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.