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Superannuation tax reform

Superannuation tax reform – the changes we DO need

John Hewison
Founder and Director
19 Oct 2015

With Prime Minister Malcolm Turnbull indicating recently he is set to examine the “very substantial” superannuation taxation concessions that help workers save for retirement, I sincerely hope that any decisions made do not discourage Australians. 

It is clear that changes for ordinary workers are unlikely, as this will result in significant political backlash however, tax breaks for the wealthy appear to be back on the agenda.

The dilemma at hand

Australia is facing an ageing population with current projections suggesting there will be as many as four million people aged between 65 and 84 by the year 2022 placing increasing strain on the social security system.

The government has quite the challenge ahead of it; it needs the superannuation system to be effective in encouraging saving for, and self-funding retirement, and reduce the dependence on the social security system. Striking the right balance will be difficult as any major change to tax concessions that result in a shift from building wealth in super, or reduce withdrawals from super, would become a major issue for the government and Australia’s future financial security.

In order to incentivise workers to save, all Australians receive the same tax concession opportunities to contribute to super over and above their employers’ compulsory contribution. Certainly, high income earners may be able to afford to take advantage of these contribution caps however, the margin is almost negligible.

Beyond this, any additional voluntary or non-concessional contributions made to super come from after-tax income. There is no taxation concession as the contributor has already paid marginal income tax on the funds, therefore there is no additional benefit.

It’s also important to understand these additional non-concessional contributions are not necessarily exclusive to the wealthy. They could come from accrued life savings, inheritance or the proceeds of sale proceeds of a small business.

Furthermore, despite the rhetoric from the opposition suggesting that concessions unfairly favour the wealthy, there is in my opinion, a serious misconception on what constitutes wealthy when it comes to the capital retirement to self-fund retirement – particularly in these times of historically low interest rates.

The notion that someone with a million dollars in superannuation is considered wealthy is absurd. To put that into context, $1 million dollars invested at an average income return of 4 per cent equates to an income of $40,000 per annum, which you could hardly call lavish. 

Suggested changes

I don’t believe it is likely we will see a change in the 15 per cent superannuation contributions tax, apart from that which already exists, as this is a key incentive to participation. Likewise I do not believe we will see a change to the tax free status on pension payments.

I do suspect however, we are likely to see the introduction of a tax on investment earnings within super funds above a certain figure, say $150,000 per annum, per trustee. It is a commonly held belief that unlimited tax-free earnings on super money in superannuation is overly generous and it is therefore a soft target for the government. Also this is unlikely to upset the majority of Australians.

I do suggest the government give careful consideration to multi-generational wealth transfer, as opposed to the current superannuation pension system that requires compulsory minimum pension payments designed to exhaust the capital over time.

The transfer of wealth to future generations would progressively assure the country’s prosperity through the decrease in dependency on the social security system and increase financial activity and government revenues.

If it ain’t broke

In my opinion, the current superannuation system is working; it is being used for the purpose of generating superannuation pensions for retirement income.

I remind the Turnbull government that Australians generally are very cynical when it comes trusting politicians and dislike any threat to their control over their own hard earned and accumulated wealth. Given they have consistently encouraged Australians to contribute their life savings to super, any perceived opportunistic tax traps sprung by the government could may well result in mass abandonment of superannuation.

Removed:

We have seen a graphic illustration of the ramifications of this in Greece which, without major reform, will send that country broke. 

This has been acknowledged by Mr Turnbull so one can only hope that the government will appreciate that they cannot afford to throw out the baby with bath water by discouraging the ongoing success of the superannuation system in Australia.

Taking all this into consideration, the government must encourage Australians to continue to use the superannuation system to self-fund in retirement for the benefit of all Australians in the future financial security of the country.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.