Well before the Productivity Commission reports on the efficiency of the superannuation regime, Tuesday's federal budget may well irrevocably damage its attractions as a retirement savings vehicle for many Australians. With changes to the substantial taxation assistance to negative gearing already ruled out, the probability of adverse taxation changes to the super contributions of middle and higher income groups has increased significantly.
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The combination of higher upfront taxation on contributions and lower and uncertain investment returns could well prove to be a lethal mixture encouraging investors to direct their voluntary savings elsewhere. Treasury has long considered that the introduction of compulsory super has reduced the need for taxation concessions to encourage superannuation contributions.
The harsh reality, however, is that millions of Australians will need to make substantial voluntary super contributions if they're to achieve a comfortable retirement. The compulsory super arrangements are flawed by not covering all taxpayers. All self-employed taxpayers and those relying on investment income are excluded.
Furthermore, many of those covered have accumulated relatively small balances from past contributions and won't be able to catch up merely by relying on future compulsory contributions. Even those on annual incomes above $200,000 are entitled to compulsory employer contributions of $20,000 annually. After applying the mooted 30 per cent contributions tax, the annual increase in their account balance is only $14,000.
Treasury stuffed up mightily in 2007 when it designed simplification changes that both removed the Reasonable Benefit Limits and made super payouts after age 60 tax-free. This is the main reason why a few taxpayers are in a highly privileged position.
But they are unwilling to admit this. Instead of tackling these issues head on, for example by limiting contributions for those with large super balances and defined benefit pensions, they are focusing on reducing the assistance to higher income taxpayers, including those with relatively small account balances.
This strategy for raising additional revenue is doomed to failure given that outright ownership of the family home and negative gearing offer much larger tax benefits than superannuation. Given the choice, the first priority for savings will be to overinvest in the family home and to pay off the mortgage as quickly as possible.
This then provides the collateral for negative gearing and the accumulation of assets outside super. There are further attractions to these options not shared by investing in super including the ability to engage in related party transactions and to draw down the savings if needed before age 60.
Since 1999, once deposited in super, money is virtually untouchable until at least age 56 or later retirement. Just ask anyone unemployed or with a relationship breakdown what the advantages of super are compared with owning accessible assets.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
