Retirement – changing concessional tax on super

Changes to superannuation tax concession will happen but what are they likely to be?

Rolls of money received in superannuation tax concessions

In the second of a series of articles focusing on possible changes to retirement income policy in the Federal Budget 2016/17, this week we consider ‘the big one’ – likely changes to concessional tax on superannuation.

This proposed change has been ‘on the table’ and ‘off the table’ more times than my mum set the table when I was growing up. But Treasurer Scott Morrison has confirmed the Government is indeed planning on changing the way the concessional rate is calculated.

The current rule
There is currently a concessional tax of 15 per cent on super contributions, which applies to all workers, except those earning $300,000 or more, who pay 30 per cent tax. This arrangement favours those who earn between $180,000 and $300,000. The cost of these tax concessions (to the annual federal budget) is set to overtake the cost of the Age Pension (currently $39 billion per annum) within 12 months.

Suggested changes
Changes suggested by many different interest groups include the following measures:
1.Change from a concessional tax of 15 per cent to a 15 per cent rebate on an individual’s marginal tax rate (Deloitte). Low income earners will pay six per cent and those in the $180,000- $300,000 bracket will pay 34 per cent
2. As above but with a 20c rebate (Henry Review 2010
3. Lower the upper limit from $300,000 to $250,000 (Labor Party policy)
4. Allow only $11,000 per year contributions with a $250,000 lifetime cap (Grattan Institute)

Opinion
In the interest of greater fairness in our superannuation system, we believe a hybrid of the Labor Party policy of reducing the upper limit from $300,000 to $250,000 makes sense. But the fairest change would be to also move from the 15 per cent flat rate to a rebate on marginal tax. Such changes would mean a far more equitable system, unlike the current situation where the more you have or earn, the better your retirement wealth, while the less you have/earn, the worse it will be. Either of the above policies or both would need bi-partisan support so that these rules can be supported for at least a 10-year period. Previous governments have continually fiddled with superannuation leading to uncertainty for those planning and entering retirement. In 2012, the Gillard government Treasurer Wayne Swan did introduce a five-year moratorium on ‘major’ changes to superannuation tax policy, but this was reversed by the incoming Abbott government in 2013. Regardless of which party introduces such changes, indeed any changes to super, they really do need to be in place for a minimum of five years to allow workers to best plan their retirement income.

What do you think? Should the current tax concessions on contributions to superannuation remain as they are, or is it time to make them fairer to those with less?

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    COMMENTS

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    roy
    17th Mar 2016
    10:06am
    Vote independent.
    Anonymous
    17th Mar 2016
    6:06pm
    the labor parrot
    LiveItUp
    17th Mar 2016
    12:17pm
    Without incentives many people will not add any extra to super. I have advised my kids to invest their money elsewhere and not add more money to super under the current rules.
    Possum49
    17th Mar 2016
    1:04pm
    I think they need a moratorium for 5 years because the rules are changing too often. Most people do not have the level of super they are discussing but get caught up in their changes to the super legislation. The government needs to look at get money from the top companies that don't pay tax and leave the less well off alone. Liberals need to be wary of grey power at the election.
    Possum49
    Anonymous
    17th Mar 2016
    3:02pm
    They were in the last election and where wiped out they are a wasted vote.

    17th Mar 2016
    1:25pm
    Time for a change, do away with super altogether, implement another fairer system. In Holland with a population of 17 million, everyone gets a pension, not means tested. Why can't we do the same??
    particolor
    17th Mar 2016
    8:29pm
    Its they same in Many European Country's ! They just delight in Kicking Old People Here in Australia ! I wonder who they think BUILT THE PLACE ?
    TREBOR
    20th Mar 2016
    2:27am
    Pay everyone the Pension and tax income according to the scales above that. That'd hurt a lot of politicians and their tame fat cats in the PS.... and not before time.
    Rae
    17th Mar 2016
    1:36pm
    Why would anyone earning over 180 000 want to be bothered with superannuation and risk losing money to government risk. They would be better off incorporated and buying assets within the corporate structure.

