Nick Bruining: Chalmers’ $3m super tax battle has been won but war on our $4.5t retirement pot has just begun

While the superannuation industry and pre and post-retirees are celebrating the Federal Government’s major backflip on its proposed $3 million super tax, don’t for a moment think winning this battle means the war is also over. The golden honey pot of superannuation savings is just too good to leave alone, especially when super is increasingly being used as an estate planning tool. In a major backdown last week, Treasurer Jim Chalmers essentially reversed two key highly contentious proposed changes. The most significant of these was to tax unrealised capital gains. Under long-established tax law, you’re only required to pay tax on the capital gains of an asset when you actually sell it — and have the cash to pay the bill. Essentially, Dr Chalmers wanted us to pay tax on the increase in value of assets from one year to the next. How you raised the cash to pay the tax bill was your problem, not his. The concern was that this new method of calculation could leak out of the superannuation system and find its way into normal tax affairs. The second biggie was the failure to index the threshold at where the unrealised capital gains tax kicked in. Under the original proposal, the tax was only to apply on the proportion of funds exceeding $3m. That sum was to be fixed, forever! While $3m in superannuation is an eye-watering amount for most Australians, not indexing the threshold meant over time, more and more of us were likely to be ensnared by the new limit. Here’s where pragmatism took over. The reality was this proposal delivered an election promise to the Opposition on a plate. Almost without question, indexation of the $3m super threshold would be an issue at the next election. But, with the battle won, should we take comfort from the backflip? Superannuation was originally established as a means of funding a person’s retirement. By making the superannuation system attractive, people would happily build their retirement nest eggs in the scheme, thereby reducing the amount future governments would have to pay towards the age pension. Indeed, multiple intergenerational reports produced by Treasury show, thanks to super, the proportion of gross domestic product spent on pensions in future years will decline. Superannuation is attractive thanks to the generous tax concessions. Pay money into super and most of us only pay 15 per cent tax. That’s instead of our marginal tax rate which could be as much as 47 per cent, including the Medicare levy. Park the money in super to let it build? Again, you’ll only be paying 15 per cent tax on earnings. When you get to retirement, up to $2m (indexed) can be converted to a completely tax-free, income-generating investment. No tax on earnings in the fund, and no tax on withdrawals. The amount above $2m remains taxed at 15 per cent, though now an extra 15 per cent will kick in at the indexed level of $3m, and 40 per cent at an indexed level of $10m. It means a couple, each with the maximum amount in retirement at, say 65, receive a combined $200,000 a year in tax-free income from super in retirement phase. They can pull out any extra lump sums from the same fund, or from the amount remaining in superannuation accumulation phase — again tax-free. Think about this — $100,000 in the hand after tax is the same as someone earning about $135,000 from employment. The reality is very few seniors spend that kind of money right the way through retirement. The outcome is a significant amount of the money in superannuation now forms part of the estate that eventually passes through to their children. Some careful working around the rules means the tax on death at most would be 15 per cent and, at best, close to nothing. The use of super as an estate tax planning tool is alive and well. With $4.5 trillion now in superannuation being force-fed at the rate of 12 per cent a year for every employment dollar earned by Aussies, this is too big a honey pot to be left alone. Mark my words, this war is not over yet. Whether it’s Labor or the Coalition, super’s going to see plenty of action over the coming years. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association