Mission achieved: raiding the nest egg without getting bitten
The superannuation tax package that Wayne Swan and Bill Shorten unveiled on Friday morning enables them to argue that they are creating a sustainable super system, and not just sticking their hands into a $1.5 trillion honey pot. It probably defuses super as a major election issue.
How effective these changes would be in cutting the cost of the superannuation tax subsidy is unclear, however.
The key tax increase is opposed by the Coalition, and unlikely to be legislated ahead of the election that it is favoured to win: and while Treasury estimates that it would combine with an already announced cut in the super contribution tax concession for people earning $300,000 or more to save $10 billion over a decade, that would depend on two things - how effective a tax collector the Australian Tax Office is (the tax could be an administrative nightmare), and to what extent wealthy super investors respond by moving assets and income out of super into other places, including negatively geared property.
The changes continue a pattern of tampering with the super rules that undermines confidence in them, and the council of superannuation custodians the government proposes is unlikely to put an end to that.
They also have a retrospective element. People save against long-term targets for final retirement lump sums and income streams. The key change, to impose a 15 per cent tax on the earnings above $100,000 from superannuation retirement accounts in their distribution phase, changes the retirement sums for those who are affected, cutting the amount of money they have in their hands.
The $100,000 "cut-in" level for the new tax on super earnings matches the rate of tax that already applies to earnings of super funds that are in the pre-retirement accumulation phase, however, and because the new tax is not going to be levied against super fund income streams of up to $100,000, the vast majority of Australians will continue to be tax-free on their post-retirement super fund earnings. Distributions continue to be tax-free across the board.
If the fund is generating a return of 5 per cent, for example, it could hold $2 million of income-generating assets before being hit by the new tax. Self-managed funds in place for a husband and wife could hold $4 million on the same basis without being hit, because the tax targets individuals, not the funds. The $100,000 threshold would also be inflation-indexed.
If returns in the fund were higher than 5 per cent the threshold for the new tax would fall, however. A 7 per cent return would push a fund with assets exceeding $1.43 million for individuals into the new tax zone. A 10 per cent return would generate a $100,000 income stream on a $1 million asset base.
Labor's political vulnerability over the changes rises as investment returns rise, in other words, and while a return of between 5 and 7 per cent is about the multi-decade investment average, there are many super fund members expecting double-digit returns this financial year on the back of the sharemarket's recovery.
Treasury's estimate that only about 16,000 people will be affected is therefore probably too low, but the tax does aim at the exclusive end of the retirement income scale. There are few Labor voters there, and there is no corporate attack in the wings, as there was when the mining super tax was launched.
Labor's declaration that it will find a way to levy the tax on the earnings of defined benefit funds exceeding $100,000, including politicians' schemes, was politically wise, and there were some carrots for super savers. Concessional tax treatment given to superannuation assets would be extended to deferred lifetime annuities, making them much more attractive, for example.
The cap on concessional contributions to super that has been lowered by Labor in recent years would also rise slightly, from $25,000 to $35,000 from July 1 for people aged 60 and over. People 50 years and over would get the $35,000 cap on July 1 next year, and those under 50 would get it in 2018.
That is a welcome step. Super top-ups are a way for people to close in on their retirement income targets after they realise that they have been saving too little. Many baby boomers are in this position.
The political sleeper might be that capital gains will also be calculated to assess liability for the new super tax. The government has moved to "de-fang" that element by declaring that assets that had already been acquired would only be assessed for capital gains that accrue after July 1, 2024. Assets acquired after July 1 next year would be assessed, however, and that is a potential political
The government can however argue that the package eases the long-term cost of subsidising the super system, and is not a quick cash grab. The new 15 per cent tax on super earnings exceeding $100,000 raises only $350 million over the forward estimates, a fraction of the $10 billion that Treasury believes it will save over 10 years in league with the already announced plan to halve super contributions concessions for people earning $300,000 a year or more.
Will most of those hit by the new tax be unhappy? Yes, of course. But there are less of them than speculated ahead of the announcement, and there is no doubt that the long-term cost of subsidising super savings with tax concessions needs to be reined in.