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With US President Donald Trump overturning the 80-year world order, it has never been more imperative for Australia – including financial institutions – to nurture a better understanding of the Middle Kingdom.
Proposed tax changes to ‘hit’ the well-heeled and the low paid
The nation’s wealthiest and lowest-paid employees are being warned to brace for a superannuation shake-up affecting how much they can save for their retirement.
The changes could affect millions of super savers, increase the system’s complexity, lead to lower savings and, in some cases, increase reliance on the age pension, critics warn.
For the low-paid, the decision to reduce the lowest personal income tax to 14 per cent will mean those making voluntary contributions to super will be penalised one percentage point. Meanwhile, the well-heeled are facing an 15 per cent higher tax on earnings in super balances exceeding $3 million.
Aaron Minney, head of retirement income research at Challenger (ASX:CGF), a listed investment management company, says: “This creates another level of uncertainty to a system already seen as complex.”
But supporters, such as the peak industry body, the Association of Super Funds of Australia (ASFA), claim they are reasonable measures that will tackle inequity and boost fairness in the super system, claiming the top 20 per cent of income earners received more than 50 per cent of super tax concessions in 2022-23.
The nation’s super system has about 17 million members, around $4.2 trillion under management and makes around $2.4 billion a week in payments to retirees, according to ASFA.
Super savers are encouraged to boost their retirement nest-eggs through so-called concessional rates, which means lower tax for contributions and earnings within super.
The measures affecting low-paid workers are part of a two-stage reduction in the lowest personal income tax rate that will reduce income tax for those earning between $18,201 and $45,000 to 14 per cent from July 1, 2027.
That will result in the income tax rate that about 1.2 million employees pay being lower than the 15 per cent tax on any super contributions.
“It means some savers are effectively being penalised for putting money into super, which could discourage long-term saving for retirement,” says Minney.
The government has a low-income super tax offset (LISTO) payment to ensure low-income earners generally don’t pay more tax on their super contributions than their take-home pay.
But the system has been widely criticised for its low-income threshold of $37,000, maximum offsets of only $500, complexity and for being of no benefit to those not making concessionary contributions.
At the top end, fund members with balances exceeding $3 million – they are predominantly held in SMSFs – are expected to be slugged with an additional 15 per cent tax on the earnings of their super accounts with more than $3 million, on top of the existing 15 per cent rate. The legislation failed to pass the Senate in the last Parliament, but Labor is committed to reintroducing the legislation that can be expected to get the support of the Greens.
About 80,000 Australians are estimated to have superannuation balances of more than $3 million, or about 0.5 per cent of all superannuation account holders, according to ASFA.
The Financial Services Council (FSC) estimates this will grow to more than 500,000 over coming decades as savers now in their 20s and 30s retire at 65.
Super funds in the pension phase currently pay zero tax on earnings for balances below $1.9 million, and this is expected to continue under the new regime (although indexation is pushing this up to $2 million from July 1 this year). Earnings on any excess amount in an accumulation account are taxed at 15 per cent.
ASFA has welcomed the changes for the wealthiest and low-paid and is pushing for the introduction of measures to redistribute revenue generated through the government’s proposed changes to support low-income earners.
Under its proposal, those with balances over $3 million and those earning more than $250,000 a year would support low-income earners by boosting LISTO.
ASFA chief executive Mary Delahunty (pictured) says: “It would foster a more balanced and equitable retirement system.”
It wants $750 million of the revenue generated by the top-end super tax used to increase the LISTO threshold from $37,000 to $45,000, plus boosting the maximum payment from $500 to $700.
HESTA, an industry fund with around $88 billion under management and more than one million members, mainly women in health and community services, says it wants policymakers to consider making the system more equitable.
“Lower-income earners typically receive less tax concessions than higher-income groups when they need it more,” a spokesman says. “Members earning lower incomes often find it difficult, particularly with the current cost-of-living pressures, to make additional contributions to their superannuation. That’s why we are focused on ensuring superannuation tax concessions are better targeted.”
HESTA says it is focusing on LISTO eligibility and payment to ensure affected members and other low-income earners are not disadvantaged by paying more tax on their super contributions than on their take-home pay.
