Labor’s possible super avenues

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The May budget is fast approaching, and with an extra $1 billion to be found it is expected that Labor will increase taxes on your clients’ superannuation accounts. Super is seen as an easy target for taxes because the impact is deferred and largely unseen by members, but according to ASFA, Labor has already reduced tax concessions by about $8.5 billion a year since it took office five years ago.

Rice Warner Actuaries, an independent financial services consulting firm, has laid out the possible avenues open to Labor. What mystery door will the Government choose, and what could the outcome be for you and your clients?

Option #1: Tax concessional contributions at higher rate (say 17.5%)

This would be poor policy, according to Rice Warner. The firm argues that it would lead to a different tax rate for fund earnings and on concessional contributions received. It could also reduce the attractiveness of superannuation enough for some clients to consider saving through alternate vehicles, as well as reduce the amount available to offset the Age Pension in future.

Option #2: Tax contributions at higher rate (30%) for those earnings more than $180K

ASFA has indicated that this change would double the number of individuals affected and would double the taxes raised, possibly to $2 billion over three years. But Rice Warner says it is another poor policy. High-income clients would simply pay the SG and divert their other savings into negatively geared property and equities. This could well fuel asset value bubbles as has occurred in the past.

Option #3: Tax fund earnings at higher rate

Taxes on investment income could be raised, potentially from 15% to 17.5%. This would reduce net investment returns, which are vital in building superannuation for all members. Reducing net returns will increase the future demand for the Age Pension.

Option #4: Tax pension earnings

Rice Warner said there was merit in having a single tax rate across all accounts, but that the long-term tax rate should be set in the order of 10% rather than the 15% rate on accumulation accounts. Lowering the tax rate on accumulation accounts will help build higher balances at retirement, according to the firm.

Option #5: Tax lump sums

The government could tax large lump sums at a higher rate, but this would only work if they reintroduced maximum withdrawal factors on account-based pensions, says Rice Warner. It is unlikely this measure would raise much revenue, but it would be good policy to discourage large lump sum payments.

Option #6: Make the transfer from accumulation to pension a CGT event

It would be cynical to make the point of retirement a capital gains tax (CGT) event for tax purposes. Labor could argue that it only affects those clients in the SMSF sector so it is targeted at wealthier Australians. However, many APRA funds are introducing member-directed investments so the tax will spread wider. Rice Warner said it was a bad tax that “simply reduces retirement benefits”.

The consulting firm suggested that the existing system could be modified without destroying the “basic tenets of simplicity, equality and affordability”, by:

  • Reducing the lump sum available on retirement to no more than once times average earnings (about $72,500). This could be scaled in over five years.
  • Reintroducing maximum withdrawal values on account-based pensions so that members become accustomed to working to a budget within retirement.
  • Raising the Preservation Age to 62 and keeping it bound at five years before the Age Pension eligibility age. There would need to be a phase-in period (say five years), but the issuance of new Transition to Retirement (TTR) benefits under age 62 could be terminated immediately.
  • Forcing retirees to use much of their own superannuation before they fall back on social security. Reform of the Age Pension itself will lead to significant cost savings for government as well as reducing middle-class welfare.

What option do you think the Government would be best placed to choose, if any? Share your thoughts below.

  • Lets Get Real on 27/03/2013 3:57:27 PM

    Hi Terry. Would your opinion still be the same if, after years of slaving away to improve yourself so that you can finally earn more money and place you and your family in a secure financial position (and not rely on welfare), of course all the way along playing by the rules and paying much in the way of tax, suddenly a Cyprus style haircut of your savings is on the table through no fault or neglect on your behalf, the goalposts just keep moving against you. Do you realise that self funded retirees are regular not able to 'avail themselves' of much in the way of concessions (ie welfare)while those low income earners you have referred to are mostly those who will benefit from the taxes paid by the people trying to self fund. If we continue in this fashion the productivity levels of Australia will fall even further behind. My bigger concern is that it will also push people into more risky outcomes eg negative gearing with all the resulting complications that go with it. Or maybe you just earn a truckload and don't mind giving it away? Cool if you do of course......but thats not everyone.

