|Summary: The Federal Government has not ruled out further changes to super legislation in the upcoming budget announcement, and self-managed super funds are likely to be a key target.|
Key take-out: But a big shift to negative gearing could wipe out much of the gains to the budget from higher super taxes.
Key beneficiaries: SMSF trustees. Category: Superannuation.
You might not think you are “fabulously wealthy”. But what is that anyway? We won’t know until the Gillard Government defines it.
But be under no misapprehension that if the government is going to tinker with super taxes in this year’s budget, the losers will predominantly be SMSFs.
It is SMSFs where the large super balances are at. (Government, industry, retail and corporate funds tend to lose their customers with bigger balances to SMSFs.)
Hopefully, it’s nothing more than government ministers flying kites that will crash to earth. But what’s worrying, and suggests there’s more to it than that, is the internal fighting going on within Labor. Senior former ministers Simon Crean and Joel Fitzgibbon have openly criticised the potential changes and given the impression they might cross the floor of parliament to stop them.
What could happen? What kites are flying? There’s a few.
A massive increase on taxes paid within super by the fabulously wealthy, making more Australians pay higher contributions taxes, and, of most concern, the retrospectivity of those changes.
The first one is actually beefing up one of last year’s announcements. That is, the higher contributions tax of 30% for those who earn more than $300,000.
It has now been floated that this limit of $300,000 be dropped to $180,000, so that it will be in line with the highest marginal tax rate threshold. That would increase the number of people impacted by the tax to around 2.3% from less than 1%.
(Interestingly, this change is still not law for those earning $300,000. The government is having problems framing the legislation, particularly as it would apply to those higher earners in defined benefit funds.)
But the biggest concern is actually in regard to higher income earners having their super fund’s regular income taxed differently.
Again, as “fabulously wealthy” is not defined, we’re left to wonder what the government is thinking. This may become clearer as next month’s budget approaches.
Will it be super funds worth a certain amount, such as more than $1 million (presumably per member)? Or will it be a non-super income amount, as in those earning more than $180,000 or $300,000?
And what sort of tax rate would be considered? Would it be 30% – double the current taxation on income in funds?
Perhaps the current flat tax of 15% for income could be raised. One industry pundit has said it’s possible it could be raised to 17.5%, but across the board.
Would the CGT exemption be removed for certain funds? Currently, complying super funds that have held assets for longer than one year get a one-third discount on income tax for capital gains, making an effective rate of 10%.
Of course, there are loads of other options. One would be to start taxing super fund pensions after the member has hit a certain amount. In essence, this would be a reintroduction of the highly despised reasonable benefits limit (RBLs).
This could be a portion of any pension, or a graduated scale of taxation, not unlike the marginal tax system.
That’s the biggest issue – the one that is grinding Labor, if not Treasury. Pensions are currently tax-free. Many have said that was one step too far by Treasurer Peter Costello, who introduced those laws in 2007.
Whatever money the wealthy can get into super becomes a tax black hole for the government. Under current rules, they won’t be able to tax it. (Current rules can, of course, be changed.)
But the real issue, which is what Simon Crean has highlighted, is the likely retrospectivity of any changes to the taxation of super funds.
If the government were to increase the tax rate for super funds (particularly if it was to increase the tax rate on earnings for the wealthy), it would likely have to be a retrospective tax.
That is, people have been contributing to super and following the laws of the day, based on the belief that they would be taxed at a given, or understood level. For years, people have contributed to super on the understanding that the earnings on those funds will be taxed at 15%.
Would they have made the same decisions if they knew that, at some stage in the future, the government was going to, for instance, double the tax rate for income for them?
Many will have made a choice (five, 10, 15 or 20 years ago) to push money into super. That is, delay expenditure now, for the purpose of having a better retirement. (That’s likely to be the case for many Eureka Report readers, who are generally higher contributors to super and actively involved in their super investment decisions.)
“I will oppose anything that seeks retrospectively to tax people's accumulated earnings in superannuation,” Crean said. “That's tantamount to taxing people's retirement surpluses to fund our surplus.”
One media outlet said that Crean, Fitzgibbon, Senator Kim Carr and up to five cross-benchers have raised concern about potential changes to super. That would make it hard to get legislation through.
Consequences? Of course, there would be some. For many, that could be deserting superannuation contributions for negative gearing. At least negative gearing rules change less frequently than super rules.
A considerable shift to negative gearing could wipe out much of the gains to the budget from higher super taxes. And I’m specifically only talking there about regular, non-super money.
With negative gearing a possibility in SMSFs, it’s also possible that trustees could look to take greater advantage of super gearing opportunities to reduce tax.
It was actually a similar story last year. In the months leading up to last year’s budget, the rumours were swirling of, particularly, SMSFs being targeted. Thankfully, they were kites and there were few changes aimed specifically at SMSFs.
Hopefully, the same occurs this year. But with each year that the chatter increases, there is a greater likelihood that something will actually happen.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
- The Federal Government’s plans to consider further changes to taxing superannuation is pushing retirees to look at alternative investment strategies outside of super, according to Ken Raiss, a director at accounting group Chan & Naylor. “In the last year to 18 months, the comments I hear are, ‘Why would I put extra money into super? I just don’t know what’s going to happen to it in the future’,” he reportedly said. He also said that the Government’s rumoured plans to tax super funds that hold more than $1 million could create a false impression of the amount needed to provide for a comfortable retirement.
- Challenger chairman for retirement income, Jeremy Cooper, says that there should not be any statutory safety net put in place for self-managed super funds (SMSFs) affected by fraud and theft. Speaking at the Australian Securities and Investments Commission Annual Conference last week, Cooper said the trade-off for choosing to run an SMSF was that the trustee must be held responsible for the wins and losses. “I am very strongly of the view that there should not be an equivalent to Part 23 of the Superannuation Industry (Supervision) Act 1993 for SMSFs,” he said.
- Deloitte superannuation lead partner Russell Mason says it is too early to tell if industry funds’ direct investment options will be able to adequately stem the flow of members to self-managed super funds (SMSFs). “We’ve seen a number of industry and retail funds begin to offer direct Australian equity and term deposit options in order to counter the trend to SMSFs, and there are more sophisticated offerings on the way,” Mason reportedly said. “But it is yet too early to determine the success of these strategies.”. But recent research by Deloitte indicates that growth in the sector is still strong. According to the research, the SMSF sector is tipped to hit more than $500 billion and is expected to exceed one million members by the end of the financial year.