Armistice Day for super troopers

The super tax war is over for now … and an armistice has been declared.

Summary: Federal Treasurer Joe Hockey today announced what many had already been expecting. Labor’s proposal to levy a 15% tax on any pension assets that earn income above $100,000 a year has been axed. The Coalition has also reaffirmed its commitment not to make any surprise changes to superannuation in its first term of government.
Key take-out: The Government’s decision could reignite superannuation interest in the property sector, as the Labor proposal would have meant those wanting to sell a property investment owned by their super fund in pension phase would have been hit with additional taxes. Such assets remain tax-free.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Armistice Day is celebrated on the 11th hour of the 11th day of the 11th month every year.

Treasurer Joe Hockey and Arthur Sinodinos, the minister in charge of superannuation, chose the 11th hour today of the 11th month to announce an armistice for the Treasury-driven campaign to lift the tax on Australian retirees.

The first Armistice Day in 1918 was supposed to celebrate the end of the war to end all wars. Instead, just over 20 years later, we were at war again. Perhaps Joe and Arthur chose the sixth day, rather than the 11th day, to remind everyone to be vigilant on the superannuation tax front.

I chose that analogy to underline to everyone just how significant the superannuation armistice is to Australian savers. It is possible that Joe Hockey or some future treasurer will launch another attack on retirees, but it will not be easy and we must be vigilant.

The proposed tax attracted much controversy when it was flagged by Labor earlier this year.

The new laws – if they had been brought in – would have seen individual super accounts earning more than $100,000 a year in income slugged with an extra tax.

From July 1, 2014, earnings on pension assets would have been tax-free up to $100,000. Anything above that would have incurred a 15% tax.

At the time, some suggested that this extra tax would only affect those with $2 million or more in super. Labor’s own rationale was that the new rules would “make the superannuation system fairer and more sustainable, and … help restore a number of the original intensions of the system”.

In fact, at the time, Eureka Report’s Bruce Brammall found that the changes would have hit many more super savers than reported, potentially even those with just $500,000 in their super account.

A lot of people stay out of superannuation because they are frightened about rule changes. I have been investing in superannuation since the 1970s on the basis that I would adapt to whatever rule changes came forward. But, almost certainly, those rule changes would still leave superannuation as a better retirement savings vehicle than assets in my name, my wife’s name, or within a company or trust.

During those five decades there have been a vast number of changes, but superannuation has always remained the best retirement savings vehicle. Finally, on Superannuation Armistice Day 2013, superannuation has won a significant battle over the enemies of superannuation in Canberra.

Indeed those enemies have been routed. Superannuation has come out trumps. You can now invest in superannuation and, at aged 60, if you put your funds in pension mode then the investment income is still tax-free. Under legislation, you’re required to have a pension.

No other investment vehicle has that tax-free advantage. I have had the view that the advantage is so great for people with large sums in superannuation that it was unsustainable. And it certainly looked as though Treasury was going to mount a vicious assault via the previous government.

We were lucky that Treasury did not understand how superannuation worked and messed up their sums. The previous government used our sums, but the proposal they came up with – a 15% tax on an individual’s superannuation income over $100,000 – would have been an administrative nightmare.

Yet, sticking with Labor’s view that the tax changes would only affect those with the highest of super balances, shadow treasurer Chris Bowen criticised today’s decision.

By not going ahead with the tax, he said 16,000 people with super balances of more than $2 million would be given tax breaks, while low- and middle-income earners would have super tax reimposed.

“The government’s priorities and values are just wrong,” Bowen said.

The tax was estimated to bring in over $300 million in revenue, but the administrative costs proved too high for the Coalition to be able to justify its implementation.

“It was undeliverable … It was nigh on impossible for the private sector to be able to identify who was responsible for that liability and how it would be assessed,” Treasurer Hockey said today.

It is possible that there will be another attack, but at this point superannuation is looking very safe.  

“This is a demonstration of the government’s commitment to provide certainty for superannuation fund members by making no adverse unexpected changes to superannuation during our first term,” Hockey said.

While superannuation is the most tax-effective way of savings, it does not suit everyone. For example, paying a house mortgage can be of greater importance. But in terms of longer-term non-residential savings, superannuation is the best vehicle.

There are two main ways to invest in superannuation, leaving aside the employer-employee arrangements. You can gain a tax deduction for investments of up to $25,000 for people aged 65 and under. Over 65 and you must satisfy a work test (40 hours in any 30-day period is the main test) but then you can gain a tax deduction for a $35,000 contribution.

In addition, anyone can invest $150,000 a year from tax paid earnings ($450,000 over three years for under 65s) and, of course, after you turn 60 the investment returns on those funds are tax-free, subject to making a pension-mode decision. That’s a huge advantage.

Australians love to take lump sums out of superannuation. In some cases they need the money, but it is madness if you want to live on the investment returns. And with self-managed funds you can control where the money is invested.

Indeed, property could well get another boost as a result of today’s decision. A growing number of investors looking to buy property are setting up self-managed funds to take advantage of the related tax benefits. Having a property in your super fund can significantly increase the annual earnings, meaning many investors could have incurred the extra tax. Now that this has been put to bed, investors can breathe easy and focus on growing their own super pot.

I believe all Eureka Report subscribers should look again at the superannuation vehicle strategies. Tax-free investment returns after age 60 look pretty good. And even if it is changed, the superannuation tax rate will be less than personal income tax.

Additional research for this article was conducted by Cliona O’Dowd.

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