With the budget in deficit to the tune of $40 billion, Treasurer Scott Morrison is looking for savings in the superannuation sector – and his plans could cut tens of thousands from your super balances, according to research from Industry Super Australia (ISA).
The two ideas put forward by the Turnbull government in recent days would see people between the ages of 18 and 24 allowed to opt out of the compulsory super system, receiving the money their employers are now compelled to pay into their super funds in their pay packets instead.
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A second idea involves cutting in half the discount on capital gains tax paid by super funds.
Both measures combined could see someone retiring at 67 after a working life on the average wage with $33,500 less in their super balance than would be the case if no changes were made.
More capital gains tax
The proposed halving of the capital gains discount in super funds would see capital gains taxed in super funds at 12.75 per cent compared to 10 per cent at the moment.
That means whenever a super fund sells an asset, like some shares or bonds, that it has held for more than 12 months it would pay tax at the new higher rate. That, in turn, would mean super returns to fund members would be lower.
“The measure would reduce the attractiveness of long-term investment for super funds by increasing the earnings tax on assets held longer than 12 months,” said ISA chief executive officer David Whiteley.
The move could also make investing in nation-building projects less attractive.
“Funds that invest with a longer time horizon and in asset classes that experience significant capital gains such as infrastructure and private equity would be disproportionately affected,” Mr Whiteley said.
The measure would hit younger people harder than those at or close to retirement as the older people would have enjoyed the larger discount during their working lives and once they move into retirement their super earnings become tax free.
ISA figures show that a 25-year-old who works till 67 on the average wage would have their fund balance slashed by almost $13,500 at retirement.
“It is hard to see how such a proposal is consistent with the policy objective of increasing super funds’ appetite for the types of long-term investment the economy would benefit from, let alone better retirement outcomes,” Mr Whiteley said.
Young people to suffer
Matt Linden, ISA public affairs director, said the plan to allow young people to cash out their employer-funded super contributions would also cut retirement balances.
“We estimate that allowing 18 to 24-year-olds to opt out of super contributions would mean they would be around $20,000 worse off on retirement.”
The figures would apply to someone working continually at the average wage through to retirement at 67.
“It’s probably one of the worst times not to make a contribution because you miss out on the effects of early compounding,” Mr Linden said.
The power of compounding is far greater for younger people than for those in their 50s, Mr Linden said.
“Each dollar compounding in your super fund from your early 20s is worth $4 on retirement,” he said.
“Whereas a dollar going into your fund in your mid-50s only compounds to $1.60 in retirement.”
Capital gains provide about half of super returns earned by super funds. However they are only taxed when the underlying assets are sold by the fund.
Chris Morcom, an advisor with investment group Hewison Private Wealth, said he believed the government would “have to look at the rate of tax on contributions to super. Most would understand that a move like that would be equitable”.
Currently, contributions to super are taxed at 15 per cent. Proposals have been floated to change that regime to taxing contributions at the marginal rate of the taxpayer minus 15 percentage points.