3 Super Myths Busted
This is an extract of an article written by Paul Rickard from The Switzer Daily ENews. Read the full article here
“With the Budget to be handed down two months from today, it is hardly surprising that changes to the superannuation system are being mooted. The superannuation “honeypot” is just too tempting for politicians and interest groups.
Unfortunately, most of the suggestions for change are based on misinformation or a miss-understanding of the super system. We’ll call them the ‘super myths’.
While the Government has promised to make “no unexpected detrimental change to the super system” in its first term, the worrying thing is that these super myths are starting to become accepted as fact. Let’s bust them wide open.
Myth 1 – Rich people get a 34% tax break on super contributions
Most superannuation contributions, such as your employer’s 9.5% or amounts you salary sacrifice, are taxed at 15% when they hit the super fund. Within the contribution cap, (the general concessional cap is $30,000), individuals can add to their employer’s contribution through salary sacrifice and generate a tax saving as the tax payable on their salary is reduced.
However, not all contributions are taxed at 15%.
Low income earners, those earning less than $37,000, effectively pay 0% tax due to the rebate known as the Low Income Superannuation Contribution.
More importantly, high income earners pay tax at an effective rate of 30%. One of the Gillard Government super legacies, people with an adjusted taxable income of $300,000 or more pay additional contributions tax under what is known as Division 293 tax. While $300,000 sounds like a pretty comfortable income, it includes a person’s taxable income, reportable fringe benefits, superannuation contributions and net investment losses. In other words, a person’s salary could be well south of $300,000 and they would pay tax on their super contributions at 30%. And there is no phasing here – unless you are right at the threshold, you will pay tax at 30% on all your super contributions.
The people doing best out of these super tax concessions are the upper middle income earners – those paying tax at 49% but who don’t earn enough to qualify for the 30% tax rate above. As the following table shows, their effective tax benefit is 34.0%.
Myth 2 – the ‘rich’ use super
An old saying goes that it is easy to be charitable when you have something to give, much harder when you have nothing. Well, it seems this could apply to the super debate, because some of the leading advocates who argue that the super concessions are too generous are very well known business people and commentators. These people aren’t poor – they are pretty rich!
Maybe this is uncharitable of me to say so – but I reckon that these people don’t have much money in super and never will, and therefore, it is a pretty easy position to advocate. How can I make this claim?
The fact is that contributions to super have been capped since 2007 and you simply can’t get that much money into super. The maximum concessional contribution is $35,000 a year (aged 50 or over), and the maximum non-concessional contribution (own monies) is $180,000 per year. For a person with $10 million, it would take over 45 years to get that sum into super.
Rich people don’t use super.
Myth 3 – superannuation concessions are costing the taxpayer $42 billion a year
Superannuation concessions do cost the taxpayer – although it is nowhere near as much as some commentators like to make out. In fact, I can’t find any factual reference to the $42 billion that some like to claim.
Treasury publishes a Tax Expenditure Statement each year – the latest was released at the end of January. This statement considers potential revenue the Government “forgoes” by not taxing, or concessionally taxing, a source of income, from capital gains tax concessions on the family home through to retirement savings. Under retirement savings, 15 items are listed – from the concessional taxation of unused long service leave accumulated prior to 15 August 1978 through to the exemption from capital gains for small business assets held for more than 15 years.
The two largest items, the concessional taxation on super contributions and the concessional tax treatment on superannuation entity earnings, account for the bulk of the revenue forgone – an estimate of $29.7 billion in 2014/15.
The former relates to the tax treatment of employer, salary sacrifice and contributions for which a tax deduction is claimed, as discussed above in Myth 1. It is projected to increase from $16.3bn in 2014/15 to $19.05 billion in 2017/18 (Table 1). Refer to the full article for an analysis of these tables
Table 1 – Employer Super Contributions – Revenue Forgone
The second concession relates to the taxation of the investment earnings of a super fund – 15% when the fund is in accumulation, or 0% when the assets of the fund are being used to support the payment of a pension. This is forecast to rise from $13.4 billion in 2014/15 to $26.8 billion in 2017/18.
Table 2 – Taxation of Super Entity Earnings – Revenue Forgone. What’s wrong with Treasury’s analysis? Refer to the full article for this analysis.
Table 3 – Employer Super Contributions – Revenue Gain
Table 4 – Taxation of Super Entity Earnings – Revenue Gain
Using these figures, the $42 billion has been reduced to $27.3 billion this year, and to $40.55 billion in 2017/18.
Of course, the other criticism of this model is that it does not take into account the cost savings that accrue to the Government due to self-funded retirees supporting themselves in retirement, rather than relying on the age pension. This is, after all, a fundamental objective of the superannuation system.
Due to the growth of super savings (now sitting at $1.9 trillion), it is expected that by 2047, the number of people receiving a full rate age pension will fall from around 50% of the eligible population to just 30%, with a small increase in the proportion of the population receiving no pension. Further, people independent of the pension, or receiving a part pension, will enjoy a higher standard of living. Unfortunately, Treasury doesn’t publish data on these savings to the taxpayer.
Where to for the super system?
With the constant harping in the media about the inequity of super tax concessions and discussion about the budget deficit, I think it is inevitable that Government will make some changes. If not this term, then certainly the next.
There are some simple things the Government could do to make the system fairer and perhaps more importantly, sustainable. Further, these changes wouldn’t have too material an impact on superannuants.
Firstly, get the super preservation age back in sync with the pension age. The Gillard Government moved the pension age from 65 to 67, and the Abbott Government is talking about going to 70 (both being phased in over a long transition).
However, no one has done anything about the age at which super can first be accessed (the preservation age) – so this gap has gone from 5 years to 7 to 10 years.
Move the preservation age to 62 or 65. Change the tax rate on lump sum withdrawals or super pensions so that the effective 0% tax rate also only applies from age 62 or 65.
Next, scrap transition to retirement pensions. Prospectively, not retrospectively.
While the transition to retirement pension, an idea of the Howard Government, was well intentioned, the reality today is that in many cases, it is just used to reduce the tax rate on a super fund’s earnings to 0%. As any financial adviser knows, if you have turned 55 and aren’t taking a transition to retirement pension, you have rocks in your head.
Finally, apply the Division 293 tax (the higher tax on superannuation contributions) to the $180,000 income level. This will mean that most taxpayers are enjoying a tax benefit of around 20% – probably the amount that is needed to encourage people to make additional contributions to super and accept the trade-off that they will be locking their money away for up to 40 years.