Life's certainties: death, taxes and changes to super

Labor stays true to form by cutting benefits and raising taxes.

Labor stays true to form by cutting benefits and raising taxes.

OVER the past 28 years the one constant for superannuation has been change. Unfortunately, it has too often been viewed as a cash cow to be milked whenever governments need to balance the budget.

The recent changes by the Gillard government have continued this tradition.

In fact, since 1983 the trend has been for the Coalition to mainly increase and improve super benefits while Labor has increased tax on super and reduced benefits.

During the Hawke/Keating era the 15 per cent tax on both contributions and the income of a super fund were introduced. This meant Australia was the only country out of a list of 10, including Britain and the US, which taxed contributions, income and benefits paid by a super fund.

One of the other major changes introduced during that period was the introduction of what were called reasonable benefit limits. Under this measure, people who exceeded an arbitrary limit paid extra tax on their super payouts. For lump sums they paid an extra 15 per cent on the excess component, and missed out on the 15 per cent tax offset where it was received as a pension.

The otherwise super-friendly approach of the Howard government started off badly with the introduction of a 15 per cent extra tax to be paid on contributions by people who exceeded an income limit. To their credit, the Liberals recognised that this was inequitable and phased out the surcharge over time.

The constant changes made to super up until 2007 led to an overly complicated superannuation system. When Peter Costello introduced the new superannuation system on July 1, 2007, three types of super were reduced to one taxable component and nine different non-taxable types of superannuation were reduced to one exempt component.

The main change resulted in both the lump sum and pension payments from a super fund becoming tax free once a person had reached 60. This meant that Australia, like many other developed countries, only taxed two components of superannuation.

Another key benefit introduced to assist lower-income earners was the co-contribution scheme. Where a person's taxable income fell below a minimal limit, they effectively received a maximum super gift of $1500. To receive this, they had to make an after-tax non-concessional super contribution of at least $1000.

To further simplify superannuation, three annual contribution limits, based on a person's age, of $15,260 for those under 35, $42,385 for those from 35 to 49, and $105,113 for those 50 and over, were reduced to $50,000 for people under 50 and $100,000 for those 50 and over.

It did not take the Rudd government long to continue the Labor tradition of negative changes to superannuation. The first involved cutting the maximum contribution levels to $25,000 and $50,000. The second was to cut the super co-contribution down to a 100 per cent match and a maximum of $1000.

Not to be outdone, the Gillard government has announced yet more adverse changes to super. In fairness though, in addition to these changes there have been some good policy moves. These include the introduction of cheaper super accounts under My Super and the banning of commissions on financial products including super and insurance inside super.

To add insult to the injury of the reduction in maximum super contribution limits, the Gillard government has announced that these limits, which are supposed to increase in $5000 amounts in line with increases in average weekly ordinary time earnings, will be frozen for the 2013-14 year. The Commonwealth super co-contribution will also be cut further to 50 per cent and a maximum of $500 from July 1, 2012.

To offset this cut, from July 1, 2012, the tax effectively will be reduced to zero on super guarantee contributions for people earning up to $37,000. As this cut will only apply to super guarantee contributions, low-income self-employed super members will get no benefit.

When you combine the removal of the contributions tax, with the reductions in the co-contribution rate, someone on $37,000 who made non-concessional contributions of $1000 will be worse off.

The tax saving on a super guarantee contribution of $3330 will be $500, while the co-contribution will have been reduced by $1000.

The success of the co-contribution scheme with low-income earners cannot be denied. In the ATO 2009-10 report on the scheme, the number of people benefiting from the co-contributions grew from 201,349 in 2008 to 1,269,918 for the 2009 year. The average co-contribution benefit was $877.

But on the basis of the changes that are proposed, 643,497 people will be at least $377 worse off.

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