by Olivia Long

Coalition repays the faithful with decision to abolish tax on $100K earnings in the pension phase.

It seems an eon away but it was only last February that Opposition superannuation spokesman Mathias Cormann addressed SPAA’s 10th anniversary national conference in Melbourne to rapturous applause; it was a rock-star like welcome. The vast majority of those SMSF professionals present were letting it be known – loud and clear – where their political sympathies lay.

Nine months later, these same professionals would be feeling very vindicated. Although the 5 April superannuation statement by the then Labor Government did calm troubled SMSF waters, there were still a few “nasties” that the industry would have preferred not to have in there. In particular, the Coalition’s decision to abandon the plan to tax earnings exceeding $100,000 from assets supporting self-funded pensions at 15% rightly drew widespread industry praise.

Labor’s proposal had been correctly identified as being extremely complex and difficult to administer – and without generating a lot of income for the budget. And although it was widely perceived to be aimed at SMSFs, it would have affected all types of superannuation funds, big and small.

It was Labor’s estimate that the tax would have hit about 16,000 funds. This figure was believed to be derived by using an average annual return of 5%, meaning a fund would have had to have $2 million in assets to generate an income of more than $100,000.

But quite clearly that number has been shown already to be wide of the mark with many funds – again, large and small – showing returns of 14-15% on the back of strong equity markets in 2012-13. Assuming a 15% return, a fund would have only needed about $670,000 in assets to have to pay tax on the fund’s earnings.

Quite clearly, the converse is true. In lean years when returns are in the low single digits (or even negative), fewer funds would have been affected, but that was little comfort for retirees with relatively modest balances potentially facing a tax impost.

From my perspective, this proposal removes one more uncertainty for those saving for their retirement, as well as those obviously in retirement and relying on their super to fund their day-to-day living.

But if the Coalition was rightly praised for this measure, it’s my judgment it has erred with its decision to maintain the position held in Opposition and repeal the Low Income Superannuation Contribution that ensures people earning less than $37,000 a year do not pay more tax on their compulsory superannuation contributions than they do on their income.

It’s not just a question of inequity, although it’s clearly that. By penalising people for contributing to superannuation, the Coalition is implicitly undermining our compulsory retirement incomes policy by creating a two-tier system. When you consider many of the people affected are young and will be living well into their 80s and 90s, that’s exactly the wrong policy lever to pull.