Superannuation, the ultimate government cash cow?

[sptrawler]

Thanks SP, Interesting stuff. I didn't realise super could be so generous prior to the 2006 changes.

Nevertheless, I think the bottom line is it is still the best tax shelter currently available.

Well I think that is subjective, what would be the best investment.
$3m in Super and living in a cheap house 100km out of the city, or having a full pension, $500k in Super and living 6km out of the cbd.
Because it's difficult for the wage slave to achieve both.
It depends what the individual places value on.
The ideal thing would be having the beautiful house overlooking Sydney Harbour, bucket loads of cash in Super, the kids all going to top schools, overseas holidays etc. But for many life is about compromise, because they can't have it all, so they have to chose which is the best tax shelter, the PPR or the Super.
A married couple has to have a lot of Super, to afford a better lifestyle than the pension plus pulling capital from a Super balance at the pension threshold.

I'm just plucking numbers for example purposes, I haven't looked up pension assessment scales.

 

[farmerge]

Well I think that is subjective, what would be the best investment.
$3m in Super and living in a cheap house 100km out of the city, or having a full pension, $500k in Super and living 6km out of the cbd.
Because it's difficult for the wage slave to achieve both.
It depends what the individual places value on.
The ideal thing would be having the beautiful house overlooking Sydney Harbour, bucket loads of cash in Super, the kids all going to top schools, overseas holidays etc. But for many life is about compromise.

I'm just plucking numbers for example purposes, I haven't looked up pension assessment scales.

The average Joe's dream. For mine 1/2 acre on the south coast away from the heat and flies. Not a dream but this dream is coming.
I don't think buckets of money make most people happy, it is how they want to live in their retirement that is important.
Personally being close to a major city, I couldn't think of any thing worse, apart from having a holiday by the seaside, which used to be Fremantle Gaol.

 

[sptrawler]

The average Joe's dream. For mine 1/2 acre on the south coast away from the heat and flies. Not a dream but this dream is coming.
I don't think buckets of money make most people happy, it is how they want to live in their retirement that is important.
Personally being close to a major city, I couldn't think of any thing worse, apart from having a holiday by the seaside, which used to be Fremantle Gaol.

Spot on IMO, money doesn't make you happy, it just gives you more options.
I was talking to a mate yesterday, we were going up to Perth to get his phone he had left it on the train and it had been handed in.
But we were both saying, even if we won lotto, we couldn't think of anything that we would do or buy with the money.
It's a good feeling being happy with what you have got.

 

[farmerge]

Spot on IMO, money doesn't make you happy, it just gives you more options.
I was talking to a mate yesterday, we were going up to Perth to get his phone he had left it on the train and it had been handed in.
But we were both saying, even if we won lotto, we couldn't think of anything that we would do or buy with the money.
It's a good feeling being happy with what you have got.

Ah great content and how lucky to get the phone handed in. Still a few honest types around the traps

 

[mullokintyre]

Good write up by Don Hamson in Livewire Markets

Earlier this week, Jim Chalmers announced a new Government policy set to double the concessional tax rate, from 15% to 30%, for superannuation balances over $3 million.

The move would begin in the 25/26 financial year.

Given this change was not flagged before the 2022 election, it is somewhat comforting that it’s only scheduled to take effect after the next election (despite being passed into law in the current term).

This will give voters the chance to have their say. And it will no doubt give the Liberal election spin doctors some very strong ammunition.

There does, however, seem to be one major flaw.

The Plato Investment Management team were surprised the Treasurer indicated this cap will not be indexed over time. We got some affirmation on this view at a Pinnacle Investment Management event this week where we ran a poll – 84% of the 137 financial advisers and wholesale investors who responded in Sydney and Melbourne agreed the cap should be indexed.

Why is this a problem?

Currently, the move is expected to impact 80,000 people, or just 0.5% of super accounts with balances of over $3 million (in today’s money).

However, lately, you might have heard about inflation.

It is currently running at 7.8% and will erode the real value of the $3 million cap over time, meaning that a lot more than 0.5% of superannuation balances will eventually be taxed at 30%.

We would like to see forecasts of how many people will be impacted by this change in the future. How many people in the superannuation system today will be impacted by this cap at some time in their superannuation journey?

ranking credits remain critical for retirees​

Other than the indexation issue, we think it is a much better policy than Labor’s proposed change to franking credit refunds they took to the 2019 election, which we wrote about extensively.

Our analysis highlighted that a ban on franking credit refunds would have impacted many ordinary retirees. Targeting very large superannuation balances is, we believe, a much better, fairer and politically pragmatic approach.

Below we show a chart of what the value of $1 of pre-tax earnings is worth on an after-tax basis for various tax rates, depending on whether those earnings come in the form of a fully-franked dividend, a long-term capital gain, a short-term capital gain and unfranked income.

For superannuation balances over $3 million, you can observe the after-tax value of $1 of fully-franked dividends falls from $1.21 to $1 as the tax rate increases from 15% to 30%.

Similarly, the after-tax value of long-term capital gains falls from $0.90 to $0.75 (a 15% flat tax is imposed on superannuation balance increases with no discount), and the value of both short-term capital gains and unfranked income falls from $0.85 to $0.70.

