Update No. 107 – 05/04/13

Superannuation was very prominent in the Australian news this week. For those not familiar with it, Wikipedia will explain. In short, it was ‘newsworthy’ as the current Australian Government is (as Governments always are) looking for new, sustainable and reliable sources of revenue to support spending ‘initiatives’…

This graph from the same Wikipedia site explains why the asset pool is an attractive taxation target:

Although the graph ends in 2006, the Bureau of Statistics confirms Australian Superannuation levels at the end of 2012 were about $1.5 trillion – so the graph very much continues ‘up and to the right’. Such a big pool of assets will always present as an attractive target.

My view on this or virtually any other taxation initiative is that provided any meaningful changes are announced with a forward looking bias, they will be generally accepted and understood. Our Government failed us here with the mining tax debacle that led to our most recent change of Prime Minister. The issue with the mining tax was the needless creation of sovereign risk and the sense of an ‘urgent’ grab for revenue to try and return the budget to surplus. Constituents are looking for ‘vision’ from their political leaders; as such a ‘tax-grab’ which tries to stuff some hastily raised taxation into a recently discovered fiscal hole will always raise electoral ire.

Had the Government created a mining tax that was to apply to all future projects completed after a certain date sometime a few years hence, there would have been no talk of sovereign risk, because new investment decisions would have been made with full knowledge of the future taxation rules applicable to each project, rates of return could be calculated with full knowledge of the ‘rules of the game’. Such a tax would have received widespread public support in my view and although the opposition would have decried the tax (all oppositions do – always) the voting public would have understood.

If the current or any future Australian Government wants to broach any new taxation, they need look no further than the Howard Governments introduction of a consumption tax (GST) in 2000 as an example. For although it nearly led to a rare single-term Federal Government, it was taken to the people in an election. It was thoroughly (some would say exhaustively) explained and although the Democrats (remember them…) caused it to be more awkward in its application through various exceptions than it needed to be, it was broadly implemented as intended.  Most importantly, it was two years in its implementation (more than 15 years in the development given the push started in the early 1980’s), rather than hastily cobbled together. The accompanying tax cuts meant most people were not much better or worse off, but the revenue was a wonderfully stable stream – consumption of goods and services presented a similarly attractive growing taxation target as the following graph shows:

The shape of that graph you would concede is very much like the Superannuation graph above (actually Superannuation is growing faster than GST but different scales are used on the graphs).

As to Superannuation, there are valid reasons why changes could be made; the system clearly favours the very wealthy more than the working class – in that by making larger contributions (because they earn more) the level of tax ‘avoided’ by contributions is much higher. Someone earning $60,000 will currently pay around $12,000 in income tax in Australia, whereas someone earning $600,000 will pay about $250,000. 10x the income for 20x the taxation – that is why the ‘high-earner’ who foregoes income to contribute to Superannuation derives greater benefits, their marginal tax rate is much higher.

The tax breaks are very generous in the Superannuation system, contributions and earnings are taxed at a very low rate & distributions are generally tax-free.  If I was to design a tax it would probably attack the distribution side of the equation, perhaps levy tax on the distributions at a rate which (over a reasonable period of time – in order not to punish those who contributed under different expectations) grows to perhaps 30% of the equivalent ‘employment’ income.  In this way, people would still be encouraged to contribute to their retirement in a tax-effective way, but if they manage to build a substantial Superannuation asset that enables a very high retirement income, they will pay some tax on the distributions.  Also by having the distributions taxed at a ‘proportion’ of the prevailing income tax, the system retains the progressive shape important to taxation equity.  For example using the same examples from above, the Superannuant generating a $60k distribution will pay $4k in tax and the well-heeled Superannuant getting a $600k distribution will still pay about $80k in tax.

Mostly, I hope our politicians of all stripes think long and hard about every taxation proposal, because the GST was the last major taxation reform which was properly thought through.

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The post up to this point was prepared Wednesday night, when there had been much speculation but little known of the substance of the impending Superannuation changes. The announcement today clarifies the intent, although being that the current Government is on its last legs, we may not ever see this legislation enacted.  The announcement does in-fact target the distribution phase as I had suggested above and though probably a good deal more gently than I had proposed with all earnings up to $100k annually remaining tax-free and anything over that tax at the 15% concessional rate. As I commented on Twitter today, this is probably the most sensible policy announcement the current Government has made.

It properly targets persons using the Superannuation system to accumulate truly excessive amounts of savings away from taxation. People need to remember the Superannuation system exists to encourage as many as possible to save for their own retirement.  What the Superannuation system is not supposed to be is an onshore ‘Tax-Haven’ enabling you to avoid massive amounts of tax through accumulating a massive asset base away from the full effect of the tax-system. It exists to provide an inducement in the form of certain concessions effectively ‘forcing’ you to provide for your own retirement and thereby negate the need to have the State fund your retirement.

$100k of earnings per annum per Superannuant is quite a suitable target as the ‘tax-free’ portion (the line has to be drawn somewhere); the non-Superannuant has to earn nearly $150k to possess $100k after-tax – so the Superannuant is streets ahead already. My only suggestion is that the calculation should probably be levied on a rolling 3-year basis as some people with substantial equities exposure may earn over $100k one year, but lose money the next through the vagaries of the market.  But a portfolio that has been accumulated over a number of years can probably be managed in such a way that the ‘realised gains’ are fairly stable.

Like everyone, I abhor tax, my Wife and I will through Income Tax, Capital Gains, GST, Stamp-Duty, Carbon Tax and other taxation pay a 6-figure tax bill this year on the assets we own or control. This is brutal, because we are not especially wealthy (yet), but the upside of this awful fact is as compensation for it, we get to live in the best country in the world – Tony Hansen 05/04/13

EGP Fund No. 1 Pty Ltd. Up by 14.70%, leading the benchmark by 8.18% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 39.63%, leading the benchmark by 28.52% all-time (April 1^st 2011).