(03) 9020 2905If I could have just one super power, I think it might be … the power to tax! How cool would THAT be?
Bit short of cash this month? Credit card crept away from you? Budget blown to smithereens and spending spinning out of control? Be cool. You can make everyone in the country chip in to help dig you out of your hole.
Governments get to do that. Sadly, sometimes, like Darth Vader, they succumb to the dark side of The Force to penalise people to help balance their budgets and fund spending programs.
Too dramatic? Sorry, but I think changing a forever fundamental tenet of superannuation fits into that category. The government has used its super power … to put a brand new tax on super.
Superannuation changes most years. Super is designed for investment over decades, so that level of change is ridiculous, but that’s what happens.
But one of the few things that has remained constant over super’s lifetime (pretty much since Kal-El arrived as a boy from Krypton) has been that super pension funds aren’t taxed.
That is, once you turn your super fund into a pension fund (after age 55), the fund itself stops paying tax (instead of paying tax at 15 per cent).
Prior to 2007, some of the income then drawn as a super pension was taxed. But that was removed by the Howard Government.
So, what’s the big deal? For the first time, Australians with super pension funds that earn in excess of $100,000 income a year are going to be taxed.
The government claims only 16,000 Australians will be hit. It was suggested they were pretty much the richest 16,000 people in the country. That is 0.07 per cent of the population.
And what are they going to be taxed? Earnings in excess of $100,000 a year inside the pension fund will be taxed at 15 per cent. If their pension fund earns $200,000, they will pay $15,000 tax, versus $0 previously.
Super funds earn income the same way we do. They earn interest on savings, coupons from bonds, dividends on shares and rent on property investments. If they’re slumlords, then can be beheaded when the revolution happens.
A super fund generating $100,000 income is not going to be a “tiny”. But the claim that it will only hit funds worth at least $2 million is simply misleading.
There will be funds worth less than $1 million that will pay the new tax in the first year. That is a guarantee.
Largely, the new tax will only hit the “uber” wealthy. If a couple has $2 million each in super (total of $4 million) then it’s more than likely that they have at least that wealth outside of super.
You can probably assume that even the ones at the low end of the scale are worth a total of $15 million.
Most dollars earned by people with that sort of net wealth is going to be taxed at the marginal tax rate of 46.5 per cent outside super. And paying 15 per cent in super, versus 46.5 per cent outside, is still a brilliant deal.
Madonna, as Eva “Evita” Peron: “Don’t cry for me, Aussie taxpayers”. Sure, not too many tears will be shed for people that wealthy paying some extra.
But the problem with this tax is that it’s retrospective. That is, it is going to tax people for decisions they have made in previous years.
For more than three decades, Australians have invested in the understanding that pension funds don’t pay tax. A lot of investment decisions and contribution decisions have been based on that premise.
Now they will be taxed.
Well, some wealthy Australians will. It will be hard to feel sorry for them. They probably drive BMWs, Mercedes or Maseratis. They don’t holiday in the same countries we do. They have “weekenders” worth five times as much as our homes. They can afford better lawyers than we can.
But there will be loads of people facing the new tax who don’t fit that stereotype. They’ve worked hard, sacrificed a lot, taken great risks, in order to grow their super fund to a point where they can retire, reasonably comfortably.
And now, having made those sacrifices with the understanding that super funds don’t pay tax, the rules have been changed.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.