Australians earning high incomes, who have large balances in collective superannuation funds, will have less confidence in the system following tax changes in the federal budget even in the context of recent laws boosting workers’ mandated rate of savings, according to Tria Investment Partners.
Superannuation’s viability has declined on a “slippery slope” under federal Labor even after the rate of compulsory savings was boosted from 9 per cent to 12 per cent of workers’ pay in March, Tria says. The halving of concessional contribution limits and the recent budget’s doubling of the super-contributions tax to 30 per cent for people earning more than $180,000 make super less attractive for at least 209,000 Australians on high incomes.
Such moves, which can be seen as making the system more equitable, may dissuade high-income earners from using superannuation as their major way of investing life savings, Tria says. Collective super funds are already losing wealthy members to self-managed super funds, which accounted for $392.7 billion in assets at September 30, 2011, according to the Australian Prudential Regulation Authority.
The maximum contribution an individual can make to super under the current concessional cap is $25,000 minus 15 per cent, or $21,250, Tria calculations show. A person aiming to commit 12 per cent of their pay to super can have a maximum annual income of $177,000, slightly less than the annual pay of people whose income is taxed at the highest marginal rate of $54,550 each year, plus $0.45 for each dollar earned beyond $180,000.
“This is a pretty bad outcome for super. Not only do funds start losing their effectiveness to serve members’ retirement needs once they hit the top marginal tax bracket, there is increased risk that those members – who have some of the highest balances – will defect if they have to go elsewhere for tax advice and non-super investments,” Tria says.
High-income earners enjoy no taxes in retirement. But the new tax rules play to the strengths of accountants, financial planners, investment banks and fund managers as financial-service providers to wealthy people. These businesses can provide alternative savings funds, such as trusts, and assets that incur low taxes, such as stocks paying franked dividends, low-turnover stock funds, exchange-traded funds and real estate.
“This is a good example of failing to consider the cumulative effect of small changes,” Tria says. “Each change has been sold as minor or affecting only a small number of people. But put them together, and here we are questioning the future role of super for anyone on the top tax bracket.”