Crikey Clarifier: what’s coming in superannuation reform
The federal government, opposition and industry groups are locked in a pre-election slanging match with claims and counterclaims over potential changes to superannuation — what’s needed, what isn’t and what might hurt. Crikey sorts the fact from the fiction …
Government changes so far
As part of the minerals resource rent tax, the government legislated to raise the superannuation guarantee from 9% to 12% by 2020. Labor also introduced the Low Income Superannuation Scheme, which provides workers earning $37,000 or less a contribution of up to $500, which in effect makes their contributions tax free. Prior to the introduction of the scheme, some low-paid workers were paying tax on their super contributions even though they paid no tax on their income, effectively penalising them for saving.
Both of these reforms were meant to be paid for with the proceeds of the MRRT. As we now know, that tax has collected far less revenue than was forecast, but the government has nevertheless committed to funding both promises.
Labor also reduced the contribution cap, first from $100,000 to $50,000 in 2007 and then down to $25,000. It was also announced in the last budget that the tax rate on contributions for those earning $300,000 or more would double to 30%. The rationale? It acted as a tax avoidance scheme for higher income earners to lower their tax liability. But it was criticised for discouraging (rich) people from saving.
The case for future change
Regardless of who wins government, future revenue growth will be constrained and meeting election spending promises will require some combination of less spending and more tax. Julia Gillard flagged “structural reforms” to the economy in her National Press Club address and Labor has reportedly been looking to superannuation tax changes to achieve these structural savings. The current superannuation system is full of concessions which either lower the rate of tax or remove tax altogether from superannuation contributions, income streams and super withdrawals.
These concessions cost the government $32 billion a year in lost revenue — a figure forecast by Treasury to rise to $45 billion in 2015/16. Overwhelmingly, these concessions favour high income earners. Analysis by Treasury also shows the top 5% of contributors receive 20.3% of concessions, and the top 1% some 5.3% of discounts. For instance, tax paid on super contributions and investment earnings are the same, no matter the level of income, which advantages those on higher incomes who would otherwise be paying a rate of 45% tax on those earnings.
What the parties have committed
Labor has been making the industry nervous by not spelling out all of its plans. What the government has ruled out is making changes to the tax-free status of superannuation withdrawals by those over the age of 60, which narrows its options for future changes.
The Coalition has pledged not to make unexpected changes to superannuation in its first term, seeking to draw attention to Labor’s plans and the unpopularity of changes the government has introduced. It has committed to raising the superannuation guarantee from 9% to 12%, but has pledged to cut the Low Income Superannuation Contribution — its $2 billion-a-year cost was supposed to be paid via revenue from the MRRT.
Naturally, no one wants to pay more tax on their superannuation or see their pension raided by government policies, making the issue politically complex. Add to that a large and powerful industry lobby and it just gets harder. Industry groups are warning that making changes increases uncertainty and may lead to people not investing in their super funds.
What might the government be planning?
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