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Super tax change painful for retirees
Investment inside super may be a political “soft target” as it will not be felt directly in voters’ pockets, but will have unfavourable longer-term impact in retirement outcomes, according to Parametric.
Parametric said the possibility for government to increase superannuation taxes in response to the ballooning budget deficit caused by COVID-19 could severely hurt member balances at retirement
Raewyn Williams, head of research (Australia) and analyst Josh McKenzie, in a paper titled ‘Will retirees pay the price for superannuation tax rises?’ indicated the two most likely tax options which would be increasing the headline tax rate of 15% or reducing the capital gains tax concession from one-third, while the third option assuming limiting the claiming of franking credits for Australian share dividend was scrapped as being “too political risky”.
According to the report’s authors, the smallest tax increase (15% to 17.5%) would cause a member to forgo (in today’s dollars) $40,509 in retirement savings but if the tax rate was increased to 25%, then the member could lose $150,448 in retirement savings, ending up with 22% less than expected outcomes under the current tax regime.
“The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member,” they said.
“A very small reduction (3%) in the CGT [Capital Gains Tax] discount concession to 30% would shave a negligible $1,545 of the member’s retirement balance of $682,146. Even using our most aggressive assumption (the CGT discount more than halving to 15%), the expected loss to retirement savings is a modest $8,446.
“Other more muted changes to the super CGT rules are also possible, such as extending the current one-year holding period rule (for CGT discount eligibility) to three years, capping carry-forward capital losses or limiting the types of assets eligible for CGT discounting.”
Parametric stressed that just the possibility of tax increases should send a clear message to the industry – for funds to better manage the tax impacts of their investment decisions.
“Our research on the Productivity Commission’s report showed that a genuine after-tax focus could be more valuable to retirees than reigning in fees. So, what if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement outcomes?” Williams and McKenzie asked.
“After all, good retirement outcomes are the raison d’etre of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.”
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Under the current accounting and umbrella trust setup holding both Accumulation and Retirement Income assets in the one trust fund, the capital gains is never if ever realised as the funds are perpetual in nature and so no tax is paid to the government but deferred indefinitely. The managers say that the unit price system used the member’s amount is adjusted for the tax. However, the investment managers take their clip on this deferred capital gains tax liability. At a very rough estimate the deferred capital gains could amount to about 3% of the total held in the Superannuation environment. The only way the government can realise this deferred tax liability is to go to an annual accrual basis of taxation. Further, this would make the valuation of illiquid assets more realistic.