  • Terry Percival on 27/03/2013 2:40:28 PM

    DMC makes sense- that way it is fairer to all including the low paid. I would make it a tax offset that a low paid worker could have refunded if he/she paid no tax- like a franking credit.
    If people choose to invest outside of super then so be it- a tax concession should not be the only reason to invest.

  • DMC on 27/03/2013 11:37:20 AM

    Ive said it before and I'll say it again. The only thing that makes any sense is to give everyone the same incentive to contriobute to super. So instead of having a flat rate of 15% on concessional contributions lets make it a 15% rebate off an individuals marginal income tax rate. Yes I know that contributions are actually considered to be income to the fund thats why the tax on cc's and investment income is the same so what I propose would need a change to admin systems etc but I'm sure it is possible. Leave everything else as it is.

  • John in Perth on 27/03/2013 10:46:15 AM

    If Labor's super policy is unsustainable, it needs to be changed. The problem is which labor policy is sustainable? Current Gov's spending is unsustainable.

  • GAB on 27/03/2013 9:09:21 AM

    Anyone see the ABC business headlines.....financial advisers sucking fees from super according to an industry super chief at a meeting chaired by Stephen Long of the ABC, who we know hates advisers. I know where we could save costs....cutting the salaries of biased ABC journalists and industry super bosses.

  • peter on 27/03/2013 12:58:25 AM

    As an immigrant to Australia 8 years ago, when donations to SMSF funds were considerably larger than now, I placed a large sum of money into super based on rules that existed at the time. I have become horrified by the constant "adjustments" mislabeled as "reforms." As an American (now also Australian citizen) I am horrified by the very concept of retrospective legislation. How can anyone feel any sense of security when there is no security that anything will remain constant. It isn't just super! I love Australia, but it is a shame that many people feel like they are living on financial quick sand. How did Australia get to this point?!

  • Chris on 26/03/2013 6:17:07 PM

    Regarding comment "Craig Offenhauser on 26 Mar 2013 11:09 AM":
    All unfunded super is still subject to tax after 60 - doesn't matter whether it is the pollies fund or other unfunded public sector funds.
    Only fully funded super is tax free on pension payments after 60.
    On mortgage payments relief - not going to happen as already have compassionate grounds access to 12 months interest payments on mortage foreclosure threats.
    If they allow anyone to make payments from their super to give some mortgage relief, it will just be another handout used and abused by the "haves" with their own house. The renting "have-nots" will miss out.
    Feedback we are getting is members are sick and tired of changes and lack of certainty.
    Leave super alone so people can trust the concept again.
    Get on with running the country and start cutting spending instead of spending more and needing a tax grab to fund it.

  • PAUL LEVY CFP® JP on 26/03/2013 3:14:12 PM

    Pat
    It is not about Super Law, SIS Regs, Section this or Section that, it is all about struggling Australians trying to make ends meet.

    I do not wish to lock horns with you suffice to ask what have you tabled which can help struggling Australians get through this terrible time?

    Rather than spend your time attempting to slash my constructive idea to pieces, why don't you table something useful to help those struggling Australians.

    My 37 years of experience shows me that I have never before seen such difficult times. Difficult for the Australian public, and increasingly difficult for Advisers.

    Put something useful on the table.

  • Pat on 26/03/2013 1:36:17 PM

    Paul,

    I fully realise that January article was yours.

    1. Sole purpose test has existed (via OSSA) well before the 1992 recession, which had a greater impact on Australians than the GFC, particularly low income Australians who didn't have significant wealth affected by the GFC.
    The sole purpose test worked back then and still works.

    2. Lending institutions are creative enough to allow people to effectively borrow more due to funds that can be held in an offset account. I can't see it being that difficult to imagine banks lending more pushing up prices.

