That’s not a bug …

Hysterical article in the AFR this morning about Super and tax rorts:

A lot of these strategies involve “shuffling money” in and out of super funds to trigger a lower tax rate, or glean tax deductions on personal expenses.

The most popular is 55-year-old executives who start drawing a tax free pension from their fund, while tipping their entire salary into it and effectively reducing their taxable income from 46.5 per cent to around 15 per cent.

Another common strategy is to put money into super to get a tax deduction, then pull the money straight back out tax free.

Well yes, I’m not surprised. That is what the 2006 Howard-Costello Super reforms were designed to facilitate. This is what I wrote in the AFR at the time:

To maximise the value of super, the government should have abolished the contributions tax. The government, however, is not looking forward 40 years – it’s looking at the here and now.

A large number of individuals have probably not saved enough for their retirement and so need to keep working. This policy waives taxation on their forced savings. Of course, people should be allowed to work for as long as they are willing and able. By abolishing tax on lump sums, people will also be able to party at the taxpayers’ expense. This component of the policy should be dropped quickly, and quietly. This policy is a short-term fix. In fairness, it is the best short-term fix, but one that will be frequently revisited.

Okay – so the 2006 reforms haven’t been revisted – but they should be. They do create massive fiscal problems in the future.

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18 Responses to That’s not a bug …

  1. Bruce of Newcastle

    The most popular is 55-year-old executives who start drawing a tax free pension from their fund, while tipping their entire salary into it and effectively reducing their taxable income from 46.5 per cent to around 15 per cent.

    Ah, its good to know that executives are on $30,000 a year. What good value they are! /sarc

    Ms King is either clueless or a liar. I will let her choose which.

  2. dianeh

    The most popular is 55-year-old executives who start drawing a tax free pension from their fund, while tipping their entire salary into it

    This is bullshit. There are caps on the concessional contributions (35000 for over 60,s and from July to over 50′s as well), so an ‘executive’ cannot put their entire salary through their super. This is called a TTR pension (transition to retirement).

    Agree or disagree with TTR pensions, but to discuss we must start from a true premise when talking about it, and it is not an ‘entire salary’ that can go through the TTR pension.

    ISinc was right about taxing lump sums. I know a few people who have blown all of their super as they thought it would stop them getting the pension. It wouldnt have, as they didnt have enough and it would have been handy for them to pay bills etc in the future. But they would have needed professional advice to know that, and most people dont get it. The more complex the super system and the welfare system, the harder it is for people to do what is in their best interests.

  3. H B Bear

    Keating’s superannuation revolution (as amended by Howard-Costello) is looking more and more threadbare every year.

    Inadequate levels of compulsory taxed contributions going into high cost funds, with a forecast four in five people still able to receive a full or part-pension in 30 years time.

    What a crock.

  4. .

    Not only a crock, completely vulnerable to sovereign risk and enforced a compulsory system which virtually all full time workers had their own private plan anyway (55% of the workforce at the time IIRC already had superannuation).

    It was simply a another form of revenue, and at the time it was set up, was taxed regressively, madly enough.

    I outlined on the 15 May 2012 how superannuation was actually a socialist plot to enable unions etc with easy funds or control over capital projects.

    See more:

    http://catallaxyfiles.com/2012/05/15/guest-post-is-superannuation-a-socialist-plot/

  5. Pete

    Rather than complaining that it isn’t taxed, wouldn’t it be fairer (within policy) to include the lump some payment as generating an assumed income stream (in a similar way to actual funds left in a super fund would be) in lifetime pension means tests, whether or not assets are maintained at this level?

    At some point there would have to be a transition, but it would be a way to reduce pressure on the pension (in the longer term) and also do what some people suggest is needed to develop a viable annuity stream market.

  6. Infidel Tiger

    At the very least everyone should switch to SMSFs. They may never mature, but keeping the money away from unions will keep you warm in your twilight years.