This implies that fully franked dividends are still the most tax-effective method of generating earnings for this segment of the market.

After-tax value of $1 of pre-tax earnings
Source: Plato Investment Management & ATO (using 1 July 2020 tax rates including Medicare levy).
It also highlights that superannuation tax rates will still be generally lower than effective tax rates for the top two tax rates for individuals. Super is still likely to be tax-effective, just not quite as tax effective for those with balances over $3 million.

One caveat is that capital gains – short, long and unrealised – will all be taxed at 15%. This means that the tax on long-term capital gains will be 25%, which is a slightly higher rate than the current long-term capital gains tax rate for the highest-taxed individuals (23.5%).

We also think there might be some flaws for balances that flip-flop around the $3 million mark, but hopefully, industry consultation can fix that issue.

This aside, we do truly believe that the great flaw in this policy is that the Treasurer is not looking to index the cap. It’s an enormous oversight.

Inflation will mean that many, many more individuals will be hit by this cap in the future if it is not indexed to inflation.

The other big question for the majority of retirees is - what other changes is this Government likely to make next?

Mick

 

[dyna]

the bottom line is it is still the best tax shelter currently available.

For sure, no doubt about that in my mind, but as things stand , only up to the $ 3 mill each, cap. Then bail out with the the difference between the $ 1.9 Million tax free pension account ( from July 1st 2023 ) .
I pity those poor buggers ( oops , they're "rich ", right ? ) with large amounts of their business assets locked up in the SMSF with members being a long way from retirement. They're now stuffed.
How did Robbie Burns put it ? " The best laid plans of mice and men..."

 

[mullokintyre]

We had our business premises in the SMF, but fortunately sold it a few years ago, otherwise I would have been even more pissed off.
Mick

 

[dyna]

Joke of the day.

Opposition Leader , Dutton promises to repeal Labor's super changes if the Libs win the next election.

C'mon Pete , have you seen the bookies' odds? They are giving your lot ,only a 25 % chance for 2025.
Might have to push that big promise out to the following election, after that , old mate.
I could live with Labor in power for the next 10 years so long as the loopy Greens don't ever get to run the place. ( Those dimwits scare the bejesus outta me. )

 

[Belli]

OK, now I get an idea where they are heading with DB pensions. From the SMH today.

"The government’s changes will extend to people who rely on defined benefits schemes for their retirement income, including public servants, federal MPs elected to parliament before 2004 and the federal judiciary.

Finance Minister Katy Gallagher said the government would take industry advice on how to bring defined benefit schemes within the planned reforms.

She said one area of discussion would be taxing a defined benefit scheme’s income stream the same as the equivalent earnings on a $3 million accumulation fund. From July 1, people aged between 65 and 74 have to draw down at least 5 per cent of their fund, which equates to an income of $150,000 a year. The drawdown rate increases with age.

Another discussion point would be how defined benefits schemes were valued relative to the $3 million threshold for accumulation funds."

If you got a DB Pension and an SMSF, consideration could be given to ditching the SMSF. Consider if someone is on $120k pa DB. Multiply that by 16 and you get $1.92m. However, @ 5% that is $96k (albeit tax free). To get $120k pa you would need $2.4m. If you also have an SMSF valued at say $2.0m.....well, if they summed the two, it's possible you could get into the 30% additional tax area which is based on a change in value from one year to the next as per the example in the Treasurer's release. Yes, it's a tax on unrealised gains folks. And it's an additional tax over an above the fund's earnings.

 

[farmerge]

Joke of the day.

Opposition Leader , Dutton promises to repeal Labor's super changes if the Libs win the next election.

C'mon Pete , have you seen the bookies' odds? They are giving your lot ,only a 25 % chance for 2025.
Might have to push that big promise out to the following election, after that , old mate.
I could live with Labor in power for the next 10 years so long as the loopy Greens don't ever get to run the place. ( Those dimwits scare the bejesus outta me. )

Unfortunately the loon brigade are everywhere these days.

 

[divs4ever]

Joke of the day.

Opposition Leader , Dutton promises to repeal Labor's super changes if the Libs win the next election.

C'mon Pete , have you seen the bookies' odds? They are giving your lot ,only a 25 % chance for 2025.
Might have to push that big promise out to the following election, after that , old mate.
I could live with Labor in power for the next 10 years so long as the loopy Greens don't ever get to run the place. ( Those dimwits scare the bejesus outta me. )

25% ?? wowee !! i wasn't even aware he was picked as opposition leader

i suppose after 2020 they weren't game to give super-spreader Pete a shadow health ministry

i remember Pete for all the wrong reasons

where the heck is that drover's dog the Bill Hayden kept talking about

 

[sptrawler]

There appears to me, to be a lot of small levers pulled, that could have opened huge flood gates, let's watch.
I always remember what the wife said, when she was at uni doing business management, they were playing with economic inputs to the GDP programme.
She couldn't believe how much affect, small changes to the input parameters, had to the economic outcomes.
Well I'm waiting with baited breath. ?

