Tuesday, May 20, 2008

Potential Changes (Yet Again) to Superannuation

Gottliebson has some interesting insights on the upcoming Australian tax review. I think it makes sense that "salary sacrificing" of superannuation contributions will be ended. What does this mean? At the moment contributions to super (=retirement account) are taxed at 15% up to a limit of $A50k per year. Above that you can make "undeducted contributions". Earnings in the fund are taxed at 15% (10% for capital gains). Payouts are tax free (and this is out of bounds for the review) and if you convert your account to a pension then the earnings of the fund from then on are tax free too. Eliminating the concessional rate of tax on contributions has two effects (apart from raising revenue for tax cuts elsewhere):

1. It makes the super system simpler by abolishing concessional and non-concessional contributions.

2. Currently people in the 15% tax band get no gain from this concession. Labor will eliminate another middle class welfare expenditure.

By carrying out this reform Australia will have gone from a system several years ago that gave concessions on contributions and superannuation earnings and taxed payouts heavily, to one that taxes payouts lightly if at all and gives no concessions on contributions and only some on earnings. In other words, from an approximation of a 401k to an approximation to a Roth IRA. The US Congress likes Roth IRAs because they bring tax revenue forward to the present. The Australian Treasury, whose head is heading the enquiry, likely feels the same way.

Even so, I'm not inclined to add any extra money to Snork Maiden's superannuation and lock it up for the next few decades!


enoughwealth@yahoo.com said...

Problem with that idea is that self-employed get a tax deduction for superannuation contributions. Hence eliminating salary sacrifice would be introducing an inequity between salaried and self-employed people that are in the 30%+ tax brackets. Salary sacrifice is basically an employer contribution, so the employer claims it as a tax-deduction (same as a self-employed business person does).

Anyhow, this isn't "middle class welfare" (and it isn't really even a tax revenue expense, as lots of people make out) as everyone is currently taxed at 15% on deducted contributions going into super. All it means is that retirement savings aren't a part of our "Progressive" tax scale.

The fundamental reason that those in in the 15% tax bracket don't benefit from shifting savings into super is that they already only pay 15% on their investment income! Since they are likely to be eligible for the means and assets tested aged pension (while those who were in higher tax brackets while working fund the welfare system and have to be self-funded in retirement).

If they eliminate salary sacrifice, higher income earners will simply stop making any "extra" contributions into super and instead go back into negative gearing of shares and property. Despite lots of talk from the left about wanting to do away with negative gearing entirely (as part of any tax revamp), I doubt it will happen. Last time it was tried (under Keating) it immediately impacted investment in residential rental properties and caused a massive rent surge. It was reinstated after one year!

I suspect they may try to 'quarantine' deductions to be only against income in the same category eg. only deduct interest against share and property loans, not allow it to be deducted against salary income. The latest budget changes to exclude these deductions from calculating eligibility for super co-contributions is probably just a first step in this direction.

It's typical socialist government policy to be trying to make taxation ever more progressive (with the goal of everyone being steered towards similar income levels via taxation and welfare payments). It just a bit hard for them to sell the idea directly when they have massive tax revenue surpluses, so they have to think of more subtly ways of getting from A to B. Last budget had some of the first baby steps...

I'm sure that in private the current government's goal is to get back to the "good old days" of a 60%+ top income tax rate (hence the goal of reducing the top income tax rate to match the company tax rate is only "aspirational") and bring back death duties (they can easier do this by making death a CGT event without the current concessions). I'd guess that at least half the Labour Party membership believes that if only everyone had the same income and same wealth will society be perfect ;)

mOOm said...

Gottliebsen says that he doesn't think they'll eliminate negative gearing due to trying that under Keating as you mention. It's a legitimate business expense. Even if there is no concessional rate on contributions, earnings of funds are taxed at a lower rate for those above the 15% band which is some incentive and there is no tax on earnings after you convert to an income stream. They could not tax any of the earnings and be exactly like the Roth IRA, but that would eliminate the incentive currently in place to convert to a pension...

I'm not sure I understand the issue with self-employed getting a tax break for super - an employer would deduct the super contribution for their employee from profits just as they deduct the regular wage. With the self-employed the shareholder and employee is the same person. Is there an extra tax break involved?