  7. Mel Gibson

    I thought this comment from another blog was interesting:

    Increasing the preservation age is a favourite policy of conventional economists.

    If one looks just at the surface, it is superficially appealing. It is so easy to argue that superannuants should not be able to withdraw their “tax advantaged” savings, spend the lot, then go on the pension.

    If, however, one thinks a little harder and considers the plausible realpolitik consequences, then this policy begins to look very, very dangerous.

    Start by asking yourself why Australians are prepared to pay an average fee of almost 1.25% pa for the management of their superannuation when there are funds available which charge less than half that amount and whose performance is no worse.

    The reason is human nature. Superannuation “savings” are so divorce from the everyday life of most people that it is hard for them to associate the fees they are paying with the benefit they receive.
    This comment is not another rant about superannuation fees. Rather, it is about this peculiar and well-documented aspect of human nature, and the ways in which it might be exploited by the ruthless.
    Imagine now that it becomes impossible to withdraw money from the system. Imagine that the best one can do is to convert it into an annuity . . . an annuity which must comply with relevant government legislation.

    You now have a huge pot of money which no-one can ever ask to have paid out to them in full.
    Now ask yourself this: How long will it be before some politician takes a look at that Great Big Pot of Money and thinks to himself, “Mmm. Mmmmmm! It would be really, really convenient if we could tap into that pot and direct it into something useful. That would be much more palatable than having to raise taxes.”

    In fact, those who were not born yesterday will remember that such a scheme existed in Australia until 1985. It was called the “30/20 Rule”. Complying superannuation funds were required to keep 30% of their portfolio in government and semi-government bonds, of which 20% had to be Commonwealth government bonds.

    The ”Ghost of 30/20” has been seen wandering the corridors of power lately. There is a notion abroad that complying superannuation funds should be forced to “invest” a certain proportion of their portfolio in private infrastructure projects. We all know how Mr Abbott and Mr Hockey love pushing their favourite infrastructure projects!

    Of course, such mandatory investment is necessary only if the rate of return is less than that on comparable investments that are not mandatory. And as soon as it becomes mandatory, the issuers will adjust their rates of return accordingly. In short, it will become a tax.

    And the burden to superannuants – like the excessive fees they pay – will be so divorced from their everyday life that they’ll hardly know what is happening.

    Now, anyone with the slightest sensitivity to realpolitik will see where this is leading. It is leading to the greatest milch cow in the history of Australia.

    Why “tax” people [I say “people” but it really only applies to wage and salary earners; the rich don’t earn their money that way] when you can get them to “save” 12% of their incomes . . . and bleed the money off their captive superannuation funds.

    Through successive governments – Labor and Coalition – Australia has been slowly but surely developing a privatised taxation system.

    Instead of wage and salary earners [the rich being exempt] paying taxes to the government to provide basic services, they are having their income streamed off into superannuation funds (where the ticket-clippers take their cut), thence into infrastructure funds (where the ticket-clippers take their cut), and thence into privatised infrastructure projects (where the financiers take their cut) . . . to provide the very same services that were once provided quite cheaply by the government itself!!

    And once it begins, it is simply too much of a temptation not to keep returning to the trough for more.
    I have made the point before: this is a throwback to the “ancient regime”. It is a throwback to Colbert and the ferme generale.

    It is a system that will eventually collapse under the weight of its own inefficiency.

    (And never forget what happened to the tax farmers of the ferme generale. They met their end on the 8th May 1794. At the sharp end of the guillotine.)

  8. mundi

    The y will just keep tightening the regulations around SMSF until the compliance costs are many thousands per year.

    The biggest super scam of all is the defined benefit funds which the government allowed to continue instead of making then shut down and pay out.

    How’s that defined fund in accadamia doing, you know the one that isn’t even 50% funded. Still waiting for a government bail out? How is it even legal for it to operate?

  9. Milton Von Smith

    They do create massive fiscal problems in the future.

