Ugly super reform plans in the balance until after the election
The damage to superannuation's reputation over the past five months of shadow campaigning is incalculable. Once the actual date for the federal election has been set, the superannuation policies of both major parties will hopefully decrease the growing level of distrust in superannuation.
The superannuation reform package announced in April by the Gillard government increased the anxiety levels of retired Australians. For the first time, an increase in the taxation of superannuation would have been retrospective. Previously any changes to superannuation, since the fiddling started in 1983, had always ensured existing benefits were protected.
The superannuation reforms included changes that were a mixture of the good, the bad and the ugly. Given the number of changes, and the lack of parliamentary sitting days, there was not a high expectation that the reforms as a package could go through a consultation and legislation process before a federal election.
Thankfully the reform measures that either improved the superannuation system, or could be justified on social equity grounds, were separated from the rest and became legislation on June 28. Of interest now is whether returned Prime Minister Kevin Rudd will take the remaining policies to the electorate.
Those not yet legislated include some that came out of the Cooper review that predated the policy announcement in April. These in the main were designed to strengthen the integrity of the system.
They include:
■ The banning of off-market SMSF transfers for listed securities;
■ A better penalty regime for SMSF trustees for the Commissioner of Taxation to use;
■ Tougher penalties for people accessing superannuation illegally; and
■ More stringent identity checks when superannuation was being rolled into SMSFs.
In the "bad" category of superannuation reforms announced in April was a change in the treatment of superannuation pensions for Centrelink income test purposes.
Currently superannuation pensions received are reduced by a purchase price to arrive at the income amount counted by Centrelink. This is because over the life of a superannuation pension it is expected that the superannuation member will draw down their capital. To change the treatment of this ignores the equity of the current system and is a backward step.
The most far-reaching of the reforms, which was thankfully excluded from the package that reached legislation, is the proposal to tax income earned in a superannuation pension account when it exceeds $100,000 a year. Under the simpler new system, many Australians were encouraged to maximise retirement wealth in superannuation. If this proposal becomes law it will be the ugliest change ever introduced, due to its retrospective nature.
Currently income earned on investments in superannuation used to fund a pension is not taxable. Under the proposal, where an individual's pension account earns more than $100,000 in income a year the excess would be taxed at 15 per cent. This tax will apply to all superannuation no matter when it was contributed.
People who believed in the long-established principle that existing benefits are protected can rightfully feel betrayed if the proposal is ever passed by Parliament.
Frequently Asked Questions about this Article…
The April superannuation reform package (announced by the Gillard government) contained a mix of measures described as the good, the bad and the ugly. It included integrity measures from the Cooper review, proposed changes to how superannuation pensions are treated for the Centrelink income test, and a far‑reaching proposal to tax income earned in pension accounts above $100,000 a year.
Measures that either clearly improved the superannuation system or could be justified on social equity grounds were separated from the rest of the package and became legislation on June 28. The article does not list each enacted item by name but notes that the more acceptable reforms were progressed first.
Several integrity measures from the Cooper review were not yet legislated, including: banning off‑market SMSF transfers for listed securities; a stronger penalty regime for SMSF trustees that the Commissioner of Taxation can use; tougher penalties for illegal access to superannuation; and more stringent identity checks when rolling superannuation into SMSFs.
Currently Centrelink reduces reported pension income by a purchase price to reflect expected capital drawdown over a pension’s life. The proposed change would alter that treatment and count the pension differently for the income test — a change critics call a backward step because it ignores the equity built into the current approach.
A proposed reform would tax income earned inside a superannuation pension account above $100,000 per year at 15%. Crucially, this proposal would apply to all superannuation regardless of when contributions were made, meaning it would operate retrospectively if passed.
Retrospective changes break the long‑standing principle that existing superannuation benefits are protected. The article says this kind of change would damage confidence in the system and leave people who planned their retirement under previous rules feeling betrayed.
It was unclear. The article notes a lack of parliamentary sitting days made it unlikely the entire package would be finalised before an election. It also raises the question of whether returned Prime Minister Kevin Rudd would take the remaining policies to the electorate.
Everyday investors should watch the federal election timetable and party superannuation policies, as the remaining reforms (particularly integrity measures and the proposed pension‑income tax above $100,000) could be changed, withdrawn or taken to voters. The election outcome and any subsequent legislation will determine whether those proposals proceed.
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