Why it's hard to tax superannuation pensions

On the way back from the Canberra budget lock-up and a budget breakfast speech in the Great Hall, I ran into one of the more prominent members of the Liberal Party (aside from politicians) who, along with other party people, had been briefed by Joe Hockey on the budget.

He asked the question:  “I can’t understand -- why they didn’t tax superannuation along with all the other nasties?

In the discussion that followed, it was clear that there is ignorance in parts of the Liberal Party on superannuation issues.

First, most of the superannuation debate concentrates on the tax-free status of funds that are in pension mode. It’s very hard to tax pensions because part of the pension can be a return of capital, so you head into a mathematical nightmare.

Accordingly, any pension mode of superannuation tax has to be in the income of the fund, not the pension itself.

Under the former government, Bill Shorten tried to introduce a tax on income generated by funds in pension mode, but ran into a problem. Treasury had prepared material that claimed that the cost of superannuation was $30 billion, which was mathematically wrong. The cabinet was flying blind and was forced to use my figures (How Treasury mucked up its super sums, February 8 2013).

Treasury has since amended the figures, but it is still peddling material on the superannuation costs that is not accurate (Has Treasury mucked up its super sums, again? February 10).

So before the cabinet can have any meaningful discussion on superannuation, it has to go to outside information providers to determine what the real sums are.
 
Bill Shorten devised a tax on superannuation fund income over $100,000 for a beneficiary.

The Shorten tax turned out to be an administrative nightmare. That sort of material is not readily collectible given that most people with large amounts of superannuation have multiple funds. Industry and retail funds would have required completely new systems.

So when he was assistant treasurer, Arthur Sinodinos decided it was too hard and dropped the Shorten tax. It cost the forward budget estimates $2.4bn.

Tony Abbott has kept his promise that there will be no substantial changes to superannuation during this parliament, but that promise was made when the Shorten tax  was expected to be introduced. Abbott could go back to a simplified version of the Shorten pension mode of superannuation tax.

But Arthur Sinodinos could not devise a simplified version of it. It’s not easy.

The combination of a promise, incorrect Treasury figures and great complexity means that the government has stepped back.

The danger is that if the issue is not resolved – which could be a possibility – a government might do something silly.
 
Vigilance and continuing education of politicians will be important.