    You may be right, but neither Treasury nor the Government seems to think so. They are projecting that tax revenues from superannuation funds will grow by nearly 50 percent in nominal terms over the next two years.

  10. Sinclair Davidson

    Milton – read the paper at the link.

  11. Fess

    The author doesn’t know much about super. All contributions above $25000 pa are above the concessional limit and are taxed at your full marginal tax rate. No one is putting all their salary in at 15% tax and pulling it out tax free unless they’re earning less than $25000. There are all sorts of limits on how you take your super out, and you can’t take it out in great lumps unless you paid it in after tax. This theory that super is costing other taxpayers is a furphy. If you pay into private super you can’t accumulate enough to retire unless you contribute about 50% of your earnings throughout your working life by my rough calculation and personal experience. Not sure in Sinclair D missed the detail of the concessional limit before full marginal tax rate applies – must look at his paper and see what he says.

  12. Fess

    Oops – I don’t think Sinclair missed it at all he seems to be saying there should be No contribution tax. I agree because it’s the only way anyone will accumulate enough super to retire before the age of 120, let alone 70.

  13. Milton Von Smith

    I have read it. It looks like you are committing the same error that Treasury does it its TES estimates – you are assuming no behavioural response?

  14. Sinclair Davidson

    Milton – my argument is that there will be a budget problem in the 2030s, not in the next two years as your comment at 2.05 suggests.

  15. Bill

    That AFR article is hysterical – that is supposed to be a financial journal of record, but Green Left Weekly could not have got it any more wrong. No wonder Fairfax are going to have to close most of their dead trees.

  16. Fess

    The afr journalist, if you read her whole article, makes a big issue of ‘rich’ people (clearly that’s a black mark against them for a start) accumulating $5million in their super. She assumes that has only been subject to the input tax rate of 15%, but if that were the case they would have to have contributed for 200 years at the current concessional limit of $25k per year, or earned unbelievably large returns on investment. She has not even considered the possibility that the contributions were made after tax, or were subject to the full marginal rate because they were in excess of the concessional limit. I’d suggest that anyone with more than $2million in super has made a large portion of their contributions fully taxed. I don’t know the journalist, but until proven otherwise I’ll assume she’s an arts or journalism graduate, innumerate, and interested in nothing more than confirming her own prejudices based on hearsay. She claims anonymous accountants and superannuation experts as sources for her info, but I doubt that she has a single credible source, and has not bothered to research beyond what her friends chat about after the 12th glass of Chardonnay. Sloppy journalism and it makes me cranky.

  17. Julian mclaren

    I agree with many comments that the AFR article has been poorly researched and contains many inaccuracies. Not covered yet is that income streams from superannuation from age 55 to 60 are in fact taxed (less the deductible amount) and receive a 15% rebate to offset the marginal tax rate. As covered by many comments there are contributions caps of $25,000 (more for over 60) to prevent the rorting of the system. The reference to $430,000 contributions for couples each year is completely unreconcilable. I assume there is some SMSF gearing involved here which of course results in taxable income for the lender thus more taxation. It goes to show how little a journalist understands and I would suggest that an expert was explaining it to the journalist and some glazing of the eyes occurred and the short hand notes didn’t quite make the story that was promised so they just made it up. Quite sad. However, having said all that. Reform is needed. 1 to encourage younger people to contribute earlier to let the magic of compund interest take place and 2. Put disincentives in place for lump sum withdrawals just like there was prior to 2007.

  18. Tony of South Yarra

    “There are caps on the concessional contributions (35000 for over 60,s and from July to over 50′s as well), so an ‘executive’ cannot put their entire salary through their super.”

    Exactly what I thought when I read Sinclair’s cut-and-paste, so I went to the original to check the context. The article in question now says “The most popular is 55-year-old executives who start drawing a tax-free pension from their fund, while tipping their salary into it and in effect reducing their taxable income from 46.5 per cent.”, leaving out the word “entire”. There is no indication that the article has been updated or modified.

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