By Mark Morris
Like many baby boomers I am reluctantly coming to terms with the need to bump up my superannuation contributions so that I can fund a reasonable lifestyle in retirement.
However, I find it hard to generate much enthusiasm for the prospect given the tantalising alternatives of an annual trip to London or an upgrade of the family car. Nonetheless the rationalist in me knows it is something I should do.
Accordingly, one of the very last things I want to grapple with when I struggle to make extra superannuation contributions is yet another barrage of tax changes to our superannuation laws.
However, I accept that tax changes to our superannuation regime are now inevitable as the costs of maintaining the existing superannuation rules are unsustainable and difficult to justify in the more straightened times we live in.
In part, this is because Treasury’s 2014 Tax Expenditures Statement vividly illustrates the burgeoning costs of maintaining our current superannuation regime most of which was set in place way back in May 2006 when the country was thriving under the mining boom. For example, Treasury estimated that the cost of maintaining the concessional tax treatment of employer sponsored contributions alone would be $18.1 billion for the 2016-17 year.
At the same time the Turnbull Government needs to urgently find sufficient revenue to finance the cuts in corporate and personal tax rates needed to lift national investment and productivity in a period of falling revenues.
In this context it looks increasingly unlikely that such cuts will be fully financed through an increase in the Goods and Services Tax rate and/or base, especially given the Opposition’s commitment to fight such reforms.
Accordingly, the Turnbull Government is slowly but surely building up its rhetoric on superannuation reform including its oft mentioned references to tax reform which is both fair and equitable.
In doing so it rarely refers to the fact that it is easier to sell superannuation reform where the impact of cost savings only hit home at some vague point in the future as opposed to GST reform where increased prices will immediately hit the hip pocket.
You really grasp such reforms are almost fated to occur when the Financial Services Council urge the Federal Government to cut back superannuation concessions for high income earners as they did on January 14. When a peak body representing superannuation and management funds calls for a revamp of superannuation concessions for the wealthy you know that a major overhaul to the superannuation regime is almost certainly on the agenda.
Hence, as there is growing consensus that there needs to be some form of superannuation reform, what policy options are available to effect those changes? Especially if the Federal government wants to generate sufficient revenue to help finance more broad-based tax reform?
In my view the Federal government should consider four major policy changes.
First and foremost there is real merit in revisiting Recommendation 18 of the Henry Tax Review which proposed that the tax on superannuation contributions be abolished, and that superannuation contributions should be taxed as income in the hands of individuals at their marginal rates, albeit subject to a 15% refundable tax offset.
In these circumstances a high income earner subject to the current highest marginal rate of tax of 49% would obtain a 15% tax offset in respect of any employer superannuation contributions made whilst a low income earner on the 19% tax rate would similarly receive a 15% tax offset thereby leading to a more equitable tax treatment of superannuation contributions.
We would therefore avoid the current scenario where a multi-millionaire’s superannuation fund effectively pays 15% tax on contributions received being the same 15% tax rate that would apply to a fund receiving employer contributions made on behalf of a sales assistant deriving an annual taxable income of $40,000.
Deloitte recently championed a variant of this proposal in its publication “Shedding light on the debate – Myth busting tax reform” which it suggested would generate a reform dividend of around $6 billion in the 2016-17 year. Not surprisingly similar changes are also the centrepiece of the recent modelling undertaken by the Financial Services Council in tandem with PWC on possible superannuation reforms.
Second, the Turnbull Government should consider the former Government’s proposal that income derived by a fund in pension mode should only be tax-free up to $100,000 a year with any excess subject to tax at a rate of 15%. Whilst this change was only expected to generate around $350 million back in April 2013 the revenue take from such a proposal could be further increased if transitional relief under that measure was ditched and a more punitive rate than 15% applied to funds generating $300,000 or more taxable income per year.
Third, we should revisit the notion that funds are entitled to a refund for excess imputation credits. It is wholly appropriate that funds should be able to extinguish their 15% tax liability during the contributions phase but another thing altogether to allow them to also get a refund of the 15% surplus franking credits on dividends franked at 30% in the dollar.
Finally, it makes little sense that funds in the contribution phase should only pay an effective tax rate of 10% on any capital gains made, being a one third discount on the 15% tax rate that applies to such funds. In a sense this is a doubling up of concessions as the fund is already subject to a low rate of tax being 15% and does not require an additional CGT concession to encourage investment.
Of course we should all recognise that implementing the above changes will invariably mean that some people are worse off being predominantly high income earners.
As is the case with any tax reform some will lose and will have to wear some grief.
However, such changes are absolutely crucial if we are to sustain a superannuation regime which is both robust and fair, and which will provide the additional revenue needed to finance much needed tax reform.
Put simply, superannuation tax reform is a change we have to have if the country is to prosper.