The Super Honeypot

If the rumours are true - that the Government intends to impose a surcharge on contributions by those earning over $300,000 - then it serves as a timely reminder of the risks associated with super investing.

As an aside it should also provide a nice windfall to those promoting 30 June products due to the extremely high effective tax rate it imposes on the $300,000-400,000 bracket. It is possible a person earning $325,000 (and contributing the max to super) will end up with a marginal tax rate in excess of 60%.

That might be good for investment bankers but it isn't good for you. Unfortunately for super investors, our superannuation savings are a large sum taxed at very low rates. Like a honey pot in a field of bees, we shouldn't be expecting it to go untouched.

Now don't panic, I am not about to launch into a 'super theft' conspiracy theory. The simple point is that everyone contributing to, and relying upon, super should be allowing some margin for error in their assumptions.

For instance:

1. Will contributions be further restricted? There has been significant restriction already (and supposedly more in this budget) so this might be safe for a little while. But it is not too difficult to see a reduction in non-concessional contributions for instance if the budget is tight in the future.

THE IMPACT ON YOU: Don't assume you can 'catch-up' on contributions many years down the track.

2. Will the tax rate remain at 15%? During the course of our lifetimes almost certainly not. It will be a big move for sure, but the super tax rate has been changed before and it will change again. The following paper gives an idea of the sort of pressure Governments of the future (facing an aging population) will be under to act: https://www.tai.org.au/index.php?q=node/19&pubid=540&act=display.

THE IMPACT ON YOU: Any financial analysis should allow for an increase in tax rate to 20-30% (on both income and capital gains). Most strategies will still make sense but it will highlight those vulnerable to rule changes. Most negative gearing strategies will carry this risk.

3. Will pensions remain tax free? Again, it is almost inconceivable the status quo will remain in the long term. It wasn't long ago we were taxed on payments from super and it will most likely be that way again.

THE IMPACT ON YOU: Again, this shouldn't impact on the viability of super or super strategies. But it may make sense to allow a buffer for tax on pension payments (especially at higher levels) in doing your budgeting. Better to get the pleasant surprise of there being 'no change' then to get the nasty surprise of an adverse change.

 

As I said, no need to panic. Just make sure you are financially prepared for super to become a bit less attractive in the future.

 

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