Once again critics have called for government to cut the budget deficit by removing the tax-concessions on super. Their catch-cry is that they are not needed, and amount to little more than a tax scam for the affluent. This may be true for the most wealthy, but certainly not for the most who may conscientiously deny themselves luxury and even needed items, to save for their own retirement.
To my thinking the present 15% contributions tax is acceptable, (below an income of $300,000), but to be taxed higher than this might not. I have no accounting or taxation ability to voice an authoritative opinion but invite readers to consider a consumer’s perspective, and to keep an open mind about taxation alternatives.
I believe that the Canadian Registered Retirement Savings Plan yields delivers a higher end retirement benefit over our Australian super whilst also enhancing home ownership. It achieves this by allowing new home buyers to dip into their super savings to a limited extent. If this is true then surely Australia should seriously look at a similar scheme.
When should super contributions tax be paid?
Most investments are made with after-tax dollars. After-tax super payments can still be a profitable investment too, as retirement approaches, and surplus funds become available, and would reduce the amount of tax to be paid on future earnings.
The difference in super to other investments, is the term without access. A contributor at 20 will have to wait 50 years to spend his savings, with the balance eroded by inflation, subjected to costs, and market risks. The government benefits by collecting tax at the outset when its value is greatest in terms of spending power. This can be a very significant advantage for the government.
If their super-fund goes into liquidation, and contributors lose their savings, they will then also lose the tax they have pre-paid.
Think too what happens if there is a significant draw-back, perhaps reducing the balance by as much as 40%-50%, as in the recent global financial crisis. Again the tax they have pre-paid would have been on the amount contributed, not on what is left of their benefit.
Such catastrophes may be uncommon but non-the-less a distinct possibility when the investment extends over a 50 year term. Furthermore there are many more years of negative returns when the losses should be offset against the profits in years of positive results. (I don’t think averaging occurs).
A fairer form of taxation to encourage thrift
I refer to the tax deferral concessions that apply to the RRSP in Canada. Of course the government is likely to reject such a proposal because it would reduce their revenue and advantage the superannuants. But a tax deferred benefit by encouraging thrift, might result in savings on social services in the long run. Tax to be paid on withdrawal would be more aligned to its spending value.
- There is a stronger incentive to contribute to their super. There would probably need to be a cap on what could be contributed each year. At present there is a cap of $30,000 before 55 and $35,000 after 55, in the Superannuation Guarantee Scheme
- There is a disincentive to early and excessive withdrawal in retirement, leading to longer preservation of super. This is important with retirees enjoying a longer life expectancy.
- Deductions for finance costs could be allowed to reduce the taxation liability at the current marginal rate.
I believe our politicians should put the reasonable needs of retirees for more not less savings for retirement, before their own need for tax revenue to fund the aged pension.