... with billions of dollars in savings extracted from the system by reneging on a tax break meant to encourage higher retirement savings, and a doubling of the concessional tax rate on the super contributions of those earning more than $300,000.
The Budget brought back unwelcome memories of the unlamented ‘superannuation surcharge,’ which ran from 1996 to 2005, with the imposition of a higher contributions tax on workers earning more than $300,000. This portion of the workforce loses half of its superannuation contribution concession: these workers must now pay a concessional tax rate of 30 per cent on their super contributions, up from 15 per cent before.
The other main news for the super industry in the Budget night – and a double-whammy for high-income earners – was the deferring of the “50 over 50” reform, which would have allowed workers aged over 50 to put $50,000 a year into their funds at only 15 per cent contribution tax – compared to the $25,000 limit for other employees – provided their accounts did not hold more than $500,000.
The higher concessional contributions limit for this group was intended to take force in July, but has been pushed back to 1 July 2014. The estimated 140,000–150,000 people over the age of 50 who are currently putting $50,000 a year into super will be allowed to contribute only up to $25,000 a year for the next two years.
According to the government, delaying the “50 over 50” reform to 1 July 2014 will bring “significant synergies and efficiencies, as it will allow implementation to occur in conjunction with changes to superannuation fund reporting and systems that will be occurring under the SuperStream reforms.” (The SuperStream reforms will make it easier for super fund members to consolidate and keep track of their accounts.)
Deferring the start date of the higher concessional contributions limit will also provide savings to the Budget of $1.46 billion over the next four financial years – the largest single superannuation budget savings item in this year’s budget.
In the same vein, lifting the contributions tax on workers earning more than $300,000 from 15 per cent to 30 per cent – which is expected to affect about 128,000 people – is predicted to save the government $950 million over four years.
These are not small amounts for a government looking for every tweak it can find to push the Budget into surplus, and stay there. But the super industry says making small changes to the rules at the margin to gain revenue for short-term political gain is short-sighted, and works against the development of a sustainable long-term retirement incomes policy.
In the short term, argue some industry figures, making it difficult to maximise contributions to super risks inducing people toward other forms of investment, for example negatively geared property, to build wealth.
The government justifies this move by arguing that under the current tax arrangements, high-income earners – who face a higher marginal tax rate – get a bigger tax break on their super contribution than average income earners. Raising the tax rate on their contributions merely ensures that they will get a tax benefit of 15 cents in the dollar on their super contributions, which is the same as that enjoyed by average income earners.
After all, the government says, the change only affects 1.2 per cent of the Australian population. And – runs the unspoken argument – if you are earning more than $300,000, paying an extra 15 per cent tax on your superannuation concessional contributions probably isn’t that much of a concern.
The tweaks made last week are not the first to the super system, and they will not be the last. It is a bi-partisan thing: the superannuation surcharge was a Coalition initiative. It just goes to show that while super remains a wonderful vehicle for creating wealth for retirement, it is and always will be a maze of regulation, with what seems to be the way forward constantly turning into a blind alley. The temptation for governments to fiddle with the system is too strong.
The point is that this Budget yet again shows the value of good financial advice. Strategies considered sound a matter of weeks ago may now be outdated. When the differences can be a matter of being many thousands of dollars worse or better off, it makes it even more imperative to get proper guidance.
By James Dunn
11th May 2012