat touches, amends or produces cannot be simple. Why am I happy --- I like a little humour >>>
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  • avatar
    Come on Reece - you're off with the fairies. Do you never experience RBLs and the surcharge. The 2007 changes were called Simpler Super for good reason. These proposals are totally impractical and as others have commented based on flawed principles.
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  • avatar
    Gerard Wilkes FCA CFP Sunday, 10 August 2014
    I cannot believe that a couples' comfortable lifestyle costs $58k per year while a modest income is $34k. This year we spent (after medical fund rebates) $28,000 on doctors and hospitals. I completed a cash flow last week for a client who does not live the high life and her income requirements are over $50k per year. She is a widow. My point is that $1 mill for a couple is not enough. I recommend that my clients aim for $2 mill in todays dollars to ensure a hassle free retirement. The problem with Taxpayers' Australia via Reece Agland's article is that the dollars are completely unrealistic. We have to do our spreadsheets and use real figures.
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  • avatar
    Personally, I consider Treasury to be pretty hopeless at long term, logical, tax policy. However, I would be quite happy if they did a nasty attack on super and sent more work to tax and estate planning lawyers such as ourselves.

    The real truth about tax is that there are only 2 classes of taxpayers and they are not the rich and the poor. They are the well advised and the rest. It was ever thus.
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  • avatar
    The unfairest aspect of the whole system is that the earnings of a super fund is tax free once a pension commences. There is no logical, equitable or economical reason for this.

    Given the size of the super pool the country cannot afford to have hundreds of billions of dollars invested in "tax free land" where the government also gives the owners free hand outs in the form of a refund of franking credits.
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  • avatar
    Good discussion but it is a bit late to redesign the system completely. Those on higher incomes pay higher marginal rates of tax - that is how it used to work in Australia and fair enough. Why do the bleeding hearts crowd then expect that when these people stop earning their higher incomes they should pay more on their retirement income (like having a wealth tax). I don't think that is fair.

    For all those that think that there should be a tax on pensions, good luck getting a lot of 90 plus year old self funded pensioners to stay up to date with their tax affairs and start lodging accurate tax returns again. I don' think that is a good idea.

    It seems like super is the last and easiest golden egg for Treasury to get their hands on. Why not just put up the marginal tax rates and be honest about it.
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  • avatar
    Duncan Fairweather Thursday, 07 August 2014
    Lifetime averaging of super contributions has merit as it provides flexibility. As Anne points out, people can save more in the later stages of their working lives when they have paid off their house, educated their children and have a greater capacity to save. Re-engineering of the super system should be aimed at enabling more people to put more money into their super savings because the system is failing its purpose now most people dont save enough to be financially independent in retirement. If you are successful and earn more you can save more and enjoy a better standard of living in retirement. Along the way you will also have paid a lot more tax, including on non-concessional contributions to your super. In fact, higher income earners pay the lion's share of income tax. The FSI's Interim Report sees virtue in policy stability for confident, long term investment in super. We agree.
    Duncan Fairweather
    SMSF Owners' Alliance
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