IN THE last 50 years, Australia's best federal treasurers were Paul Keating and Peter Costello, especially for their ground-breaking work in superannuation. Keating instigated the superannuation guarantee whereby employers regularly contribute to superannuation funds on behalf of their employees. Costello made superannuation an attractive form of saving to cover cost of living expenses in retirement years.
Their common goal was to prevent retirees relying on the age pension, which no future government could afford. During the Costello years, the government was without debt and could afford the tax concessions available to people wanting to boost retirement savings and after age 60, receive a tax-free pension.
Under the current government, the benefits of contributing to superannuation have steadily declined, causing uncertainty and people to question why they would place their hard-earned money into superannuation. The options are spend as you go and not save or place the bare minimum into superannuation and invest outside superannuation. Importantly, both of these strategies will result in insufficient superannuation savings possibly causing people to rely on the public purse in retirement.
Until last Wednesday, the government was considering taxing superannuation pensioners over 60 who have more than $800,000 in their member's account in their fund. Assuming a rate of return on the fund's investments is five per cent on $800,000, a person would receive a modest pension of $40,000 to live on. The future pension of this deemed (by the government) "rich" person would start to diminish because the $800,000 would be subject to the new tax. This tax would have been retrospective because the person has contributed to their fund on the basis that no such tax would be payable.
The government has been barraged by current and future pensioners, the wider superannuation industry and Peter Costello who said in the Australian Financial Review that the proposal would destroy the goals of the superannuation system and would put superannuation back decades. Last Wednesday, Prime Minister Julia Gillard recognised this groundswell of opinion against the new tax and announced it would not proceed: this saved her from accusations she had broken her promise in 2010 not to impose any new tax on pensioners aged over 60.
Despite the backflip, the honey pot of the $1.3 trillion in superannuation savings for a government desperate for revenue may still attract other ways of imposing new taxes.
Mike Bannon is a tax consulting partner at Duesburys Nexia, Canberra