I appreciate that people of goodwill have competing views about which policies would be best for Australia in the long term, but in superannuation, Labor is pushing one particular policy that I regard as indefensible. That is the repeal of legislation allowing employees to claim a tax deduction for additional voluntary superannuation contributions.
For many years, superannuation regulations prevented a person from claiming a tax deduction for additional personal concessional contributions if an employer was contributing for them. There was no logic to it, and nobody has ever been able to tell me the reasoning behind it.
The unpopular and complex 10% rule
This silly rule was introduced to assist doctors in private practice who did a relatively small amount of work outside the practice. As the rules stood then, even a small payment from a hospital, from which superannuation had been deducted, was sufficient to deny the doctor the right to claim a tax deduction for contributions made from their main source of income.
So the government of the day created the 10% rule, which allowed people such as doctors to claim a tax deduction for their own contributions provided their external income represented no more than 10% of their gross income.
That was bad enough, but the rule also created two classes of citizens: a sole trader could make additional personal contributions and claim a tax deduction, but an employee of a company could not. There was a loophole if their employer was prepared to offer salary sacrifice, enabling their employees to contribute part of their gross pay as an additional superannuation contribution.
Even if you were one of the lucky employees with access to salary sacrifice, you could still find yourself with problems. Some unscrupulous employers took the opportunity to treat the extra salary sacrifice contributions as part of their 9.5% compulsory superannuation obligation, conning their employees by reducing their compulsory contribution.
But generally, the outcome was that employees of companies that offered salary sacrifice were better off than those working for businesses where it was not offered.
The rule was removed on 1 July 2017
Finally, thanks to the Turnbull Government, all taxpayers were given equality. From 1 July 2017 everybody has had the opportunity to make additional superannuation contributions up to the concessional limit of $25,000 a year (including employer contributions) and claim a tax deduction, not just those who can salary sacrifice.
Many employees are cash poor and cannot afford to have their fortnightly pay reduced by additional contributions even if the employer does offer salary sacrifice. But they may well be able to save a bit here and there and make an extra contribution at the end of the financial year. One major benefit of doing so would be to get a tax refund, which could be used as a contribution to superannuation in the following year.
Now Labor, despite always arguing about inequality and claiming to be the champion of women, is threatening to reverse this long overdue and essential change to the rules. They want to bring back the 10% rule, and revert to a system in which certain privileged employees got an effective tax deduction through salary sacrifice while less fortunate ones missed out. Where is the logic in that?
Maybe there’s a hint on the Labor website, which points out that only 2.3% of taxpayers made $25,000 or more of concessional contributions in 2012–13. But that’s not relevant. The new rules allowing all employees to make concessional contributions only took effect from July 2017. Before then, most employees were prohibited from making additional tax-deductible contributions – so of course there were few extra deductible contributions! It’s a flawed proposal, based on flawed logic.
Proposal on franking credits unfair
Most voters have no idea how the imputation system works.
The word ‘imputation’ means to give credit for, and the imputation system was introduced to prevent double taxation of company dividends. Dividends from Australian shares are the only Australian income stream where profits are taxed before you receive them. The franking credits are simply a credit for tax paid by the company on behalf of the investor.
If you invested in direct property or a property syndicate, or received interest from a bank account, the income from that investment would be paid to you in full and you would pay tax on it at your normal marginal rate. Think about two investors – one receives a franked dividend of $700 plus a franking credit of $300 for tax deducted by the company. The other receives a $1,000 distribution from a property syndicate and no tax is deducted by the company paying it.
If they were both retirees on zero taxable incomes, the franking credit of $300 would compensate the first investor for tax deducted by the company paying the dividend and under present policy would be refunded to him. Therefore, both investors would receive $1,000 net.
An analogy would be a person who is a PAYG employee and has tax taken out of their pay. When they do their tax at the end of the year, losses from activities such as negative gearing may reduce their taxable income. They will then get a refund of part of the PAYG tax deducted by the employer.
Now the unique thing about numbers is you can offer different interpretations. Shadow Treasurer Chris Bowen was recently quoted as saying:
“Think about a nurse who earns $67,000 a year – we make her pay $13,000 in tax. Yet a retired shareholder with a substantial balance in superannuation could receive $67,000 in income with his fund paying zero tax. On top of that he expects the government to write the fund a cheque for $27,000. That is not okay.”
But there are many anomalies which could be described as “not okay”. Why should a top marginal taxpayer receive 49% back from the government on tax losses if he negatively gears an investment property, while the nurse gets back just 34.5%. Why should some politicians be allowed to access their superannuation before they turn 60?
Our superannuation system is designed to encourage people to invest for their retirement which means people with money in super will be often be better off tax-wise than people out of it.
But our retiree has a lifeline. He could get around the franking credit changes by transferring his SMSF to a retail or industry fund where the franking credits will be used to pay contributions tax and earnings for members in accumulation phase.
One group will be left stranded
This group is the self-funded older retirees who are not in super and can’t contribute because of their ages. Think about a self-funded retiree, not in super, whose income from dividends is $67,000 a year. The taxable income would be $95,714, after adding $28,714 in franking credits. Tax on that $95,714 would be $24,825 ($22,911 tax, plus Medicare levy of $1,914) leaving a refund of just $3,889. That’s way different to the $27,000 that the Shadow Treasurer is quoting. Furthermore, the retiree’s effective tax rate is almost 30% while the nurse’s is 19.4%. Is that fair?
Talking about fairness, Labor has been very quiet about its intention to abolish catch-up super contributions, as well as stopping employees making extra super contributions and claiming a tax deduction. If that gets up, our nurse will not be able to make extra super contributions to make up for time spent raising a family, and she won’t be able to boost her super contributions unless her boss offers salary sacrifice. That is definitely not okay.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. [email protected] This article is based on an understanding of Labor’s proposals, which have not yet been legislated.