    Perhaps if the government spent less time stewing about how to get at our savings then they could actually run the country properly.
    Anonymous
    17th Mar 2016
    3:07pm
    Rae super has other benefits apart from tax eg. if you become bankrupt you keep your super, if you are self funded and have a pending divorce you can keep it away from your spouse if you use your brains and there are all sorts of things you can do if have a split family, if you are sued the payment will not come from super.
    LiveItUp
    17th Mar 2016
    9:17pm
    Sorry they can get your super now too.

    You need a structure where you own nothing but control everything.
    FM
    17th Mar 2016
    3:43pm
    I agree with the Deloitte suggestion that a 15% rebate on one's marginal tax rate is much more reasonable and equitable. The current system really disadvantages those who are already disadvantaged income wise and overly favours high income earners. Current retirees who were in defined benefit schemes got no tax concessions on their contributions. They were mandatory after tax contributions and people had to pay them. It would also be reasonable to lower the threshold for the 15% concession from $300,000 to $250,000. It would also be reasonable to restore an upper limit on what can be contributed to super fund over a lifetime. Most importantly there needs to be system in place that will cover the cost of a pension for those who will need one. Many people will not be able to contribute anything like the amounts currently allowed and will need a PENSION. No party is looking at this at the moment.
    It would not be a good idea to convert to an annuity at the moment when rates of return are so low, assuming they will rise again.
    I am not sure why the opinions of the The Grattan Institute matter. They are just another unscrupulous think tank that will come up with whatever they are paid to come up with. If you cite them you need to also state who has paid them for their opinion. John 'leaking tax' Daley has generated a fortune for himself 'elder bashing' over the past year.
    LiveItUp
    17th Mar 2016
    8:00pm
    Change is inevitable so I really can't see a problem with changing the rules. A plan needs to be flexible enough to be able to change with any changes.

    I still have a home phone but I know it is going the way of the dinosaur and it's days are numbered. When I bought that phone I had no idea that one day I'd have to move over to a smart phone or an internet based phone system but if I don't one day it simply won't work any more. Same with one's retirement and super plans. They are plans on today's rules and regulations. I know that those rules and regulations will change many times before I leave this mortal world and that I must be flexible enough to change with them.
    Rae
    18th Mar 2016
    8:22am
    That is sage advice Bonny. Unfortunately those caught by the compulsory defined benefit super system have no ability to change anything. They basically we forced into a system with no tax advantages, very poor returns and a choice at forced retirement age to either take the lump sum or take an annuity style pension by signing away the money.

    The rules should change but never for people locked into an old rule game plan that can't be changed. The changes to defined benefit accounting for Centrelink should have been grandfathered.

