How short-termism cruelled a sustainable superannuation taxation policy

Fiscal balance sheets looked very different in 2007 when former Treasurer Peter Costello introduced tax-free super to the nation in July that year. The Budget was in surplus, allowing the then Howard government the latitude to hand back taxes (and win voter favour).

Soon afterwards, the GFC hit and Australia began a spiral of ever increasing Budget deficits. Consequently, there is general consensus in 2015 that the 2007 era concessional terms for superannuation are no longer affordable.

The Abbott Coalition government promised not to make any adverse changes to superannuation in its first term. However, the current structure of concessions remains generous and inequitable. The government has noted the trend in costs in the latest Intergenerational Report (IGR) and also created a Tax White Paper Task Force within Treasury to address this and other tax issues.

The Coalition has attempted to introduce indexation of Age Pensions (from wages to prices) to curb the growth in these costs, but this measure has been opposed by other parties. It is likely that the government will revert to changes in means-testing in the forthcoming May Budget.

Meanwhile, Labor has recently unveiled its new retirement incomes tax policy where:

• Investment returns on retirement income products above $75,0000 would be taxed at 15% (these are currently tax free).
• The Section 293 tax threshold would be brought down to $250,000 rather than the current $300,000 which would result in more high income earners being taxed at 30% on contributions rather than the concessional 15%.

The changes are touted as promoting generational equity and improving the budget. Rice Warner agrees the proposals are a step in the right direction, though gradual changes will cause more pain than an immediate movement to the best policies – due to the increased costs on the industry and tax office of administering and managing complex policies.

Such costs would tend to diminish the benefits of the underlying policy. Challenges include:

• Collecting information on members with multiple accounts and aggregating their earnings position.
• Determining income for members who will be subject to the Section 293 tax which currently requires a complicated and inefficient process.
• Grandfathering of existing arrangements (large unrealised gains in pension phase accumulated on the basis they would be tax free).
• Ensuring members do not ‘game’ the system by:
  – timing the realisation of capital gains to reduce their tax bill
  – investing more conservatively to avoid tax while reducing risk
  – moving money out of pensions mid-year if the cap is likely to be breached or switching to cash to avoid excess returns.

Each of the last two points could contribute to sub-optimal retirement outcomes!

A flat rate of tax on retirement and accumulation investment earnings would be a better approach. It would:

• Allow the government to reduce the overall rate of tax on investment earnings in the accumulation phase.
• Maintain capital gains taxes for those shifting from accumulation to pension phase.
• Be much simpler to administer and remove other costly administrative functions, including the need for:
  – actuarial certificates to segregate accumulation and pension assets
  – transition to retirement accounts
  – separate accounts for accumulation and pension phase (and a single set of unit prices for investment strategies).
• Help reduce the Budget deficit.
• Improve structural tax issues with an ageing population.

Similarly, a contributions taxation regime in line with the Henry Review recommendations would improve equity between high and low income earners and would be much easier to administer than the current section 293 tax. Henry suggested removing the tax on fund contributions but including all employer contributions in taxable income with a flat rebate (15%).

The industry is experiencing a period of high costs related to the Stronger Super policy reform. Fees are also under the spotlight and were a focus of the recent Financial System Inquiry.

The Tax White Paper is a chance to look at simplifying the administration of superannuation and setting a long-term structure which will bring certainty to financing the aged for the first time.

Rice Warner believes whatever the outcome, policy makers should stop making frequent band aid changes, and, with bi-lateral support, go about building a coherent and sensible retirement incomes taxation policy.

– Nathan Bonarius, Consultant