Superannuation: Moving the goal posts halfway through the game

Feeling frustrated that the Government has put playing with super rules back on the table?  I have been inundated with calls from concerned clients over the last week asking me what to do.  In particular, one theme of exasperation has come through resoundingly:

“That’s the end for super for me – the Government is playing with the rules to basically take back any advantage when I eventually retire.  I don’t trust this or future Governments to treat me fairly.  Super is a honey pot they will go after.  Why would I lock my money away when the Government will keep changing the rules, keep raising the tax rates.  If they don’t get me now, they will get me by the time I’m 60.”I feel the same way too.  Cheated.  But my advice is not to run for the exits yet.  It is a fact of the superannuation system of the last 30+ years that it consistently outperforms other platforms for passive wealth generation for the risks involved.

The proposed new rules produce unequal results for different citizens based on “wealth”, they are manifestly unjust and frustrating because they fly in the face of the policy platform the Government took to the last election.  But hang in there.  Emotional decisions are rarely the best ones.  The law is not changing yet, may affect only a few, and there should be opportunity to take protective steps before any change if necessary.The most important announcement to be aware of is Prime Minister Julia Gillard’s announcement on 6 February 2013 that she wishes to increase the tax rate on superannuation earnings of the top 1% to a tax rate that could be as high as 30%.  Common sense suggests that ultimately it is unlikely to be that high given this is a change that would cripple people’s long term retirement savings plans.  “Absolutes” such as “top 1%” also tend to produce unintended winners and losers – leaving inequities at the margins.  For example, if my fund balance is $X my tax rate might be 15%, but if I have $X + $1 it might be 30%.  Manifestly unjust.

If the announcement is carried through, there may be no more than 100,000 retirees affected.  However the policy dilemma the Government faces is that taxing so few funds is unlikely to deliver the material revenue increases the Government is looking for.  It will involve great pain for modest gain.  For the tax to really deliver solid revenue outcomes, it would need to apply to a wider range of taxpayers.

From 1 July 2012, the Government increased the contributions tax rate to 30% for people with “adjusted incomes” of $300,000+.  That would be one option.  But the number of these taxpayers still remains limited.  So to really raise decent revenue you would need to tax people around or below $200,000 in income.

So where does that leave Prime Minister Gillard’s policy in terms of its value to society?  Are there now a group of ordinary Australians out there who are distrustful of the superannuation system as a result of the Government’s media campaign? Absolutely.  Certainly, if you want to give the rich a kick in the guts, this is a great way to do it.  But what will those top 1% of retirement earners do?  Increasingly they will look offshore at neighbouring jurisdictions that have more reasonable tax rates and take their earnings out of this country with them.  If they don’t leave, their children certainly might.  You only have to pick up the newspaper to read of people such as Gina Rinehart and Nathan Tinkler shifting their footprint to Singapore to realise that punitive taxation of the rich (or even the threat of it) simply motivates the rich to relocate their wealth to friendlier shores.  Take the example of France, which is far more advanced with draconian taxation rules for the rich.  The country is being crippled in part by investment wealth fleeing the country.  There is presently a generation of French patriots who are leaving France because of these rules.  Gerard Depardieu’s much publicised migration to Russia is an illustration.

Sadly, this is just the type of measure that could gain the support of the Greens and Independents. The Liberals will oppose it. So despite the fact we may have a Liberal government on September 15 2013, there is a fair chance that by budget night such a change might be law. This would then require Tony Abbott to repeal the law ab initio which it appears he is prepared to do. It increases the line of division between the Liberals and Labor.  It sets up the election campaign on terms that will increase Labor’s prospects in its marginal electorates in a campaign of class warfare which in my view ultimately damages Australia’s national interest.

If the Government wants revenue, the best way to do it is to either expand the tax base of the GST or raise the rate.  It is the blatantly obvious thing to do.  The Government must expand its review of the taxation system to include GST.  By the way – wasn’t the mining tax supposed to fill this revenue gap? … Oops.

Stephen Cribb is a Director of Prosperity Advisers
photo credit: betta design via photopin cc

About Stephen Cribb

Stephen is a Director of Prosperity Advisers and one of Australia's leading Growth and Taxation Advisers.

Over his career, Stephen has managed an array of large corporate transactions, held a number of senior tax roles within the ‘Big 4’ accounting firms, and guided the growth of many many businesses.

Stephen has the expert ability to analyse and understand the complex taxation needs of his clients and design and deliver development programs that achieve the required business improvements. Stephen’s approach is to break down and simplify complex business and tax issues to frameworks that clients can understand and implement.

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