Wednesday, September 14, 2016
Why is it such a big deal? Because it ticks so many boxes. Because it makes the taxation of super much less unfair.
Note, I didn't say much fairer. It will still be an arrangement that gives the least incentive to save to those who find saving hardest, and the greatest to those whose income so far exceeds their immediate needs that they'd save a lot of it anyway.
A report by John Daley and others at the Grattan Institute, A Better Super System: Assessing the 2016 tax reforms, independently confirms the government's claim that the changes will adversely affect only about the top 4 per cent of people in super schemes.
That still leaves a lot of well-off people – including the top 4 per cent – doing very nicely out of super.
Remember this when Turnbull's backbenchers embarrass their leader and add to their government's signs of disarray by pressing for the changes, announced in this year's budget, to be watered down.
Whose interests did you say the Liberal Party represents? Why exactly does it claim ordinary middle-income voters can trust the party to look after their interests?
But back to the reform's many attractions. It would cut back one of the major loopholes that make tax paying optional for the well-placed but compulsory for everyone else; that allow very high income-earners to end up paying a lot less tax than they're supposed to.
A lot of the savings from reducing concessions to the high fliers (who, you should know, include me) would be used to improve the bad deal given to low income-earners and to make other changes but, even so, would produce a net saving to the budget of $770 million in 2019-20.
This saving would get a lot bigger over time.
So the super reforms would contribute significantly to reducing the government's deficits and debt, but do so in a way that spread the burden more fairly between rich and poor than the Coalition's previous emphasis on cutting welfare benefits.
A lot of well-off people have been using super tax concessions to ensure they leave as much of their wealth as possible to their children – a practice lawyers refer to euphemistically as "estate planning".
Wanting to pass your wealth on to your children is a human motivation as old as time. The question is whether it should be subsidised by other taxpayers.
If it is, rest assured it's a great way to have ever-widening disparity between rich and poor. In the meantime, it adds to (recurrent) deficits and debt.
The rationale for Turnbull's changes is the decision that superannuation's sole purpose is to provide income in retirement to substitute for, or to supplement, the age pension.
They fall well short of eliminating the use of super tax concessions to boost inheritance, but they make a good start.
This is the goal of the three main measures Turnbull wants. Reducing the cap on before-tax contributions to $25,000 a year will save almost $1 billion in 2019-20.
Capping at $1.6 million per person the amount that can be held in a retirement account paying no tax on the annual earnings. Any excess balance will have its earnings taxed at the absolutely onerous rate of 15 per cent – less dividend imputation credits. This will save $750 million a year.
Introducing a $500,000 per person lifetime cap on after-tax contributions, counting contributions since 2007, will save $250 million a year.
If those caps strike you as low, you're just showing how well-off you are. The huge majority of people will never have anything like those amounts.
They're set at levels sufficient to allow a comfortable retirement even for those anxious to maintain a high standard of living. Anything more and you're in estate planning territory – or you just want every tax break you can get because you're greedy.
The claim that starting to count contributions towards the $500,000 cap in 2007 (the time from which good records became available) makes it "retrospective" is mistaken.
The measure is prospective in that it applies to income earned after the day it was announced, not before.
Where contributions in excess of the cap have been made already, they won't be affected by the measure.
Any tax change is likely to affect the future tax consequences of actions taken in the past. That doesn't make it retrospective.
To say "I had planned to do things in the future to reduce my tax which now won't be effective" is not to say the changes are retrospective.
Sometimes politicians announce changes well before they take effect, to allow people to "get set". But it's common for them to make tax changes that take effect from the day of announcement, precisely to stop people getting set. That doesn't make the change retrospective, either.
As Daley says, "the proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties.
"If common ground can't be found in this situation, then our system of government is irredeemably flawed."