Labor's recent superannuation changes will damage confidence and put more pressure on future budgets

On Friday 5 April, Treasurer Wayne Swan and Superannuation Minister Bill Shorten made an announcement which supposedly provided certainty about Labor’s planned tax increases for superannuation.  In fact it did no such thing.

For several months there have been rumours surfacing in the media that additional tax was to be levied on superannuation.  The stories evidently emanated from government, ‘road testing’ various ideas to see which would cause the least political grief.

Prior to Labor’s recent changes, superannuation in Australia was taxed at 15 per cent on contributions out of pre-tax income; 15 per cent on earnings; and there was no tax on income received from a superannuation fund in retirement.

In the 2012 budget Labor announced a change to the tax on contributions: people with incomes exceeding $300,000 would pay tax at 30 per cent (rather than 15 per cent) on their contributions. 

Labor’s recent announcement adds a new level of tax on income received from a superannuation fund in retirement.  There will now be tax on income from a superannuation fund exceeding $100,000 in a year, with a tax rate of 15 per cent applying to the excess.

Labor has greatly increased the uncertainty surrounding superannuation, in three ways.

First, by conducting a very public process, lasting for several months, of casting around for various possible new taxes, Labor has highlighted to Australians its appetite to tap the large ($1.5 trillion) and growing superannuation savings pool for additional tax revenue.  The possibilities canvassed have included a tax on the balance in a fund above a certain level (reportedly $800,000 was considered as the threshold); additional tax on contributions by people with incomes above $180,000 (lowering the threshold for this tax from the $300,000 already introduced); and additional tax on income from a superannuation fund in retirement.

Secondly, by announcing its specific changes recently, Labor showed its readiness to change the rules, with little notice and consultation, at just about any time.  This is a powerful demonstration that your long term savings in superannuation could be subject to short term changes in tax treatment.   In turn, the confidence of Australians in superannuation as a long term saving vehicle has been sharply affected.

Thirdly, there is uncertainty about exactly how the new tax will apply.  The government claimed that it will only apply to funds with a balance exceeding two million dollars – but in fact the application of the tax is based on income exceeding $100,000, not the size of the fund.   If rates of return are unusually good in a particular year, or if the fund incurs a large one-time capital gain in a particular year, the tax will be payable – even if the fund’s balance is much less than $2 million. 

It is very unfortunate that Labor has mishandled this issue in a way which will materially damage the confidence of Australians in our superannuation system.  

The policy purpose of superannuation is to reduce the pressure on the federal budget – and the taxpayers who fund that budget – by increasing the proportion of Australians whose retirement incomes come wholly or partly from superannuation rather than from the age pension.

We have heard plenty of commentary in recent months about the so-called $30 billion worth of annual tax concessions in the superannuation system.   Treasury’s calculation of this concession is misleading – it incorrectly assumes that if taxpayers were not contributing to superannuation, they would leave the money in a bank account where the interest would attract tax. 

As respected actuaries like David Knox have pointed out, there is a bigger problem with the argument about tax concessions:  it ignores the offsetting savings which are to be generated in pension expenditure.  In 2012-13, spending on the age pension will be almost $37 billion – close to ten per cent of the total Commonwealth budget. 

We need as many Australians as possible  building up a superannuation balance sufficient to fund their retirement.  That is why Labor’s game playing with superannuation in recent months – and the announcement of 5 April - is very damaging.  It will reduce the rate at which people make voluntary contributions (that is, contributions beyond the compulsory 9 per cent amount); reduce the number of Australians with a sufficiently large superannuation balance; and in turn leave a bigger burden for the budget – and taxpayers - in years to come.