(03) 9020 2905PORTFOLIO POINT: SMSF trustees don’t have time to relax. They might need to take up arms against industry super funds next.
The constant battles faced by trustees to protect SMSFs and their investment sphere must be getting exhausting for everyone. Earlier this year it was lobbying to keep imputation funds from being scrapped. A few months later, the landscape changed when concessional contributions were halved.
Now, there is another threat. Broadly, it is the Henry tax review and the sort of proposals it is looking at (on behalf of the Rudd Government). Specifically, this week, it is a proposal from industry super funds to further remove incentives for higher-income earning workers to be able to use super as a retirement savings vehicle.
The Industry Super Network this week released its Supplementary Submission on Retirement Incomes to Henry’s panel. Some of the proposals (and we’ll return to these) add weight to concerns that Eureka Report has raised in recent months.
However, the majority of the supplementary submission is specifically aimed at removing tax incentives for higher income earners. The proposal is a fundamental change to the way governments award concessions for superannuation contributions.
Why should a submission from the industry fund sector concern Eureka Report’s SMSF trustee readers? There are two reasons in this case. Firstly, it’s coming from the industry funds movement – a large organisation with strong connections to the Labor Government. And two, we’re most definitely in a period with the Rudd Government where they are actively targeting wealthier Australians and have acted already to cut the super contribution incentives for able Australians to beef up their super balances.
Labor is open to a big shake-up on super. Apparently the one we got in 2007 was too generous to the wrong people. New Super Minister Chris Bowen has said he wants to deliver a new super framework that would get support from both sides of politics to the point that it would not require substantive change for years to come. (The chance of achieving that is minimal, given the philosophical differences on superannuation between the two parties.)
ISN’s proposal would upend the current contributions platform. Their plan assumes the removal of the current contributions tax rate of 15%. It would be replaced by an across-the-board system of co-contributions from the government.
On their own, those two ideas would blow out the Budget and would be unaffordable. That is overcome – and where the threat to higher-earning SMSF trustees comes – by their recommendations on caps on the co-contributions, which would effectively mean that those who were earning potentially small amounts above the average wage would be further penalised than they are now.
ISN claims it is unfair that someone earning in excess of $180,000 gets a larger tax advantage from contributing to superannuation than does someone earning below Average Weekly Ordinary Time Earnings (AWOTE), which is approximately $60,000 a year.
That is, if the high income earner contributes to super, instead of paying 46.5% in super, they will pay 15% in contributions tax for salary sacrificed payments. If they decide to contribute $1000 to super instead of taking it as salary where they’d get $535, they would get $850 put into superannuation. The advantage to putting money into super is that an extra $315 less in overall tax is paid.
However, if someone earning, say, $15,000 did the same thing, they would either receive $835 if they took it in the hand, or $850 into their super. The tax saved is $15.
INSERT TABLE 2 FROM THE SUBMISSION HERE.
Source: ISN. Includes impact of Medicare Levy and Low Income Tax Offset (2009-10)
(Both examples assume the Medicare Levy is paid by the workers.)
Using this sort of mathematics as the basis of its justification, ISN’s submission quotes a recent statistic that the top earning 5% of Australians get about 37% of all tax concessions for super contributions. That’s a lovely (and on the face off it seemingly unfair to the other 95% of the population) statistic to prove a point.
So, what does ISN propose? It makes two suggestions. They are:
- A flat 25% co-contribution or tax offset on SG and voluntary contributions, or
- A flat 33 1/3% co-contribution or tax offset on SG and voluntary contributions – which would represent a gross 12% contribution with the 9% SG (i.e. 9% + 3%)
In order to make this work from a budget perspective, ISN has recommended caps. They are:
- 25% option – a maximum of $6250.
- 33.3% option – a maximum of $4000.
The first suggests a maximum super contribution of $25,000 a year, while the second assumes a maximum contribution of $12,000. Although not in the submission, it is assumed that contributions over and above these limits would have to be the equivalent of non-concessional contributions now. That is, full income tax has been paid before the contribution has been made.
At this point, ISN argues, the cost would be roughly revenue neutral to the Federal Budget. Although not in the submission, it is also assumed that the government would have to limit contributions to super to these sums of either
The more these ideas get floated and get an airing, the more SMSF trustees – who tend to have higher account balances, higher incomes and a great interest in running their own super – should be concerned. Why is this one serious? Exactly because the government has already flown a kite about cutting one tax concession this year (imputation credits) and swung the axe on limits for concessional contribution limits in a bid to make super “fairer”.
The Rudd Government is open to new ways to reduce the tax efficiency of super for higher income earners, as they showed in the budget by halving the concessional contribution limits from $50,000 to $25,000 for those under 50 and from $100,000 to $50,000 for the over 50s (for the next three financial years).
And they’re open to doing it via (yet another) grand reorganisation of super.
Bruce Brammall is the author of Debt Man Walking and director of Castellan Financial Consulting.