The Albanese government’s first Federal Budget last month was a bit of a fizzer in that there wasn’t much in the way of changes that affected investors and superannuants.
However, subsequent murmurs by politicians’ hint at proposed changes that the government may be contemplating. In particular, I wanted to address these potential super changes and how they may impact you.
Higher super contribution taxes for higher earners
In 2011, the Gillard government introduced a higher rate of tax that applies to super contributions made by higher income earners post 1 July 2012. The aim of this new tax was to reduce the tax benefits that super afforded to higher income earners (i.e., higher income earners enjoy a much higher tax saving in dollar terms than lower income earners). This tax is called “Division 293 tax”.
Div. 293 applies to taxpayers that earn over a certain amount. The tax applies to all concessional (including employer) contributions at a flat rate of 30%, instead of the usual 15%. The Div. 293 income threshold is currently $250,000 based on adjustable taxable income. However, between 2012 and 2017 the threshold was higher at $300,000.
It would be an ‘easy win’ for the government to reduce the Div. 293 threshold to raise more tax revenue. Reducing it to say $200,000 would align it to the highest marginal tax rate threshold once the stage 3 tax cuts are implemented post 1 July 2024. It would still be beneficial for higher income earners to make contributions, as it would save 17% in tax (i.e., taxed at 30% of contributed into super or 47% if taken as cash salary).
Introduce a cap on super
Currently, there is no limit to the amount that you can have inside super. When you are retired (i.e., in pension phase), the first $1.7 million is tax free. That is, any income and capital gains generated by this balance is tax free. Any amount more than $1.7million continues to be taxed at the standard flat rate of 15% on income and 10% on capital gains – which is still pretty good.
But if you have over $5 million in super for example, why should you get the benefit of a 15% tax rate? The whole point of lower tax rates in super is that it increases the number of people that can fund their own retirement and not be a burden on the welfare system. But if you have $5 million, you will probably never qualify for the aged pension even if you pay the usual income tax rates.
Capping the amount people can have in super is a no-brainer and should have been done years ago. It would help the government increase tax revenue without costing too many votes.
Reduce the amount of super that is tax-free
As noted above, each person can have up to $1.7 million in super when retired (in pension phase) and enjoy a zero-tax rate. That means the super fund pays nil tax on investment income and capital gains (whilst still enjoying the benefits of franking credits). Also, any amount you withdraw from super as a pension is also tax free. This cap is called the transfer balance cap (TBC).
The TBC was introduced on 1 July 2017 and was originally $1.6 million. However, it is indexed to CPI and increased in $100,000 increments. Therefore, the TBC was increased to $1.7 million on 1 July 2021.
Reducing the TBC would be an attractive way for the government to raise tax revenue as it would only impact wealthier Australians. They could do this in two ways. Firstly, the government could remove indexation of the TBC. Secondly, a more aggressive change could be to reduce the TBC. The trick would be to reduce it as much as possible without increasing the burden on the welfare system i.e., ensure these retirees are still self-funded.
Ban franking credit refunds
If a super fund that is in pension phase (be it a SMSF, industry fund or any fund) receives a franked dividend, not only does it not pay tax on that dividend, but it may also be entitled to a refund of franking (imputation) credits. For example, if a super fund (in pension phase) receives a fully franked cash dividend of $70, it will also receive a franking credit refund of $30 increasing the cash dividend to $100.
Bill Shorten proposed to ban franking credit refunds in his 2019 federal election campaign. Of course, Shorten was unsuccessful – maybe because of his taxation policies.
The government could resurrect this policy but given its lack of popularity, I think it’s unlikely.
Reduce accountability and transparency obligations for industry funds
The Albanese government has proposed to make changes to super rules that are likely to reduce accountability and transparency over the sector.
The government has announced that it will review the Your Future, Your Super Performance Test which requires underperforming super funds to report to members and provide information about how to choose a better fund.
In addition, the Albanese government is canvasing changing the requirement for super funds to provide an itemised account of all marketing and sponsorship expenses, as well as political donations and payments to industrial bodies at annual meetings of members. Instead, the government proposes aggregated disclosure is sufficient.
There is no doubt in my mind that the Albanese government will wind back the improved accountability and transparency obligations that the Coalition government implemented. This is not surprising given the industry funds close links with unions. I don’t mean that to come across as a political statement – merely a statement of fact.
How could these changes affect you?
All these possible changes do not change the fact that super is concessionally taxed and therefore is an attractive environment to accumulate wealth in. Perhaps some of these changes might reduce potential tax savings, but not to the extent that you would drive you to ignore super. Governments endlessly tinker with super rules and will probably continue to do so. But it will always be a fundamental component in most peoples’ retirement strategies.
That said, spreading your eggs in more than one basket is always a good way to reduce legislative risk. Don’t ignore super. But, at the same time, don’t put all your wealth in super either. Holding some wealth in personal names and perhaps even a family trust will help you spread your risk.
