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 my superannuation and why does it matter?
Grandfathering means protecting existing superannuation benefits from new tax changes so only future contributions or earnings are affected. It matters because if governments honor grandfathering, your current super balance keeps the tax rules that applied when it was earned — if they don't, investors worry their accrued benefits could be taxed differently in future.
Have Australian governments taxed superannuation before, and did those tax changes protect existing benefits?
Yes. The article outlines several past tax changes: in 1983 a 30% tax on lump-sum super payouts was introduced (and earlier only 5% applied), the Hawke government later imposed a 15% tax on contributions and earnings, and subsequent penalties and limits were added by later governments. Historically these changes have shared one feature: they did not alter existing benefits — they applied to future contributions or income, reflecting the principle of grandfathering.
How was pre‑1983 protected superannuation calculated under the old rules?
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 number of days of pre‑1983 service. That calculation preserved the portion of benefits earned before July 1, 1983 under the older tax rules.
What did the Gillard government and opposition say about protecting existing super benefits recently?
According to the article, a question was put to Bill Shorten's office about whether the government would honour grandfathering if changes were made; the office declined to speculate and would not comment on protecting existing benefits. The shadow minister's office (Mathias Cormann) did not respond, and Opposition Leader Tony Abbott had previously signalled opposition to providing tax benefits for super.
Why do many people avoid maximising their superannuation contributions?
The article says the biggest reason many people don't maximise super is fear that future governments will change the rules or tax away existing benefits. When major parties won't commit to grandfathering, that uncertainty discourages people from putting more money into super.
Does the article recommend stopping contributions to superannuation because of possible tax changes?
The article warns that the failure of both major parties to promise protection for existing benefits is worrying and suggests Australians may want to look for alternatives to super. It does not provide specific personal financial advice, but highlights that uncertainty over grandfathering is prompting some people to reconsider how they save for retirement.
Were there any protective measures introduced when the 15% tax on contributions was added?
Yes. When the Hawke government introduced the 15% tax on super contributions, protective measures were introduced to ensure the change could not be regarded as a death tax — in other words, steps were taken to protect certain existing entitlements from being unfairly taxed.
How can everyday investors stay informed about potential superannuation tax changes and grandfathering commitments?
The article illustrates that government and opposition offices are the primary sources for official positions (for example, statements from ministers or shadow ministers). Everyday investors should follow announcements from the government and opposition, review statements from the responsible minister, and watch credible news coverage so they can assess whether policymakers are committing to protect existing super benefits.
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