FEDERAL BUDGET 2012: Taxing high flyers

Wayne Swan’s attack on superannuation contributions, golden handshakes and senior execs living away from home is a highly targeted revenue raising measure that is careful to avoid hitting the mining industry too hard.

Wayne Swan has never enjoyed a cordial relationship with the business community. This latest budget will do little to repair the rift.

Swan, and his Treasury advisers, have clearly set their sights on high-flying executives, deciding that they should be stripped of some of the tax perks they’ve been able to accumulate under previous governments.

In the first place, there’s the attack on superannuation contributions. Swan has decided that people earning more than $300,000 (including their superannuation contributions) will now have to pay a marginal tax rate of 30 per cent on their super contributions, compared to the current rate of 15 per cent.

Swan justifies this move by arguing that under the current tax arrangements, high income earners – who face a higher marginal tax rate – get a bigger tax break on their super contribution than average income earners. Raising the tax rate on their contributions merely ensures that they will get a tax benefit of 15 cents in the dollar on their super contributions, which is the same as that enjoyed by average income earners.

Swan’s latest fiddle with the super system has been carefully targeted. Instead of hiking the tax rate on super contributions to 30 per cent for all those who pay the highest marginal tax rate, he’s limited it to those who earn over $300,000. As a result, it will only apply to 128,000 people, or around 1.2 per cent of those making super contributions. These people will see the average value of their super tax concessions halve – from almost $7,000 a year to around $3,500.

Even so, the tax change is expected to boost government revenues by $200 million in 2013-14, rising to $475 million by 2015-16. What’s more, all high-income earners who are currently paying the top marginal tax rate will now have to wonder how long they will continue to enjoy their current super tax breaks.

But Swan’s assault on executive tax breaks doesn’t stop there. He’s also decided to target ‘golden handshakes’ – termination payments made to executives. Swan has decided that highly-paid executives get a disproportionate benefit from the concessional tax rates that apply to termination payments. As a result, he’s tightened up the rules. From the beginning of July this year, people will only receive a concessional tax rate when their termination payments, along with their other taxable income, is below $180,000. Executives will have to pay their full marginal tax rate on amounts in excess of $180,000.

This measure is expected to raise an extra $20 million in tax revenue in 2012-13, rising to $50 million the following year, and to $60 million by 2015-16.

Finally, Swan has decided to reduce tax concessions on living-away-from-home allowances and other benefits that companies pay to senior executives. Swan wants to ensure that the payments are limited to people who are legitimately maintaining a home for their own use, even though they’ve been forced to relocate for work. What’s more, the tax concession will now only apply for a maximum period of 12 months.

The government expects to reap substantial benefits from these changes. In 2012-13, it will deliver an extra $50 million to the government’s coffers, rising to $217 million in 2013-14, and to $399 million by 2015-16.

But Swan has been careful not to cast his tax net too widely. The new 12-month limit will not be applied to people working on a ‘fly-in, fly-out’ basis in the mining industry. Nor will it affect the tax treatment of travel and meal allowances paid to workers on short-term work trips.