    People using 60% of after tax savings to live on should have all 60% counted as non concessional. Changing that to only 10% is unfair without the option of taking the money and moving it to a different investment or spending it as some are doing now.
    FM
    17th Mar 2016
    3:58pm
    I have noticed the comments of Possum 49 and trood and agree with them. You cannot change the rules every few months and especially not for people who have already retired and made plans according to existing rules. As we have seen from contributions to Life Choices, many people who had retired and planned their lives under the rules when they retired have been left devastated by the abrupt changes in last year's budget.
    As trood says, first and foremost Australia needs a proper pension scheme like they have in Europe, UK USA and NZ. There needs to be a scheme that will cover everyone for a basic retirement income. Individuals should then have the option of contributing to a scheme for additional personal super. The present individualized, capricious scheme that is in place is fundamentally inadequate.
    Retired Knowall
    17th Mar 2016
    5:25pm
    Remove concessional contributions and tax the earnings within super accounts or over a pre-set limit, (say $80,000). Earnings within Super are no different to any other investment.
    The tax rate can also be open to debate.
    At the same time tax should be applied to lump sum withdrawals over a pre defined amount to slow down the movement of capital when the new tax laws are applied.
    particolor
    17th Mar 2016
    7:17pm
    Time for Government Change more like it. And None of the Traitors putting their hands up at the Moment ! :-( Paying Your own Super now is like Giving them a Reason to Reward themselves a Handsome Pay Rise ! :-( :-(
    Nard
    17th Mar 2016
    10:13pm
    Superannuation is very big business with Superannuation assets in aggregate of $2,046 billion ($2 trillion rounded) at the end of the December 2015 quarter.
    Superannuation law is second only in size to tax law and rightly so. Superannuation is the most tax efficient investment to save for and fund retirement (many strategies are there to ensure this is so.) Superannuation is the only legal tax haven open to Australians. To ensure that this remains so there must be rules in place to maintain the order.
    Nothing is truer than that in both tax and super there will be change and evolution. Change not just for the sake of change but for the fact that our lives our history our society our needs change and evolve.
    There have been minimal changes to superannuation rules since Simple Super was introduced in 2007. Yes since then they have played with contribution limits, excess contributions, Division 293 tax introduced but the wholesale changes made to bring in the change to simple super and the results for members from a tax perspective, Centrelink perspective have been significantly better.
    I for one look to the pre Simple Super times that had Reasonable Benefit Limits (RBL) – ANYONE REMEMBER THE OLD RBLs? RBL rules that were punitive from tax, Centrelink and capital retention perspectives, Pensions sourced from taxable components were taxable. Yes overall, you could contribute higher deductible contributions and unlimited undeducted contributions but minimum and maximum rules limited your drawings from Allocated pensions and yes you paid tax on your super even when over 60. I am so glad a lot of these rules are gone.
    It is the changes in Centrelink treatment of Superannuation Pensions or Annuities since 2004 that have upset most people, not so much super but Centrelink. This leads people to mistrust the super regime and Governments.
    Super is a structure it is a trust. The Government cannot nationalise your existing super or take your super and never will. The trustee of your fund be it a SMSF, Retail or Industry fund operates in terms of the Trust deed and trust/super law. Funds a held for the benefit of each member in their account and will be there for the member. Talk about Governments taking it are just ridiculous.
    Super is a structure it is a trust it is not an investment. An investment is the share, property, cash or managed fund you buy in your fund. It is the economy, share-market , interest rates etc that lose or gain not Super.
    Super is not the enemy it is the most tax efficient investment vehicle with which to save for and utilise during retirement. It is your tax haven to utilise with strategy to maximise your benefits including Centrelink and minimise your tax.
    Expect continued change over your life. There will be changes that effect you at times and that you may not like. Change is forever as is super as your structure to maximise your wealth.
    Joyrider
    31st Mar 2016
    10:40am
    There is a presumption that superannuation earnings are large, excessive and unfair. However Safe bank deposits, and similar, are earning less than the inflation rate and, in any case, superannuation earnings may well be negative in some years. This is effectively a capital loss for which no fair adjustment is made. If earnings are to be taxed, it is fair that losses receive an equivalent rebate after the whole system has been indexed for inflation. Unless proposed taxes on super earnings are indexed for inflation the effective tax rate is actually much higher than the nominal rate. Those who have chosen to invest in real estate instead of superannuation, especially zero taxed home owners, are likely to be much better of in the long run. I have lived a frugal life for 74 years. I find it galling to be forced to subsidize those who have chosen to live their lives without regard to the future.
    particolor
    31st Mar 2016
    8:12pm
    I'll tell a few Sick friends of Your concerns :-) I'm sure 20 years or so of Being Ill will Weigh Heavily on their Conscience's ! :-( :-(
    Pamiea
    30th Apr 2016
    12:04pm
    Fortunately I dont understand the complexities of super (only if I lose money)! Sometimes ignorance is bliss????