Hold it! We need a debate on superannuation

Logic not rhetoric needs to dominate the discussion around superannuation concessions.

Summary: Young journalists do not appear to understand self-managed super funds, which operate on the same tax rules as the big super funds. When you separate out the issue of SMSFs, it is possible to look more closely at the issues. Franking credits were introduced as company profits were being taxed twice. On the question of taxing funds in pension mode, we are talking about whether those who save sizeable amounts in super should be taxed at a higher rate than those who don’t save as much.

Key take-out: Behind any possible tax rate on super is the debate about when a retiree is rich. You are not rich with $2m in a fund in pension mode, but you are comfortable. If you only have $1m you will be under pressure.

Key beneficiaries: General investors. Category: Superannuation.

The community superannuation debate is moving to a higher and more intense phase. So I have decided that it is time to take an even more active role. It is strange how unexpected events can suddenly make the issues like this much clearer. 

On the surface we have Prime Minister Tony Abbott saying there will be no major changes to superannuation. We have the Social Services Minister Scott Morrison looking as though he is in a much more flexible mode as he negotiates legislation for the Senate. Meanwhile, Treasurer Joe Hockey is all over the place and we have the ALP saying that they will tax earnings in pension mode at 15 per cent but will exempt the first $75,000 of income for each person (not indexed). 

But there are many other forces across those basic pillars. This was highlighted to me by two letters I received from Eureka Report readers. 

The first was from Jeff Holland of Rye, Victoria and was actually a letter to his local member Minister for the Environment Greg Hunt, making the point that those who have saved around $2 million have made enormous sacrifices so that they could retire in comfort and were now being told by the “lynch mob media”, public servants and politicians that the superannuation system was suddenly “unsustainable”. And of course the point was made that many of the politicians and public servants retire on a lifetime pension which is taxpayer funded. 

A second letter from Donald Munroe from Queensland highlights the roll of young journalists who make ignorant comments on superannuation in both the Fairfax and News Corp press. And then yesterday morning (Tuesday May 26) I read a piece online that was carried in The Sydney Morning Herald and Melbourne’s The Age written by one young journalist, Nassim Khadem.

In essence Khadem was berating the fact that self-managed funds received enormous tax free income via dividend imputation and those self-managed funds in pension mode had their income tax free. Others have written similar material but this got me off my tail… it is time to separate the issues because in fact we need to have separate discussions on each issue. 

On the question of self-managed funds the young journalists do not appear to understand them. They have been set up by savers and particularly those approaching retirement or those already in retirement because they slash the costs of managing your savings. 

But they operate on the exactly same tax rules as the big superannuation funds which are by far the major beneficiaries of franking credits and the big funds also provide superannuation funds in pension mode. 

In other words it is complete nonsense to select self-managed funds in an attack on franking credits or tax free superannuation in pension mode. I want to emphasise I am not trying to unfairly isolate journalist Nassim Khadem because similar articles have appeared in the News Corp press and other areas.

It is legitimate for journalists to debate franking credits and the tax free status of superannuation funds in pension mode. But to isolate the attack to the the low-cost form of superannuation fund management and not also attack the much bigger higher cost funds simply has no logic. It needs to be attacked every time a young journalist pulls that stunt. 

Once you remove the self-managed fund mask it is possible to look much more closely at each of the issues being raised. In the case of dividend imputation (franking) it was introduced by former treasurer Paul Keating because company profits were being taxed twice first in the hands of the company and secondly when paid as a dividend in the hands of the shareholders. 

The introduction of franking credits added between 15 and 20 per cent to the overall share market values and if it is removed Australia will have to face the consequences of a major stock market reversal. Big stock market falls normally lead to recessions. 

So if we are going to change dividend imputation (and I strongly advise not to) then we need to have a debate about the pros and the cons that is completely divorced from self-managed funds. 

Similarly in the case of taxing funds in pension mode self-managed funds are a red herring. What we are talking about is whether those who save sizeable amounts in superannuation should be taxed at a higher rate than those who don’t save as much. In other words tax on superannuation funds in pension mode becomes akin to a wealth tax. And in any such wealth tax, at what point is a person declared to be “rich”. We must allow for the fact anyone trying to live off cash in savings accounts faces bank deposit interest rates that are usually less than 3 per cent. A person who saved $1.5m in superannuation would get into all sorts of trouble if they live into their 90s and started to supplement their fund’s income at the pension stage by running down the principal in the early years of the pension phase. 

That is what Scott Morrison thinks should happen. An extra tax in pension mode increases the amount of principal that people need in the longer term. And so we need a debate into the detail of superannuation and how we should tax it. I suspect that in the hurly burly we may end up going back to the original Shorten plan which taxed superannuation funds in pension mode at 15 per cent once income per person rose above an indexed $100,000. 

And behind that taxation rate is the debate about when is a retiree rich? You are certainly not rich with $2m in a fund in pension mode but you are comfortable. But if you only have $1.5m or $1m you will be under pressure.

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