The Henry Tax Review – Superannuation

by John Tutt on May 3, 2010

As you may have already heard, the Government’s Stronger, Fairer, Simpler: Tax Plan for our Future was released yesterday afternoon. There has already been a lot of criticism over watering down of the recommendations given in the Henry Tax Review which the government has had many months to dissect and digest.

Given that there is a federal budget due in less than two weeks, I thought it might be useful to look at how the government’s recommendations will affect our superannuation accounts and whether there is anything to cheer about in this announcement. I will address other issues raised in the recommendations in later posts. In regards to superannuation, there are four main areas that were addressed.

The compulsory superannuation payments made by your employer on your behalf (superannuation guarantee or SG), will be gradually raised from 9% to 12%. This will commence in 2013 and will max out at 12% in 2019.
Currently, employers only need to make these SG payments to workers up to the age of 70. This age restriction has now been increased to age 75.
The government has introduced a “super subsidy” for low income earners. Currently, SG payments are taxed at 15% on their way into super. If you earn up to $37,000pa, the government will make a payment of up to $500 which effectively means that they are refunding any superannuation contributions tax that you may have paid. This is calculated as $37,000 (Gross Income) x 9% (SG) x 15% (Contributions Tax) = $500.
In the last budget, the government halved the amount of contributions that you could make to super. The contribution cap for concessional (tax deductible) contributions is $25,000 per person per annum. People aged over 50 however, were allowed to make $50,000 per annum. This was a temporary measure that was due to expire on 1 July 2012. The government has announced that this increased cap will remain permanently for those over age 50. However, this will only apply if you have a superannuation balance of less than $500,000.

So what do we think of the changes? Anything that encourages people to have additional funds to live off in retirement has to be a positive thing. With the aging of the population, the ratio of retirees to workers will increase dramatically in the coming years. This means we will have fewer workers paying tax and more retirees needing age pension payments to survive. The government needs to do all it can to get more of the population funding their own retirement.

The timing of some of the recommendations is a concern. Given the length of time until some of these recommendations are implemented increases the risk that future governments may amend recommendations before they come in to affect. The increased SG payments for example, don’t commence until 2013. However, this is understandable as these payments are made by employers and will put additional strain on their cashflow. The introduction of the increased SG payments is set to coincide with a tax cut in the company tax rate.

Making the temporary contribution cap for those over age 50 a permanent arrangement is very welcome however, the restriction to those with a balance of less than $500,000 is somewhat concerning. $500,000 is not a huge sum to retire on. For example, a couple both aged 60,with combined super of $500,000 who drew down $40,000 pa in living expenses would find that their superannuation funds run out in 20 years*. This sounds like a long time but life expectancy for the male is 25.26 years and the female 28.35 years. Where there is an imbalance in a couple’s superannuation savings, it may be that a strategy known as superannuation splitting will help to overcome this new contribution cap restriction.

So overall, I think the new recommendations are very welcome. If you would like to contact a financial adviser to discuss anything announced in the governments new Stronger, Fairer Simpler tax plan, please feel free to contact me and I will get back to you shortly.

*Assumptions -- investment return net of fees 7%, pension indexed @ 3%,

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