By Olivia Long
On reading about the Labor Party’s recent superannuation policy announcement, I was reminded of that famous Sir Winston Churchill quote – “Those that fail to learn from history, are doomed to repeat it."
It was when Labor was last in power that Superannuation Minister Bill Shorten locked on to the idea that taxing earnings above a certain level in the pension phase was a potentially good revenue source. The earnings figure mooted then was $100,000, and all sorts of numbers were bandied about as to how much revenue it would generate for the Government’s coffers.
This proposed tax never saw the light of day – an incoming Coalition Government took one look at it and abolished it.
But Labor in opposition obviously still likes the idea – it must appeal to their notions of equity. This time around they have proposed a 15% tax on earnings in the pension phase above $75,000.
Based on their back-of-the envelope number of an average return of 5%, it means the tax will begin for those with super balances of at least $1.5 million. It’s expected to affect about 60,000 people and the “kick” to revenue is estimated at $1.4 billion a year or nearly $10 billion over the next decade. It would not affect eligibility to the part pension.
The first question that came to my mind – why 5%? That’s a very conservative return estimate. Last year the average APRA fund enjoyed a double digit return (about 12%) and since the inception of compulsory superannuation in 1992, the average fund return has been about 7%.
Using a 7% return, it means the funds needed to generate $75,000 of earnings is a tad below $1.1 million. And when the average return is 12%, then that figure drops to $625,000. Hardly a super sum to suggest someone in retirement can live the life of Riley – especially when the average life expectancy is now in the mid-80s and rising.
I suspect I know why 5% was chosen – Labor didn’t want to frighten the horses. When you drop the number to $625,000 suddenly the net widens – dramatically – as does the number of voters.
For many SMSF trustees, the principal asset in their fund is often lumpy in nature; for example, their business premises placed in the fund as their retirement nest egg. Obviously the sale of such an asset will generate a high return in the year it is sold. The question, therefore, is should they suffer the 15% tax regime because of a one-off sale? To my mind, no.
People will look for other ways to invest for their retirement (and in retirement) outside superannuation if they think it will minimise their tax obligations. To think otherwise is naïve.
I read recently that there have been 66 reviews and reports that have had an impact on superannuation in the past 13 years. And governments wonder why people lack confidence in the system.
What they system needs now, more than ever, is stability. A key recommendation of the Financial System Inquiry was for all participants to finally determine superannuation’s principle objectives, and only after achieving that, should specific issues such as tax concessions be considered.
Labor would have been far better served outlining the principles it wants to underpin the system, instead of isolating some supposedly easy tax pickings. Once again the wrong message – that superannuation is about government revenue, not people’s retirement savings – has been sent.