ALP’s Superannuation Tax Proposals

This month’s Wealth Pipeline discusses the topic of superannuation tax proposals. Next month’s Wealth Pipeline will cover selective topics that arise from the federal budget. Hopefully there won’t be any material changes to superannuation.

ALP’s Superannuation Tax Proposals

Following last week’s Australian Labor Party’s (ALP) superannuation proposals, we decided to pen some of our comments on the topic. To recap, the ALP proposed that:

• Superannuation pension accounts should be taxed where the member’s taxable earnings are above $75,000. All super pension earnings are currently exempt from tax. The $75,000 as determined by the ALP is designed to just affect superannuation account holders with balances in excess of $1.5 million. 
• They will remove the 10% tax offset on defined benefit pension income above $75,000 per year.
• Taxpayers who earn more than $250,000 a year, based on the special definition of adjusted taxable income, will pay an extra 15% tax on super contributions (up to the taxpayer’s concessional cap). This will take the tax bill on concessional contributions to 30% for each dollar contributed. Currently those taxpayers who earn $300,000 a year pay 30% on concessional contributions.

Our Comments

Our initial comments regarding the possible taxing of a member’s taxable earnings above $75,000 are:

• How will earnings from an individual’s multiple superannuation accounts be aggregated and taxed?
• Variation in super fund returns may draw in individuals not intended to be caught by the policy. For instance, the policy is aimed at accounts with $1.5 million and more, but a smaller fund with large realised gains could fall within the scope of the tax.
• People may choose more conservative asset allocations to avoid the impost of increased tax on earnings.
• Members in a relationship where moneys are viewed as the one pool will be encouraged to increase the account of the partner who has the lower balance.
• It will motivate people to move funds outside superannuation if they believe their tax obligations can be minimised more effectively through alternative strategies such as negative gearing or offshore investments.

These issues must be considered and resolved if such a proposal was to be implemented by a future government and any proposal will need to be followed up by genuine and meaningful consultation to work through implementation issues. Whether the measure announced by the ALP ever sees the light of day, we don’t know. However, what we can be certain about is that change in the long term will occur to address the Budget deficit and redistribution of superannuation tax concessions. This is a timely reminder to us as advisers that we should keep one eye on how to best manage legislation risk.

The increased engagement in the superannuation tax debate from all parties will help achieve bipartisan support for superannuation as the primary savings vehicle to deliver retirement incomes to Australians. Our government however should never lose sight of superannuation’s primary goal of ensuring self-sufficiency in retirement.