Superannuation is one part of a complex tax picture
The recent budget has highlighted the importance of superannuation in supporting the age pension system. Why then, would the Government want to remove many of the incentives for building a healthy super balance?
A clear message from the budget is the ongoing and important role superannuation plays in minimising the fiscal cost to the taxpayer of the age pension system. Care needs to be taken when removing super incentives as there may be unexpected consequences when the entire system is considered.
Let’s have an informed debate
Whilst there is a lot of discussion about the age pension system moving to age 70, commentators overlook the fact that by the time this occurs, most people affected will have had compulsory super for about 40 years. Roughly half the people on age pension today had no compulsory super at all.
The superannuation system is offsetting the direct tax payer cost of the age pension. We cannot as a nation continue to tax higher income earners on the basis that they can afford it. When almost 60% of income tax (excluding GST, transfer taxes, etc) comes from high income earners, who make up 3% of income tax payers, we must ask where do we find more of those people. We need to watch incentives are appropriate when the effective top rate is 50.5% and you need to work till 2:30 pm Wednesday before you earn $1 for yourself.
I hear the calls for change in the super tax system and the access to super rules. It’s worth remembering that unless you have ceased gainful employment, or met a condition of release, technically the age of access to super is 65 already.
Transition to retirement pensions (TTR) were introduced to allow people to access their own capital rather than going on a Newstart Allowance. At age 55 if you lose your job and can’t find a new one, then before TTR’s your only option was to go on Newstart if you did not have other resources outside super. You may have had $500,000 in super but the rules said you couldn’t use it because you were looking for work. TTR’s had a direct result of reducing Newstart applicants.
What about the tax free super rules for people over 60? The actual tax paid went up under the current model compared with the old rules. The taxable part of the pension was taxed at marginal rates less 15% and the untaxed element was a return of Non Concessional Contributions (the old ‘Undeducted’). The net result based on average incomes including the pension less the offset was an effective tax rate of nil. In many cases, super funds were retaining PAYG, then the Australian Taxation Office was returning it to the members. Under the current rules, by retaining the money in the fund and allowing it to grow, there is more available for members who then spend more with less paperwork and cost. Furthermore, the tax free lump sum rules have not changed and are still significantly higher than the vast majority of superannuation balances.
Some super changes make sense
There are logical changes to superannuation as we move to a more mature system. For example, there is inequity in contribution tax and income tax rules. Some people pay more contribution tax than income tax and others receive a significant reduction in income tax whilst only paying 15% or at worst 30% contributions tax. We need to question if contribution tax should be scrapped and all contributions go into the fund from net pay.
The question is what incentive, if any, should be provided for people to do more and stay off the age pension system? By 2024 there will be only 3.5 people employed for every person on the age pension. The tax burden can’t be borne by those people alone.
It is time for us to get serious about the tax debate and work out what the country can afford to do and what individuals need. Superannuation, whilst being a cash cow and an ‘easy target’, is a big saviour for future pension expenditures that is understood by Treasury and the government alike. Despite the political difficulties, change will happen and superannuation must be considered as part of the overall position, not in isolation.
The best outcome for our superannuation system and individuals is being allowed and encouraged to take responsibility for our own futures, with the education and skills necessary to do so. Our compulsory system gives every working person that opportunity regardless of the type of fund they are in.
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