New analysis from research house Rice Warner says the economic dislocation caused by COVID-19 might lead to Canberra making unpopular policy changes such as imposing a higher tax on superannuation.

In the report, Michael Rice, said given the bloated national debt a key issue is whether super will keep its preferential tax treatment on contributions, fund earnings, and member benefit payments.

Rice, who is an executive director of Rice Warner, noted that since 2007, all governments – and the opposition at the time – have promised to allow all superannuation payments to be tax-free. “This is likely to continue, though it would be simple to pick a number (say $100,000 a year) and deem all annual withdrawals above this to be included in taxable income.  Alternatively, withdrawals from accumulation accounts held by those with more than the $1.6 million pension transfer balance could be taxed at (say) 15 per cent.”

The actuary said an easier alternative might be to tax fund earnings at a higher rate as this is less visible than personal taxes.  The obvious way to collect more taxes, he went on to say, would be to tax each fund’s earnings in the pension phase at the same rate as the accumulation phase, namely 15 per cent.  That would increase taxes from the superannuation funds collectively by close to 50 per cent.

“Remember, we now have a huge debt and the government will be looking to pay it off over a decade or so, so superannuation will no longer be as sacred as it was in the past,” he said. “However, before the government does make a tax-grab, it should look at the existing inequities in the system,” Rice said, adding that the top 100 SMSF’s collectively hold about $8.7 billion. He also noted that many SMSF’s appear to be run as businesses and that according to the Australian Tax Office, one even has a loan of $168 million against property holdings.

“Taxing the wealthy first always makes good political sense.”

The actuary said superannuation should pay its share of the burden but hoped that any changes are well-targeted, don’t make the system even more complicated, and still allow the system to do its job, which is to provide better retirement outcomes.

Meantime, Mercer’s David Knox said there were two ways that the government could tackle the debt – through increased taxation of super and reduced benefits. He thinks it likely that Canberra will “do a bit of both” in respect of the retirement system and older people, generally.

The retirement specialist said the government may increase the tax on the investment income for pensioners and it may make the age pension harder to get.

“We must also realise that investment returns are likely to be lower in the future, compared to recent years.

“Hence, in my view, for all these reasons we need to encourage greater self-sufficiency in retirement, rather than less. However, we also need to make the total system much simpler.”

In the report, Rice also raised the twin issues of giving franking credit refunds to pensioners who pay no tax – a major political issue at the last election – and whether Australia can afford the legislated increase in the superannuation guarantee from today’s 9.5 per cent to 12 per cent over the next 5 years.

According to the actuary, the extent to which superannuation contributions reduce wages, especially for different wage cohorts, is still the subject of much academic debate.   “Some within the industry now speculate that the SG might be rounded to 10 per cent (which starts from July 2021) and then be deferred until times are better for everyone.”


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