(03) 9020 2905PORTFOLIO POINT: Labor is planning a major tax slug for super members who are a little above average. If you’ve got $1 million in super, you must read this.
I accept that I can be a bit of a cynical bugger. It becomes ingrained with a few decades of journalism under one’s belt.
So I wasn’t aware that I even owned a pair of rose-coloured glasses. But I clearly had a pair on to write last week’s column.
Here’s last week’s final paragraph (30/1/13):
“As we enter an election year, the best we can probably hope for is that the tide finally turns. Instead of governments and oppositions claiming that super is too generous, that things at least get to a position where the cuts have been made and we can look forward to some positive news.”
That glimmer of hope was shattered in less than one day.
The following morning, credible rumours circulated that suggested the Federal Government was far from finished with super. And it’s not just tinkering. We’re talking some major downgrades.
What potentially lies in store?
(Shudder.) Brace yourself.
Following the introduction of a super slug on higher income earners ($300,000-plus) last year, it would appear that anyone the government believes appears to be a certain point above average is now a target.
This could include the reintroduction of taxes on super funds in pension phase and potential new taxes on pension payments (they are completely different things). Penalty taxes for super funds worth more than $1 million. A super wealth tax, or super wealth taxes.
We got softened up for this being a possibility late last year when it appeared the SMSFs were going to be a target of a government intent on balancing its budget (an aim later dropped). It appeared at the time that Superannuation Minister Bill Shorten won a battle with Cabinet.
That the rumours have reappeared, with even worse transgressions planned, suggests it was an uneasy truce declared late last year.
But what is the magical figure that’s “too much, too rich”?
The government clearly has a figure in its head. Individual super balances below this figure are okay. Anything over this figure is ripe to be leached and taxed.
It would certainly appear to be north of $500,000 and possibly around the $1 million mark, as an individual’s balance.
Why? Labor is on the record as accepting that $500,000 in super isn’t much. It’s aborted attempted to allow the over-50s with less than $500,000 to have a higher concessional contributions threshold (the 50-50-500 rule) showed that. It is due to reintroduce that rule (but don’t hold your breath) on 1 July, 2014.
The rumours last week suggested that those with $1 million in super could bear the brunt of any soon-to-be launched tax attack. They’re fair game to be fleeced, or at least touched up with some shears, it would appear.
Is $1 million super that much? Is it so way-above average that those with seven figures in super are fair game for massive tax hikes?
Let’s take a $1 million SMSF that is producing a post-tax, post-fees, return of 6% ($60,000) which was being drawn as income. Should someone earning $60,000, which is about the average salary, be hit with a penalty tax for having too much in super? (The main difference, to be fair, is that a $60,000 super pension is, currently, tax free.)
If they’re drawing the entire earned income of the fund and just leaving the initial capital of $1 million, then the purchasing power of the $1 million erodes over time, unless a return of 6% plus inflation, with the excess being reinvested, occurs.
Or might the government simply declare that super fund members should just be taxed something on that income. I think this is what Labor is getting at – and what financial advisers, accountants and the finance industry have feared for a few years now.
Tax-free pensions are a relatively new thing, introduced in the dying days of the Howard Government’s final term. It’s pretty clear, even if Treasury were uttering “Yes Minister” to Treasurer Peter Costello at the time, that the onset of the GFC changed the ball game for Treasury, who had to retract their support.
The secretary of Treasury, Dr Martin Parkinson, is understood to be regularly on the attack over the level of tax concessions handed out to super and particularly those earning high salaries. He’s got an eye to the future. And the $30 billion-plus, and growing, concessions for super concern Treasury’s boffins.
When would Labor act?
The thinking is that it would probably occur as part of this year’s Federal Budget. Labour could announce big super tax changes, which could help fund its upcoming election promises.
That could also work into the Opposition’s hands also. Abbott’s promise of no negative changes to super wouldn’t necessarily have to include having to undo changes enacted prior to the slated September 14 election. He could just be starting from a lower base than even he had been expecting.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au