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Life’s certainties: death, taxes and changes to super

1 Dec 2011 |

Over the past 28 years the one constant for superannuation has been change. It has unfortunately too often been viewed by governments as a cash cow that can be milked whenever it needs to balance the budget. The recent changes announced by the Gillard government have continued this tradition.

In fact since 1983 the trend has been for the Coalition to mainly increase and improve super benefits while Labor has increased tax on super and reduced benefits. During the Hawke/Keating era the 15 per cent tax on both contributions and the income of a super fund were introduced. This meant Australia was the only country out of a list of 10, including the UK and the USA, which taxed contributions, income and benefits paid by a super fund.

One of the other major changes introduced during that period was the introduction of what were called reasonable benefit limits. Under this measure people that exceeded an arbitrary limit, paid extra tax on their super payouts. For lump sums they paid an extra 15 per cent on the excess component, and missed out on the 15 per cent tax offset where it was received as a pension.

The other wise super friendly approach of the Howard government started off badly with the introduction of 15 per cent extra tax payable on contributions by people that exceeded an income limit. Thankfully to their credit the Liberals recognised this was inequitable and phased out the surcharge over time.

The constant changes made to super up until 2007 had led to an overly complicated superannuation system. When Peter Costello introduced the new superannuation system on 1 July 2007 three types of super were reduced to one taxable component and nine different non-taxable types of superannuation were reduced to one exempt component.

The main change introduced was the making of both lump sum and pension payments from a super fund being tax free once a person turned 60. This meant Australia like many other developed countries only taxed two components of super.

Another major benefit introduced to assist lower income earners was the co-contribution scheme. Where a person’s taxable income was less than a lower limit they effectively received a maximum super gift of $1500. To receive this they had to make an after tax non-concessional super contribution of at least $1000.

To further simplify superannuation three annual contribution limits based on a person’s age of $15,260 for those under 35, $42,385 for those 35 to 49, and $105,113 for those 50 and over were reduced to $50,000 for people under 50 and $100,000 for 50 and over.

It did not take the Rudd government long to continue the Labor tradition of making negative changes to superannuation. The first was a cutting of the maximum contributions levels down to $25,000 and $50,000. The second was to cut the super co-contribution down to a 100 per cent and a maximum of $1000.

The Gillard government, not to be out done, have introduced and announced yet more adverse changes to super. In fairness though in addition to these changes there have been some good policy moves. These include the introduction of cheaper super accounts under My Super, and the banning of commissions on financial products including super and insurance inside super.

To add insult to the injury of the reduction in maximum super contribution limits the Gillard government has announced that these limits, that are supposed to increase in $5000 amounts in line with increases in AWOTE, will be frozen for the 2013-14 year. The commonwealth super co-contribution will also be cut further to 50 per cent and a maximum of $500 from 1 July 2012.

To offset this cut from 1 July 2012 there will be a reduction in tax to zero on super guarantee contributions for people earning up to $37,000. As this cut will only apply to super guarantee contributions low income self employed super members will get no benefit.

When you combine the removal of the contributions tax, with the reductions in the co-contribution rate, someone on $37,000 who made non-concessional contributions of $1000 will be worse off. The tax saving on super guarantee contribution of $3330 will be $500, while the co-contribution will have been reduced by $1000.


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