Super plan fair and reasonable, but probably won't become law
The collective sigh of relief last Friday, from anyone with an interest in superannuation, was deafening. After months of speculation and media leaks, the government finally released changes it plans to make to superannuation. Thankfully there was only one piece of retrospectivity included in the changes.
On balance, the changes detailed in the joint release by Treasurer Wayne Swan and Superannuation Minister Bill Shorten were fair and reasonable. The problem is the legislation is not expected to be introduced until after the federal election. If this is the case, there is a high degree of probability that the changes will never become law.
It does, however, give the Australian electorate a benchmark to compare all other superannuation policies announced in the future.
Tony Abbott's reaction has been disappointing. He appears not prepared to accept any of the changes and has committed to reversing the superannuation tax break to low-income earners.
One of the surprise announcements was a big overhaul of the penalty regime for excess concessional super contributions. Concessional contributions include compulsory super contributions by employers, salary sacrifice contributions by employees, and deductible self-employed super contributions.
Currently, excess concessional contributions - apart from a
one-off ability to have up to a $10,000 excess contribution taxed at an individual's marginal tax rate - are taxed at 46.5 per cent. The excess is then classed as a non-concessional contribution.
This can result - in some cases, where someone had already contributed up to their maximum non-concessional contribution limit - in an individual paying 93 per cent penalty tax on one excess contribution.
The changes announced would result in a fair and equitable system rather than the punitive and harsh system that exists. If introduced, all excess contributions would be refunded to the super fund member and taxed at their applicable marginal tax rate.
Given that the excess concessional contribution system was introduced by a Coalition government under John Howard, and that up until now the opposition has remained silent on how it would fix the excess contributions system, this could become a big point of difference.
The only policy change that would be retrospective is the proposed 15 per cent tax on income earned by superannuation funds paying pensions to the rich.
Currently, no tax is payable on income when investments are used to fund a superannuation pension.
Under the proposed change, where income earned by a superannuation fund paying a pension exceeded $100,000, the excess would be taxed at 15 per cent. The government believes that this will only catch people with superannuation accounts of more than $2 million.
This means Australians who were lured into maximising their superannuation when the new superannuation system began, and have superannuation of more than $2 million, will now be penalised for having done so.
To remove the retrospective nature of this change, the new tax on superannuation income earned would need to be grandfathered. This could be done by the new tax applying from its implementation date to anyone with less than $2 million in superannuation now.
For those with superannuation already in excess of $2 million, the new tax would only apply to income on the percentage increase in the value of their superannuation from the date of the announcement.
Over the coming months it will be interesting to see what policies are released by the other major parties relating to superannuation. Their challenge will be to put forward changes to the current system that will improve its adequacy, sustainability, integrity, and fairness without any retrospectivity.