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Issue #1588      April 10, 2013

Your Super

What the government is doing

The Gillard government last week attempted to allay fears that it was about to raid workers’ superannuation savings and that workers with an income of more than $100,000 would be hit. It announced a number of changes to the superannuation system, none of which will directly tax the income drawn from a fund in retirement.

The speculation, which was proving to be politically damaging for Labor, was over expected changes to the superannuation system in the forthcoming May Budget. The superannuation industry was threatening a multi-million dollar campaign similar to the successful campaigns waged against other government reforms by the mining and gambling sectors. It had the backing of the corporate media and Opposition leader Tony Abbott.

Labor had also come under pressure from trade unions with high paid members and Labor back-benchers as well as the superannuation industry. It backed off from its original intent of making substantial reforms to the superannuation system, instead opting for provisions that mostly affect the wealthy.

The government got the media headline it wanted: “Super hit on wealthy investors” and for the time being appears to have allayed workers’ fears that their super is about to take a hit. But the basic inequities built into the system remain, as do all the uncertainties that workers face on retirement as to what income they might have. An already complex system is set to become even more complex if the changes go ahead. The government has not indicated if it will put them before Parliament before the elections.

Taxation of super

There are three basic points at which taxation can be applied: when payments are made into a superannuation fund; on earnings in a fund; or on income drawn as a benefit or pension from a fund or annuity.

At present contributions to a fund are taxed. The compulsory nine percent paid by employers (to be raised to 12 percent) and any additional amount (“salary sacrifice”) out of salary or wages up to a cap of $25,000 is taxed at a flat rate of 15 percent. It is referred to as a concessional payment – it has received a tax concession if the employee’s marginal rate is higher than 15 percent.

The government has decided to raise the salary sacrifice cap to $30,000 for people over 50 years of age and possibly for all individuals to $35,000 by 2018. Contributions over and above the cap paid from untaxed salary or wages are taxed at 46.5 percent regardless of income. (46.5% equals the highest marginal rate of 45% plus 1.5% Medicare levy.)

Additional payments up to $150,000 per annum are possible out of pre-taxed income or savings. These are referred to as non-concessional contributions – there are no tax concessions related to these payments.*

The period when an employee is working and making contributions to a fund is known as the accumulation phase. Income from investments in the fund during the accumulation stage is also taxed at a flat rate of 15 percent. This tax is indirect in the sense that it is paid by the fund on its collective earnings and the net income for each product is allocated to members. The tax payment is not recorded on members’ statements.

Taxation of pension fund

During the retirement phase, there is no tax on the income on investments and no tax on income drawn from the fund or as a pension from an annuity. The 15 percent tax on earnings in the superannuation fund cuts out during the retirement phase.

The government has decided to tax income over $100,000 on investments within the fund during the retirement phase at 15 percent. This would affect people with savings in the region of $2 million if a five percent rate of return were made on investments. Not that funds always make such a return; some years they might lose income, some years it might be more.

This is still a massive concession compared with the 46.5 percent tax that might have been paid on the same income outside of the fund. For a person whose other income is over $180,000 the concession on the first $100,000 is $46,500 alone! On the remainder of earnings inside the fund it is 31.5 percent.

Compare this with a single age pensioner struggling on a pension of $21,076 a year! The latest changes do little to reduce let alone remove the obscene benefits received by the wealthy.

This will affect a very small percentage of the population and at this stage will not raise much more than two or three hundred million dollars.

It will hardly fund a national disability insurance scheme or Gonski reforms to education which was the original intent of budgetary changes to super.

Technically, the government has kept its promise not to tax income drawn from a pension fund; it will be doing it within the fund. But it has raised questions about the precedent it creates and the possibility of the $100,000 being reduced to affect low income retirees.

The non-taxation of income within the fund and on withdrawal was introduced by the Howard government, as a means of tax evasion for the wealthy. The rorting of the system was even greater before the caps on contributions were introduced. The super scheme is one huge tax evasion rort for rich and a nightmare for ordinary workers.

Pensioners hit

There are a number of other changes in the announcement last week which have received less publicity. One of these is a proposal to count income on savings within a retirement fund in means testing pensioners. They will be deemed to have received that income even if it remains in the fund. At present income outside a super fund is means tested to be eligible for a part or whole age pension.

This is a serious move that could affect pensioners who will be deemed to have income they do not have in their pockets. It is set to come into effect on January 1, 2015 and will apply to all new superannuants and any changes to existing investments in funds. It will not apply to pre-existing arrangements which remain in place.

