No one, especially me as an SMSF adviser, likes to see governments tinkering with the superannuation rules and I normally see it as akin to “dipping into a honey pot” by desperate treasurers. However, the switch to completely tax-free pensions for over 60s in the 2006 budget was a step too far by Peter Costello.
At the time, Peter Costello trumpeted them as “the most significant change to Australia’s superannuation system in decades” but what Mr Costello and his treasury advisers did not mention or properly cost out was their long-term cost to the budget with an ageing population and economy that goes through mining and property booms and busts. I, and indeed, many of my clients in conversation, realised that this was overly generous and we have always expected that the largesse would be reined in at some time in the future. Yes, I am prepared to resist any changes but more so to ensure the government of the day does not overstep the mark and hurt the confidence in the system but I and others realise that the 2006-07 move to tax-exempt pensions for those over 60 was too far a leap for our economy.
So what are Labor’s recommendations?
Now let’s look at the Labor proposals, which are not overly draconian and will affect few people, mostly the “one percenters”. Lets look at them carefully.
Labor promised in April that if it won the election, it would impose a 15 per cent tax on the super income of retirees on all earnings of more than $75,000. Well, this is per person so a pensioner couple could earn $150,000 in their SMSF or superannuation before they have to pay any tax on earnings above this amount. The ‘above’ is important as let’s say an SMSF of $200,000 had net earnings to apportion to members for a year. Well, the tax would be only on the last $50,000 (assuming even balances) and would amount to $7,500 less some of the funds expenses, which would become tax-deductible. Assuming a return of 6 per cent per annum net for a super fund, the fund would have to be valued at over $2,500,000 before attracting any tax on earnings above the $75,000 per member.
Labor has also proposed that a 30 per cent tax rate on contributions would apply to those on incomes of $250,000 and more, down from the current threshold of $300,000. Again, this means that salary sacrifice by some earning more than $250,000 would still save them 19 per cent per dollar as opposed to taking the money after tax at their marginal tax rates of 49 per cent (including Medicare and levies). So the benefit of making contributions still outweighs not saving the funds.
The old argument that these people would stop saving for retirement, spend the money and rely on government support in retirement via the age pension is just rubbish. The people affected (earning personal income over $250,000 per annum or super balances over $2,500,000) are smart enough to realise they need to take care of their own retirement and that access to the full couples' pension of $33,717 is just not going to meet their needs. They will continue to use the tax, property and superannuation systems to maximise their returns using the most tax-efficient options available to them.
The real danger in any change to the rules would be if a government were to change the superannuation rules to affect middle-income earners or if the media drummed up enough fear that confidence in the superannuation system was severely reduced. That is why even Labor has been careful to only target the fringes of the population or the 1 per cent high-income earners and we can also expect some degree of ‘grandfathering’ of any changes where anyone already committed to a pension may not be affected by the changes.
The other danger is that once you start taxing pensions and increasing tax on contributions at certain limits, the temptation is always there to move the goal posts further and reduce those limits like the suggested move from the additional 15 per cent tax on contributions for earners over $300,000 to applying that additional tax to those on over $250,000, as Labor proposes. Once they start, the precedent is set and future governments will find reasons to dip deeper into our savings.
If your SMSF clients are near the edge of the limits mentioned, there are a couple of things SMSF practitioners can suggest:
- If the client is self-employed, you could advise them to restructure their business to allow the division of income across entities and their family members.
- Urge the client to review any salary packaging options
- Ensure the client evens up their balances by using targeted withdrawals from the larger balance holder and re-contributing to the lower earning spouse or partner’s account.
- Encourage the client to use super splitting from their 40’s onwards to ensure contributions are moved to a lower earning spouse’s account consistently over time to even up balances
- If they are entitled to start a transition to retirement pension (TTR), encourage them to do so now rather than waiting and losing the benefits of any grandfathering of changes to legislation.
In summary, I believe any changes will be targeted and that the coalition under Malcolm Turnbull will be more conservative in their changes than Labor proposes. You should however do all you can to protect your own position and use strategies available to you. It also does not harm to argue the changes and force the government to justify clearly any changes to be made to ensure they understand our displeasure at tinkering with our retirement nest eggs.
Liam Shorte, director, Verante Finanical Planning