'Grandfathering' brush-offs big threat to super's appeal
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.
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.