The government plans to set up an “independent” body, a Council of Superannuation Custodians which will be “above politics” like the Reserve Bank, and advise government on future policy. The comparisons with the Reserve Bank are worrying. Its board members represent the big end of town and absolve government of key responsibilities. It amounts to a form of policy development by the corporate sector, not the public sector and elected government.

It is part of a trend towards direct rule by capital. The big three mining corporations drew up the final version of the mineral resources rental tax, which not surprisingly has cost them peanuts if anything at all.

The latest proposals also continue a trend where every couple of years the system is modified, making it difficult to plan and creating ongoing uncertainties. The changes do not alter the basic inequalities and risks involved in the present system.

Do-it-yourself super funds, largely the domain of the rich, have proven extremely valuable to some as a means of avoiding capital gains tax, such as on the sale of real estate. The government is going to close that loophole but is giving existing holders of assets until July 1, 2024(!) to rearrange (sell and pocket gains, etc) their assets before it kicks in!

Inequalities continue

The system builds into retirement the inequalities that existed during people’s working lives. In particular, it disadvantages women who are more likely to be employed on low incomes, as casuals or take time out to raise a family or as carers.

The flat tax of 15 percent is regressive. It means that the wealthy pay at the same rate in the dollar as the poor. Even worse, a low income worker whose income would otherwise be untaxed or taxed at less than 15 percent is forced to pay a tax of 15 percent on super contributions.

The superannuation tax concessions being paid by the government are expected to reach $32 billion in the financial year 2012-13 and reach $45 billion by 2015-16 – surpassing the amount spent on the age pension.

As the government correctly points out, the majority of these billions of dollars go into the pockets of the most wealthy. Taxing a few rich people a few more dollars when they are still benefiting from billions of dollars in tax concessions every year solves nothing.

There is a low income superannuation contribution from the government of $500 for those on low incomes and a co-contribution of up to $500 (cut from $1,000 by Labor), both of which Abbott has promised to repeal!

Pool of capital

In addition to winding back the age pension, the superannuation system had the aim of providing the financial sector with a large pool of investment capital. There is now over $1.5 trillion in super savings, much of it at the disposal of the financial institutions. (Some is managed by the wealthy themselves with their own do-it-yourself schemes.) This is larger than the amount of personal savings in bank deposits.

Not surprisingly, any reform that might act as a disincentive to people putting more money into super brings a strong response from the industry. It is a highly lucrative industry with layers of profit being creamed off directly in “management” and other fees as well as the power and profits that arise indirectly through the management of large sums of money and manipulation of stock markets, etc. The industry is reaping around $20 billion a year in fees from fund members.

The whole system is geared to driving savings into what are in reality privately managed funds. Even on retirement there is a tax incentive to leave retirement savings in a managed fund. If a retiree withdraws their super then every cent of income from bank savings, bonds, shares or other investments is taxed at that person’s marginal rate. Left in a fund, the income is tax free! Although this might now change for incomes over $100,000.

Many workers whose savings are invested in the default “balanced” account or other investment options with similar reassuring names, would be surprised to learn that some of these accounts are rated as “high risk” by the funds. Their main focus of investment is in shares, including a large proportion on international markets. The average return over the past 10 years on a number of these funds is far less than the government’s estimate of five percent.

The system is a minefield and workers should not be expected to be ploughing through the options, weighing up risks and possible returns, and gambling with their retirement security. There are no guarantees as to what will be in the fund on retirement. It all depends on the gyrations of casino markets in a boom-bust cyclical capitalist economy.

The present superannuation system puts workers’ savings at risk and provides the rich with a huge tax avoidance trough for them to feed on. The financial sector which manages workers’ superannuation investments takes no risks, but rakes in their fees regardless of performance.

The old paid benefits superannuation schemes provided retirees with a guaranteed level of income for the rest of their life. They have largely been replaced by a system of individualised accumulation accounts in industry and other funds.

Workers pay taxes all their lives and are entitled to retire in dignity with an adequate income.

The Communist Party of Australia is calling for the abolition of means and assets testing on age pensions and for the establishment of a National Superannuation Fund which workers could join and transfer their super savings to on a voluntary basis. At present the government is handing out billions of dollars on the basis of the wealthier you are the more you get towards your retirement.

This Fund would offer a paid benefits scheme to members (regular fortnightly payment on retirement) and invest its savings in socially beneficial projects such as public transport, public housing and alternative renewable energy development and production. It could be used for job creation instead of being gambled on stock markets in Australia and overseas.

* The system is far more complex than as outlined above. For reasons of space and to spare readers, full details have not been provided. There are a number of age-based variations.

NB Nothing in this article should be seen as giving advice. Legally, The Guardian cannot provide financial advice.   

Next article – Editorial – Korean Peninsula – who is being “bellicose” and “provocative”?

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