    3. It seems like you don't understand the superannuation system at all. Apart from the sole purpose test, there are specific provisions prohibiting financial assistance provided to members. You may want to have a look at s65 of SISA (you know, the legislation relating to super).

    4. You open up super to abuse by low income earners and you then allow anyone to use their super to free up cashflow for lifestyle.

    5. How does this impact on employment and, therefore, a person's potential access to Centrelink payments?

    6. You haven't addressed my question: why would Australian Super, say, allow a member to use their super to place in an offset account against their CBA mortgage?

    Finally, it appears you don't understand offset accounts at all - they do not affect a person's repayments, but the amount of each repayment is directed to repaying the principal.

    Again, it is an ill-thought out idea.

  • Concerned on 26/03/2013 12:06:36 PM

    2 comments -

    1. The most efficient tax we have is the GST, either broaden it's base or increase the rate.

    2. The governments need to look at the longer term, respect the super system and not use it as monetary policy. Confidence from the consumer in super is declining any more changes will lose it completely, maybe that what they want spend our money, pay tax now and rely on the age pension (cheaper than the concessions to the super system)?

  • PAUL LEVY CFP® JP on 26/03/2013 12:03:08 PM

    Pat, that was MY article in January. Those comments you highlight had absolutely no relevance to what I suggested. Let me explain why all those comments made are lacking in common sense:

    1 - Sole purpose test - The theory of the sole purpose test did not allow for any future major negative impact on a members lifestyle resulting from GFC, Carbon Tax, Mining Tax, poor government policy, collapse of investments etc etc. If Government can play and tinker with all manner of rules from time to time....WHY CAN'T THEY AMEND SOME OF THE RULES TO ACTUALLY BENEFIT A MEMBER FROM TIME TO TIME? Especially when in such dire need...LIKE NOW.

    2 - Upward pressure on housing prices...HOW? I am not suggesting that Super money be allowed to be used to purchase new properties....Just to temporarily help cash flow by offsetting against loans on housing debts THAT ALREADY ARE IN PLACE. No new houses will be purchased therefore no new demand.
    3 - PROVIDING ASSISTANCE TO SUPER FUND MEMBERS - MY MY, Is that not what Super is designed to do? Help members.
    4 - Too long to retype - Yes that cash may not go back into the super system but, the struggling member will actually be able to afford his or her lifestyle and keep their kids in school and keep the wolves at bay and keep food on the table.
    5 - INCREASED FUTURE RELIANCE ON THE AGE PENSION - If we don't do something to help these struggling people now, they could conceivably become dependant on Centrelink hand outs NOW and bring forward that problem by not having to wait until reaching age pension age.
    6 - TOO LONG TO RETYPE - To give people the opportunity to benefit NOW by not having to pay the after tax interest they would otherwise pay. This in turn will help stimulate the economy by helping these people to have the cash with which to continue paying their bills and buying goods and services.

    I must say I was disappointed by the lack of thought and understanding afforded my very practical idea that would help struggling Australians NOW WHEN THEY NEED IT MOST.

    The hardship rules are an absolute joke and I strongly stand by my suggestion which if you understand it, would stimulate the economy, reduce the number of people claiming Centrelink benefits, going bankrupt, having to vacate their homes and much more.

  • Leadership Free Zone on 26/03/2013 11:30:27 AM

    John, I think you might find that the fiscal position the present gov't finds itself in has a lot to do with the handouts given by the former one in the form of middle class welfare funded from a boom in mining revenue, company tax and CGT reciepts in the pre 2007 period. That's not to say the present government is blameless, but those payments, along with some of the superannuation concessions granted in 2007, were sustainable only so long as the governments fiscal position remained strong. The GFC combined with a significant drop in commodity prices means that present and future governments are no longer being over run with tax revenue to the extent that occurred in that period and so now the claw back begins. Essentially Howard handballed future Governments, both red and blue, and by definition us as tax payers a big problem to address as the electorate has come to expect their share of those concessions are permanent features.

