Super tinkering bodes ill for those building nest egg
Before the sweeping changes to super introduced on July 1, 2007, super in Australia was one of the most taxed in the world. Unlike other countries, such as the US that only taxed benefits paid or Britain that taxed benefits and income earned by super funds, Australia was one of the few that taxed all three components including contributions.
After those changes, at least super payments to people aged more than 60 became tax-free. Since gaining office, Labor has almost constantly been making changes to super, with many reducing benefits and increasing taxes.
The last time super taxes were increased to the same extent was during the Hawke/Keating era. Options considered by the Gillard government include taxing payouts on super accounts with more than $1 million and increasing taxes on the income of super for the wealthy.
This increase in taxation of income earned by super accounts of the wealthy, if introduced, would come hard on the heels of an increase in the tax on super contributions for anyone earning more than $300,000.
Prime Minister Julia Gillard told Parliament that Labor "will never remove tax-free superannuation payments for the over-60s". The faith in such a promise must be measured against previous promises made such as, "There will be no carbon tax under the government I lead".
At the heart of the current headless-chook activity by the Labor Party is its fear of the expected cost of super tax concessions of $45 billion a year by 2015-16. As is often the case when decisions are made concentrating on only the cost of something, mistakes are made.
Research conducted by Mercer titled Tax, Super & the Age Pension found that the benefit of the reduction in age pensions paid offset the cost of the super tax concessions.
Dr David Knox, a senior partner in Mercer's Retirement, Risk and Finance business, said "to put it simply, the rich are not getting a better deal from the government when it comes to retirement funding. It's swings and roundabouts: what low-income earners miss in tax concessions, is made up for in age pension payments."
Concentrating on only the cost of super tax concessions, without taking account of the savings received by reducing the amount of government retirement benefits paid, will inevitably lead to policy mistakes being made. Not least of which will be irreparable damage to super's reputation as being the preferred retirement saving vehicle.
Unfortunately the coalition is not exactly leaping to the defence of super. Tony Abbott's promise that there would be no changes made to super in the first year if he became prime minister provides little comfort. Mr Abbott's promise on super must also be put into context given that, as spelt out in his book Battlelines, his preference would be to scrap all taxation savings related to super and have everyone on the age pension.
Thankfully there is one promise by Mr Abbott in his book that does provide some certainty for Australians.
That is, "any changes to the superannuation regime would need to be 'grandfathered' so people wouldn't lose existing access to what's already theirs".
Unfortunately, the Gillard government has not been prepared to make the same commitment to "grandfathering". If taxes are increased and/or benefits decreased at any time in the future, without existing benefits being protected, the decrease in Australians' retirement savings inflicted by the GFC will seem minor.
Frequently Asked Questions about this Article…
The article highlights major changes introduced from July 1, 2007, which made super payments to people aged over 60 tax-free. It also notes ongoing changes since the current Labor government took office, with many measures reducing benefits and increasing taxes on super.
Yes. The article says options being considered include taxing payouts on super accounts with more than $1 million and increasing taxes on income earned by super accounts of the wealthy. It also mentions a higher tax on contributions for people earning more than $300,000.
Prime Minister Julia Gillard is quoted saying Labor 'will never remove tax-free superannuation payments for the over-60s.' The article urges caution in relying on political promises, noting past broken commitments as context.
Mercer research titled 'Tax, Super & the Age Pension' found that reductions in age pension payments offset much of the cost of super tax concessions. Mercer’s Dr David Knox says the outcome can be a trade-off: what low-income earners lose in tax concessions may be made up for by age pension payments.
The article warns that concentrating solely on the headline cost (it cites an estimated $45 billion a year by 2015-16) without accounting for savings from reduced government retirement benefits can lead to bad decisions and damage super's reputation as the preferred retirement savings vehicle.
The article reports that Tony Abbott promised no changes to super in the first year if he became prime minister, but also notes his longer-term preference (as written in his book Battlelines) to scrap tax savings related to super and rely more on the age pension. Abbott also supported the idea that any changes should be 'grandfathered.'
In the article 'grandfathering' refers to protecting existing super benefits so people don't lose access to what they've already earned if rules change. The Coalition has pledged to grandfather changes; the article says the Gillard government has not made the same commitment, which could affect retirees if taxes or benefits change without protection.
The article’s key takeaway is to be aware that politicians are considering a range of measures—higher taxes on large balances, on contributions for high earners, and changes to tax treatment of super income—and that policy choices can interact with age pension changes. Mercer’s research suggests some costs of concessions are offset by lower age-pension payments, but uncertainty and a lack of guaranteed 'grandfathering' mean investors should watch proposals and their potential effects on retirement savings.
Call 1300 880 160
Start a chat
Schedule a call
