We are only a month away from Joe Hockey handing down the 2015 Federal budget and there is no doubt superannuation taxes will feature prominently. There has been all sorts of speculation as to what may happen, so I thought I might as well throw my opinion in. Please note, I have no “inside information” as to what will happen, so I am just taking an educated guess!
Background – Superannuation Taxes
There are 3 main taxing points in relation to superannuation which I wish to look at:
- On concessional contributions – these are taxed at 15%;
- 2. On superannuation earnings – these are taxed at 15%, however any income generated to support the payment of pensions to members is exempt from income tax;
- On amounts withdrawn as pensions from superannuation – if aged between 55-59, the taxable component of the withdrawal is added to your taxable income and taxed at your marginal tax rate, less a 15% tax rebate. If aged 60 or over any amounts withdrawn from superannuation are completely tax-free!
It is the 3rd point which is now causing the most grief for the Government. This measure was announced in the 2006 budget by Peter Costello and was legislated from 1 July 2007. It was a policy no-one saw coming and was based on the Government’s excellent economic position at the time which was “cruising” on the back of record company profits and the lucrative mining boom. Unfortunately, the consequences of this “permanent” tax relief in today’s much tougher economic climate is that it is costing the country hundreds of millions of dollars (possibly billions) in lost revenue.
What we would like to see (our wish list)!
Given the fact something needs to change we think it would be sensible for the Government to do the following:
- Continue to offer tax incentives for concessional contributions – even if they increased the concessional caps from $30,000 and $35,000 (depending on your age) to say $50,000;
- Continue to offer exemptions from tax for all income generated to pay pensions;
- Tax all withdrawals from superannuation the same, regardless of age (in other words withdraw the exemption for over 60s). The current exemption is unsustainable and reverting to the pre 1 July 2007 rules from an administration perspective would be quite simple, as all superannuation administration systems would not need to change. The amount of tax an individual would pay on this change is still negligible compared to the benefits superannuation provides;
- Eliminate the archaic “10% rule” which prevents anyone who has more than 10% of their assessable income in the form of employment income from claiming a tax deduction in the individual tax return for superannuation contributions;
- Limit the amount of lump sum withdrawals from superannuation that can be made by a member (this may be somewhat controversial – but it makes sense!). Currently there is nothing stopping a taxpayer from reaching 65 years of age, after utilising the concessions available from the superannuation system for their whole working life, cashing in their super completely tax-free, spending or giving away all of their super, then accessing a full Age Pension for the rest of their life. The ability to do this goes completely against the concept of why concessions are provided to superannuation members – to reduce the need for the Government to support taxpayers in retirement!
What we don’t want to see!
- The introduction of income tested tax rates on concessional contributions. This is an administration nightmare and would be extremely complex!
- The introduction of income tested exemption limits on Super Fund earnings when paying an income stream to a member. This would be an even worse administration nightmare!
A bipartisan approach to superannuation (and in fact reviewing the whole tax system) would be a great thing to see – however the chances of that happening are extremely remote. It is always much easier in opposition to point out what is wrong with a system, than actually coming up with a viable, fair and workable alternative.
We can only hope – the superannuation measures announced in the 2015 budget will be fair, simple and affordable for all taxpayers!