THE day may be fast approaching when Australians should consider putting money for retirement under their bed rather than into superannuation. This recommendation does not come as a result of recent speculation into taxing options being considered for super by the Gillard government.
It does, however, come from both major parties not being prepared to commit to the principle of protecting existing super benefits when taxes are increased.
Over the past 30 years successive federal governments have often treated super as a cash cow when balancing the budget became difficult. Over this period most of the increases in taxation have been made by Labor governments.
The trend started almost within months of the Hawke government coming to power. In 1983 a 30 per cent tax on lump-sum super payouts was introduced, effective from July 1, 1983. This was followed by a 15 per cent tax imposed on both super contributions and the earnings of super funds.
The next tax imposed only affected people who had more super than arbitrary reasonable benefit limits imposed by the Labor Party. When these limits were exceeded, a penalty tax was paid.
The Liberals have also increased taxes on super. This occurred in 1996 with a penalty tax on super contributions by high-income earners and in 2007 with the punitive excess super contributions tax.
All of these tax changes had one thing in common. None of the increases in tax affected existing benefits. They only affected future contributions and super income. This protecting of existing benefits is called grandfathering.
Before the 30 per cent tax was introduced in 1983 only 5 per cent of lump-sum super payments were taxed. People with existing super benefits had their pre- July 1983 super taxed under the old rules.
The protected pre-1983 super was calculated by dividing the value of a person's super by their total days of service, and multiplying this amount by their days of pre-1983 service. Even when the Hawke government introduced a 15 per cent tax on super contributions, protective measures were introduced to ensure this tax could not be regarded as a death tax.
Last week, when speculation was rife about what new taxes or changes to super benefits were being considered by the Gillard government, a question was put to the minister's office, "would the government honour the practice of grandfathering existing benefits if changes are ever made to super?"
A spokesman from minister Bill Shorten's office advised that the government would not be speculating on whether changes would be made and could not comment on whether existing benefits would be protected. The same question was put to Senator Mathias Cormann's office, the shadow minister for superannuation, and no response was received. This is not surprising given Opposition Leader Tony Abbott's stated opposition to providing tax benefits for super.
The failure of the government and the opposition to acknowledge that existing super benefits will be protected if taxes are increased on super benefits justifies the biggest reason many people do not maximise their super.
This is not about being able to afford making contributions, but has always been the fear of super benefits being taxed out of existence in future.
I have always reassured people that this fear of change, when the principle of grandfathering is considered, has been a reason to maximise super before changes are made. With the failure of both major parties to commit to this principle Australians should be very worried and possibly looking for alternatives to super.
Frequently Asked Questions about this Article…
What does 'grandfathering' mean for superannuation and retirement savings?
Grandfathering in superannuation means protecting existing super benefits from new tax changes. Historically in Australia, when governments increased taxes on super, those changes applied only to future contributions and earnings — not to benefits already accrued. That protection is what’s commonly referred to as grandfathering.
Why are everyday investors worried about changes to superannuation tax rules?
Many investors fear that future tax changes could reduce or remove their accumulated super benefits. The article explains that both major parties have not committed to protecting existing benefits if taxes on super are increased, which has increased uncertainty and discouraged some people from maximising their super.
What major historical tax changes have affected Australian superannuation?
The article reviews several past changes: a 30% tax on lump‑sum super payouts introduced in 1983; a 15% tax on super contributions and fund earnings introduced soon after; penalty taxes for exceeding benefit limits under Labor; and later measures by Liberal governments, such as a 1996 penalty tax on high‑income contributions and a 2007 excess contributions tax. Importantly, those changes generally did not affect existing benefits.
Did the Gillard government confirm it would protect existing super benefits (grandfathering)?
No. When asked whether existing benefits would be protected if changes were made, a spokesman from the minister’s office said the government would not speculate and could not comment on whether existing benefits would be protected. The opposition did not provide a response either, according to the article.
How was pre‑1983 super protection calculated under past grandfathering rules?
The article explains that protected pre‑1983 super was calculated by dividing the value of a person’s super by their total days of service, then multiplying that amount by the days of pre‑1983 service. That method ensured part of a member’s benefits remained taxed under the older, more favourable rules.
Has protecting existing super been the usual practice when taxes change?
Yes. Over the past 30 years the article says successive federal governments have typically protected existing super benefits when introducing new taxes — applying changes mainly to future contributions and income rather than to benefits already accrued.
How does uncertainty about grandfathering affect decisions to contribute to super?
The article notes that fear of future tax changes — that is, benefits being taxed out of existence — is a major reason many people do not maximise their super contributions. Previously, reassurance about grandfathering encouraged people to boost super before reforms; the current lack of commitment from both major parties has undermined that reassurance.
What might everyday investors consider doing given the lack of commitment to protect existing super benefits?
The article suggests Australians should be worried and possibly look for alternatives to super if they are concerned about political risk to their retirement savings. It highlights the importance of being aware that government policy can change and that the usual guarantee of grandfathering has not been promised this time.
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