Federal parliament resumes this week with a new super tax set to be legislated that will effectively squeeze many private investors out of the superannuation system.
From this point onwards, it’s not just wealthy investors who will reduce exposure to super. Younger investors – who aspire to be wealthy – will also be cut off from the system because topping up their super contributions will often no longer be worth the trouble.
The new super tax is not indexed for inflation. This means that every year more people will be trapped in this new tax net.
Many observers thought the government might relent after its election win and announce the controversial new tax would, after all, be indexed.
But super specialists have consistently pointed out that the existing wealth tax for super contributions – known as Division 293 – has not been indexed since it was introduced by former treasurer (now Cbus chair) Wayne Swan back in 2012.
Under Division 293, contributions to super made by anyone earning over $250,000 face an extra 15 per cent tax – in reality, this measure creates an effective 30 per cent super contributions tax for higher earners.
Now the government is adding a second tax – the new super tax – also creating an effective 30 per cent tax rate, this time on amounts over $3m. (The 30 per cent comes from the new super tax which is 15 per cent on earnings on amounts above $3m and the existing 15 per cent tax for amounts above $2m.)
But worse still, the new super tax is based on unrealised gains, which means investors could be taxed on paper profits they never actually received.
Faced with superannuation taxes of 30 per cent on both contributions (Division 293) and on large amounts held in super (Division 296), investors of all ages will now look outside super, because the rates on tax shelters such as family trusts are not very different.
Moreover, the changes will ultimately narrow the attractions of the super system currently hailed as a model all over the world. Professor Jamie Alcock, an Australian who is a maths and finance professor at the UK’s University of Birmingham, says: “The combined impact of these changes won’t happen overnight – it’s more like an attack by stealth.
“I think it’s disturbing to see these developments and when you put them together it reduces the pathway to financial independence that had made our super system world-leading.”
Analysts also point out that the gradual increase in compulsory super tilts the system in favour of big super and chokes off voluntary contributions or top-ups, which had been encouraged across the advice system for many years.
As Alcock explains: “Even for those who did not make top-ups, it’s the elimination of the option that again reduces the attractions of super.”
Since July 1, the level of compulsory super (the Superannuation Guarantee Charge) is 12 per cent (up from 11.5 per cent). However, the cap on how much you can voluntarily contribute per annum on a concessional basis to super has remained unchanged at $30,000.
Again this is another move that squeezes out private investors and ensures compulsory super payments increasingly dominate the system.
In reality, tax effective super contributions cut out for salary earners above $250,000 – at which level the SGC is equal to the current contributions cap of $30,000. Anyone over this level making super contributions gets hit with Division 293 – bumping up the tax on money going in to super to 30 per cent.
Since Division 293 is not indexed, every year thousands more fall into this category.
Once the new super tax is passed by parliament, similar mechanics will kick in because Division 296 is not indexed either.
The new super tax is expected to bring in $2.3bn per annum when it is up running.
Of course, it will do no such thing, because older investors will move money out and younger investors will plan to divert savings elsewhere.
The super system as we knew it is over. Meanwhile, big super – especially industry funds – gain more control each year over a system that becomes increasingly mandatory.
James Kirby hosts the twice-weekly Money Puzzle podcast.
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