It’s good to remember that up until the mid-1980s, superannuation was far from being a widespread thing. It was typically limited to public servants and white-collar employees of large corporations. It wasn’t until 1992 that Prime Minister Paul Keating introduced compulsory employer contributions at 3% of employees’ income across Australia, to reduce future reliance on the publicly funded Age Pension. The proposal was a ‘Three Pillars’ approach to retirement income:
- Compulsory employer contributions to superannuation funds.
- Voluntary savings, including additional super contributions and other investments.
- A means-tested Age Pension as a safety net.
If we look at the fact that within 10 years, Australia’s superannuation pool grew from $148 billion to nearly $500 billion, Keating’s goal of Aussies self-funding their retirements seemed more possible every year.
But not quite…
In the late 90s, the Labor government was short on balancing the federal budget, and the word in the financial services community was that a superannuation tax was in the cards.
Behind closed doors, the finance minister knew a ‘super tax’ wouldn’t go down well with the public. So, they called it the Superannuation Contributions Surcharge. This policy imposed an additional tax on high-income earners’ super contributions. From 1996, until it was tinned in 2005, if you earned an adjusted taxable income between $70,000-$85,000 (about $148,000-$180,000 in today’s dollars), you would have paid a surcharge of anywhere from 12.5%-15% on your super contributions.
I know people have forgotten this, and not one journalist in recent press has made this connection.
In the mid-2000s, the Howard government introduced a policy allowing individuals to make a one-off, post-tax contribution of up to $1 million into their super funds. Great outcome – we’re a nation trying to grow a concessionally taxed asset so more of us can self-fund our retirement.
Fast forward to July 2017, and the government introduced a Transfer Balance Cap of tax-free pension amounts to $1.6 million. It’s been indexed in $100,000 increments, up to $2 million from July 1 of this year.
But there’s a catch. Effective on July 1 is Division 296, imposing an additional 15% tax on superannuation earnings for individuals with balances exceeding $3 million. This tax applies to, wait for it… unrealised gains! So, individuals could be taxed on increases in asset values that haven’t been sold. Critics argue that this approach could lead to situations where individuals pay tax on paper gains that may later diminish, without any mechanism for refunds. For example, one year if you pay tax on an unrealised gain and then the asset goes down in value the following year – you don’t get any tax back, just a Division 296 tax credit against future gains.
What the government had failed to acknowledge is that anyone that has more than $3 million in their super fund has probably worked their ass off over 30-40 years to accumulate that wealth in a concessionally taxed environment.
The Kicker
Some of you reading this may not know that federal politicians like Jim Chalmers, who come up with these taxation ideas, do NOT have normal accumulations and pension funds like you and I do.
They have Defined Benefit government pension funds – a type of superannuation scheme where your retirement benefit is calculated using a set formula and not based on how much money has accumulated in your account from contributions or investment returns. They are usually based on your final average salary and the length of time you spent working for the government.
Also, a little side note: These government pension funds are EXEMPT from the proposed legislation changes above!
To be clear, I’m not saying you shouldn’t be contributing additional amounts into your super, nor taking superannuation small business exemptions when you sell your business and put the funds into your SMSF.
I’m just making it crystal clear that the rules for super today will not be the same in 5, 10, or 20 years. The problem with super is not that it doesn’t work. The problem is that it has worked too well, and as it continues to grow (it’s sitting around $4.2 trillion today, and it’s expected to exceed $8 trillion by 2035), our politicians won’t be able to resist sticking their fingers in the pie.
I guarantee it.
– Justin
Disclaimer: The information in this article is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.
