"Stockholm syndrome is the psychological phenomenon where hostages express empathy and sympathy and have positive feelings toward their captors. These feelings are generally considered irrational in light of the danger or risk endured by the victims, who essentially mistake a lack of abuse from their captors for an act of kindness” (Wikipedia).
As I read through today’s superannuation announcements I experienced a moment of deep gratitude that the Federal Government had been generous enough not to proceed with the most medieval of the options that had been on the table. I then began to calculate the material disadvantage that will affect families to which these rules apply. I realised that in my momentary relief, I had forgotten that surely every family in our democracy is entitled to have certainty of outcome under the set of rules that were represented by the Government of the day to apply to their self-funded retirement. The more I considered the rules, the more I realised how poorly these rules will operate in practice. Many other ordinary people will innocently get caught in the clutches of these rules at some point. Make no mistake, as the compulsory Superannuation Guarantee charge increases from 9% to 12% some ordinary individuals will become hostage to these rules.
Superannuation pension earnings tax
From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (indexed in $10,000 increments), the balance of earnings will be taxed at 15%. Remarkably, these rules punish good investment performance. For example, the Government announcement points out that “(a)assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation. Ergo, if my fund earns 10%, I will be subject to tax once my assets are at the $1 million level. While the announcement is silent on this point, heaven help me if after 1 July 2014 I buy a capital asset and sit on it for 10 years and then realise a $1 million gain to fund my pension as a one-off. How does this get taxed? Will we be averaging over 10 years to $100,000 per year (safe) or is $900,000 of that gain fair game in the year of sale for the higher tax rate. What about the small business owners that the Government encourages to put their business property into superannuation. Is that an extra 10% clip of the ticket now when you make a gain on the sale of your warehouse? Small business already has it hard enough. If I held that business asset for 15 years outside of superannuation I would pay no tax. Surely it was not intended that the superannuation system would be an inferior option.
Has the Government forgotten the GFC when there were double digit annual declines in return which depressed superannuation balances and for which superannuation pensioners were not compensated by the tax system. Now if there is a 20-30% surge forward in one year do people who should not be punished by this system suddenly find they are subject to the system just as they earn their losses back? Surely not.
I see the need for averaging, as well as extension of small business relief, as items that will rapidly get on the drafting agenda.
Pension withdrawals themselves will not be taxed.
Special transitional rules for capital gains
- Special arrangements will apply for capital gains on assets purchased before 1 July 2014:For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
- For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
Common sense arrives for “excessive contributions”
Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold. They get taxed at 46.5% even if their personal tax rate is lower. Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error. Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.
In closing, the Government’s announced superannuation reforms are “less bad” than expected. Are we grateful that they are less bad? Yes. Can they unfairly single out and materially change the expected retirement income projections for taxpayers who have retired and generated asset balances around $1 million? Yes, but only if they invest well. Do they potentially punish people who have balances well under $1 million if they have a good year? Yes. Is mediocre performance more likely to avoid the tax than good performance? Yes. Oh dear.
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