  • Terry Percival on 26/03/2013 11:26:57 AM

    As a high tax payer I have used super to save me thousands of dollars in tax and as such I should look on tax concessions as a privilege not a right. I realise that those lower incomes have not been able to avail themselves of this concession.
    In theory super is a form of middle class dole and as such should be modified if it is for the national good.
    If it is changed I think it should be to reduce tax concessions to the higher paid (myself included)because we are more able to afford it.

  • John Percy on 26/03/2013 11:20:30 AM

    Julia Gillard was reported as saying that she has already ruled out increasing tax on withdrawals. This means they will be increasing earnings tax on accumulation and/or pension accounts.

  • Pat on 26/03/2013 11:19:46 AM

    Paul, there was an article outlining your suggestion on this site in January. There were many comments that pointed out the failings of this idea, including:

    1. Sole Purpose Test issues;
    2. Upward pressure on housing prices;
    3. Providing assistance to super fund members;
    4. Freeing up cashflow, as you indicate, that is not likely to be put back into the super system;
    5. Increased future reliance on the Age Pension;
    6. Concentration of superannuation funds with the banks - why would an industry fund, for example, allow a member to use their super benefits to offset their CBA mortgage?

    Overall, the idea seems ill-thought out and plagued with problems.

  • Craig Offenhauser on 26/03/2013 11:09:07 AM

    A question for you! Is it common knowledge that the Commonwealth Public Service Super Fund for politicians pre 2004 will allow Nicola Roxan who is currently aged 48 this year to retire on a fully indexed pension for life with a reversion of 65% to her spouse "now" at an the current amount of $140,000 per annum. She will pay tax until aged 60 however. And Wayne Swan will receive $166,000 per year indexed for life, and he is aged 58. So it will be tax free in 2 years. These are the people who are bringing in laws to restrict the amount of super people in society can contribute and accumulate. Is this equitable?

  • Peter Hansen on 26/03/2013 10:48:45 AM

    The superannuation guarantee was introduced by a previous Labor Government with an aim to increase the number of self-funded retirees and so reduce dependence on the government's aged pension. This is especially relevant for an ageing population, expecting at least 20+ years in retirement. The superannuation policies of this government seem directed at destroying the ability to self-fund retirement and therefore create further burden on the aged-pension. What an absurd outcome.

  • Matt Austin on 26/03/2013 10:28:59 AM

    If we keep using Super as a credit card for our incompetence , one day we will have to pay the balance plus all the interest we have racked up by raping our financial future. Try running the country at a profit , now there's an idea.!

  • PAUL LEVY CFP® JP on 26/03/2013 10:19:24 AM

    I think the Government should recognise that many Australians are suffering right now as a direct result of increased living costs like petrol, gas, electricity etc to such an extent that many are having to drastically change their lifestyles by going without.

    I strongly believe that it is high time the Government uses Superannuation savings, not as an easy bucket of tax pickings from which to rape and pillage for political purposes but, as a positive vehicle to help ordinary Australians who really need help now.

    Those Australians who have not yet reached preservation age and cannot access their Superannuation should be allowed to transfer some or all of their Superannuation savings into what I call a "Superannuation Offset Account" where those funds will still fall under SIS Regulations but, will be allowed to be offset against a members mortgage for say, 1 year, thereby giving that member some cash flow relief from paying some of their debt interest.

    This strategy will give those struggling Australians some extra cash in their pockets each month with which to cover those increasing expenses and maintain some semblance of a normal life.

  • Matthew Lock on 26/03/2013 10:17:31 AM

    John...I think your liberal party staffer pay slip is showing...and nice sexist comment to boot...how about stopping the political rants and make a positive contribution to the debate...deal with it.

  • John Walker on 26/03/2013 9:49:45 AM

    What a joke, as if it is about choices!
    Why should we take it lying down that the govenemtn is short of money due to their own gross negligence and incompetence. And we will all take it lying down, as if "mother knows best"
    Whoever voted in these incompetents should be ashamed of themselves and the lot they voted in

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