The rich may not be the only ones to be hit by Canberra's tax tinkering.
HIGH-INCOME earners and possibly those with large superannuation balances frequently referred to as the 1 per cent may have to rethink their personal finances if the federal government tinkers significantly with superannuation in the budget.
There is no doubt the government plans to claw back revenue through a change in superannuation tax treatment. And there seems to be uniformity among the pre-budget leaks that one area up for grabs is the 15 per cent concessional rate at which contributions, over the 9 per cent paid in by employers, are taxed.
This will affect many more than the top 1 per cent as plenty of Australians make top-up contributions. But it could provide juicy revenue for the government without annoying its heartland voters. While limiting or eliminating concessions on super contributions would be unpopular, the real sleeper would be an attempt to change the 15 per cent tax on earnings inside super funds.
Budget leaks on this possibility are not so firm. While Canberra has clearly thrown the idea around, it is no certainty. But the impact of such a move is great and high-income earners would have to think twice about topping up their super until there is budget clarity.
If the government increases the tax on income inside super it could be done only on larger balances and may not be applied to lower-income or even middle-income earners with lower balances.
One effect that an increase on the tax rate of income in super funds would be that funds would be diverted into investments that still attract some tax benefits. The most obvious is the franked dividend.
Whether inside or outside the umbrella of super, listed shares that provide fully franked earnings have the potential to be far more attractive. This is because those investments that do not deliver tax-free income in super funds, such as bank interest, would benefit from the franking credits on shares by offsetting more of the higher tax rate. This could push up the prices of high-yielding, fully franked shares.
The downside to investing on yield, which is a function of dividend over share price, is that the share price could be low because of the high risk associated with future earnings.
Among the high-yielding stocks are some of the riskier players such as Myer, David Jones, Pacific Brands, Specialty Fashion Group and Tabcorp.
But there is also a group of stocks with less volatile earnings that sits among the high yielders. The top 30 with fully franked dividends include Telstra and the big four banks.
Those at the very top of the wealth pile can put up to an additional $450,000 over three years into superannuation but this doesn't attract any concessional tax rate. The government could try to reduce this amount.
There is no real political downside in damaging the top 1 per cent of earners, who could ultimately abandon super. The mere and constant threat of unfavourable changes to the tax treatment has already prompted a reluctance by some high-income earners to put fresh funds into super.
An adviser with an investment banking firm that specialises in the affairs of wealthy individuals told me his firm had been telling clients for years to avoid saving via super and structure their affairs around trusts.
The practical problem with attempting to target the highest-income earners is that they will find more tax-effective ways to invest. The middle-income earners who do not have million-dollar balances in super may end up being collateral damage.
IT IS early days in the Peter Slipper affair, sufficiently so that it is hard to get a sense of whether Andrew Wilkie's attempt this week to reinvigorate his plan on pre-commitments in gambling will find support either with the government or the opposition. But it is worth having a watching brief on companies that would be affected by a Wilkie win.
James Packer's Crown was active in lobbying against Wilkie. Crown's Melbourne and Perth casinos would be negatively affected. It is one issue on which Packer would be in agreement with the board of Echo Entertainment, whose earnings could also take a hit. It has casinos containing pokies at the Star in Sydney and Jupiters in Queensland.
Woolworths has a huge number of machines in its Victorian pub business, thanks to winning the gaming licence from Tatts and Tabcorp. Aristocrat could be a short-term beneficiary if Wilkie was successful as many poker machines would need to be replaced.
There are plenty of moves left in the game of political chess being played, thanks to the allegations against Slipper. Wilkie is back in the game but it remains to be seen whether he can extract a win.
Frequently Asked Questions about this Article…
What superannuation tax changes is the government reportedly considering?
Leaked pre‑budget talk suggests the government is looking to claw back revenue by changing how super is taxed. The ideas floating around include revising the 15% concessional tax on contributions (above the 9% employer contribution) and possibly increasing the 15% tax on earnings inside super — potentially applied to larger balances. None of these proposals is certain, but they’re the main items being discussed.
Who would be affected if the government increases tax on super contributions or earnings?
High‑income earners and people with large super balances (often referred to as the top 1%) would be the primary targets. However, many ordinary Australians who make top‑up contributions could also be affected, and middle‑income earners without million‑dollar balances risk becoming collateral damage if rules change.
How could a higher tax on income inside super change where funds are invested?
If earnings inside super are taxed more heavily — especially for larger balances — funds may be reallocated into investments that still deliver tax advantages, notably listed shares with fully franked dividends. That shift could reduce demand for tax‑inefficient income (like bank interest) and boost demand for franked dividend payers.
Which types of shares are likely to become more attractive if super is taxed more heavily?
Shares that deliver fully franked dividends could become relatively more attractive because franking credits offset higher tax rates. The article highlights that the top 30 fully franked dividend stocks include Telstra and the big four banks, making these sorts of companies potential beneficiaries of any shift.
Are there risks to chasing high dividend yields if investors move into franked shares?
Yes. Yield is dividend divided by share price, so a high yield can reflect a depressed share price and higher business risk. The article notes some high‑yielding names are risky — such as Myer, David Jones, Pacific Brands, Specialty Fashion Group and Tabcorp — so investors chasing yield should be wary of underlying earnings volatility.
What special contribution rules apply to the very wealthy and could they change?
The article says the very wealthiest can currently put up to an additional $450,000 into super over three years, but those top‑up amounts don’t attract concessional tax rates. The government could try to reduce that additional allowance as part of revenue‑raising measures.
How might proposed gambling pre‑commitment rules affect gaming and casino companies?
If Andrew Wilkie’s push for pre‑commitment on gambling gains traction, major casino operators and businesses with pokies could see earnings hurt. The article flags Crown and Echo Entertainment as likely negative impacts, Woolworths’ Victorian pub gaming business as exposed, while suppliers such as Aristocrat could see short‑term benefits if machines need replacing.
What practical response have some advisers and investors shown to the uncertainty around super policy?
The ongoing threat of unfavourable changes has already made some high‑income earners reluctant to top up super. The article quotes an adviser who has been telling wealthy clients to avoid saving via super and instead structure affairs around trusts, because the richest will seek more tax‑effective alternatives if super concessions are cut.
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