 

[farmerge]

Hmm

25% ?? wowee !! i wasn't even aware he was picked as opposition leader

i suppose after 2020 they weren't game to give super-spreader Pete a shadow health ministry

i remember Pete for all the wrong reasons

where the heck is that drover's dog the Bill Hayden kept talking about

Isn't he the Opposition Leader albeit with no teeth. and running on 3 legs

 

[farmerge]

OK, now I get an idea where they are heading with DB pensions. From the SMH today.

"The government’s changes will extend to people who rely on defined benefits schemes for their retirement income, including public servants, federal MPs elected to parliament before 2004 and the federal judiciary.

Finance Minister Katy Gallagher said the government would take industry advice on how to bring defined benefit schemes within the planned reforms.

She said one area of discussion would be taxing a defined benefit scheme’s income stream the same as the equivalent earnings on a $3 million accumulation fund. From July 1, people aged between 65 and 74 have to draw down at least 5 per cent of their fund, which equates to an income of $150,000 a year. The drawdown rate increases with age.

Another discussion point would be how defined benefits schemes were valued relative to the $3 million threshold for accumulation funds."

If you got a DB Pension and an SMSF, consideration could be given to ditching the SMSF. Consider if someone is on $120k pa DB. Multiply that by 16 and you get $1.92m. However, @ 5% that is $96k (albeit tax free). To get $120k pa you would need $2.4m. If you also have an SMSF valued at say $2.0m.....well, if they summed the two, it's possible you could get into the 30% additional tax area which is based on a change in value from one year to the next as per the example in the Treasurer's release. Yes, it's a tax on unrealised gains folks. And it's an additional tax over an above the fund's earnings.

View attachment 154000

Hmm After Covid one would start to think that the Feds are looking to restore some moolah into the Treasury box.
Sly, Underhand exactly what we associate Govts with.

 

[divs4ever]

Hmm

Isn't he the Opposition Leader albeit with no teeth. and running on 3 legs

didn't have a lot of respect when i was a constituent in his electorate , only a touch higher than Peter Slipper from memory

and Peter was a 'Captain's Pick ' by John Howard and Tony Abbot if gossip i was getting from the LNP was correct back then

 

[divs4ever]

Hmm After Covid one would start to think that the Feds are looking to restore some moolah into the Treasury box.
Sly, Underhand exactly what we associate Govts with.

that is what usually happens , waste the taxpayer funds as an excuse to grab even more

 

[Belli]

Hmm After Covid one would start to think that the Feds are looking to restore some moolah into the Treasury box.
Sly, Underhand exactly what we associate Govts with.

Presently it's just thought bubbles. I have no idea what will actually happen. One of the major problems with closed DB pension schemes is the increasing cost. Not in respect of the pensions themselves on a year-to-year basis but future liabilities as no new money from members is coming into the schemes. It was one of the reasons for the establishment of the Future Fund which was to offset those costs. DB schemes dissolve over time as each pensioner shuffles off this mortal coil.

My gut feeling for the majority of people contributing to superannuation is aim for as much as you can up to but not exceeding the balance cap and build up income producing assets outside of superannuation as well. Others will, quite rightly, have a different viewpoint.

However, as a selfish disclaimer, as I sell the assets in accumulation phase and shift my account-based pension to an industry fund, any interest I have will go to zero. Then it will be a monthly amount to hit my account as well as receiving dividends/distributions from personal holdings. I'm done and dusted concerning myself about much apart from other activities which I enjoy - which doesn't include share price movements. Shameful I know.

Once I pass from this earth, my personal assets will be sucked up into a Discretionary Testamentary Trust and whatever remains in superannuation will be dealt with by my legal personal representative via the superannuation death benefits proceeds sub-trust in my Will.

 

[Ferret]

I've been trying to get my head around the application of the additional 15% tax to unrealised capital gains and whether this is double taxation of capital gains. The conclusion I've reached is that it isn't really.

Say you have $3.1m in super and the $0.1m is used to buy shares. In 2 years time the shares have doubled in value, but the rest of your super hasn't changed in value. Under the new proposal, you will pay 15% tax on the unrealised capital gain of the shares, ie $15k over the two years.

If you now sell the shares you will pay 10% capital gain on the shares, ie $10k.

So under current rules you would be paying $10k tax on the profit from the shares. Under the new rules you would be paying $10k + $15k.

This is an extra 15% on income from balances > $3m, so it is exactly as the proposal intends. It is not double cg taxation plus an additional 15%.

 

[divs4ever]

i see one tiny facet missing from this discussion is indexation ( to take CPI/"inflation" into account )

is the Federal Government counting on bracket creep to make this income effective

 

[Ferret]

i see one tiny facet missing from this discussion is indexation ( to take CPI/"inflation" into account )

Chalmers is quite deliberately leaving out indexation so that the paring back of super tax concessions increases over time.

Whether this is a fair thing depends on where you think the line should be for deciding if someone's super balance makes them "rich".

Personally, I feel the gap between rich and poor is getting too large in our society, so I don't object to some actions to correct this, even if it will mean I have to pay some more tax.

I don't like the inconsistency of the transfer balance cap being indexed and the 15% extra tax balance cap not being, but I guess I can live with this.