Will Planned Superannuation Changes Deter Australians from Saving for their Future?

If you ask ordinary Australians on the street, most would admit that they do not fully understand superannuation.  So how can the Government expect Australian’s to contribute more money into superannuation, when they continue to tinker with something that isn’t fully understood.  How is changing the goal posts a motivation to tuck away extra dollars for a more comfortable retirement?

Over the years we have had one superannuation reform after another but what about just making super simple. Is it really that hard?

What if everyone knew that if they put money into super, they would all get the same tax benefit? If they didn’t have the funds to contribute one year, that they could catch up the next year?  That there were no complex rules and everyone had the same limit on what they could contribute into super each year?  Could super really be that simple?

Let’s look at some 'what if' scenarios.

Why not remove all contribution tax on superannuation contributions?  This is the tax that is paid on concessional contributions (employer and salary sacrifice) that are contributed into your super fund.  For example, if you currently earn $100,000 and your employer contributes $10,000 into super, your super fund pays 15% tax on these contributions.  Effectively your super fund will have a net amount of $8,500 after this tax.  Abolishing the contribution tax will allow the full $10,000 to be saved for retirement.

Why not tax income, inclusive of super, in your personal tax return and apply a 15% tax rebate on super contributions?  This means that your entire salary package would be taxed in your personal name and you save a flat 15% on any money that is contributed into super.  This allows everyone to get the same benefit by contributing to super – you effectively get a 15% rebate by saving for your future retirement.   Currently if you earn $100,000, you save 22% in tax if you put extra money into super by salary sacrificing.  If you earn $50,000, you save 17.5% tax.    By taxing your total package and applying a rebate of 15%, everyone gets the same benefit. 

Why not allow everyone to contribute the same amount of money into super?  Currently there are complex rules around substantially self-employed individuals that restrict what they can and can’t put into super.  Level the playing field and have the same superannuation contribution cap for everyone.  Keep it simple!

Why not increase the contribution caps?  If we allow Australian’s to put more money into super, the Government will have less people in retirement to support. Sure it will cost the Government in tax concessions but relying only on your super guarantee contributions in retirement is not going to support you into your 90’s and you will inevitably be relying on the Government’s Age Pension.  Why not allow people to contribute more from an earlier age instead of focusing on increasing super contribution caps when you are in your 50’s and beyond.  Let’s keep in mind that compound returns work best when you invest early.

Why not support the averaging of superannuation contribution caps?  This makes sense for small businesses that can’t afford to contribute into their super fund in their early years of business or suitable for a stay at home parent who takes a few years off to raise kids.   If you don’t contribute one year, you get to catch it up in the next year.  If you don’t use your caps, then your unused cap can be tallied and recorded in your personal tax return. Remember, if all super contributions were included and assessed in your personal tax return, then this would be a mechanism for the Australian Taxation Office to record and report to taxpayers each year of any amounts that they could potentially contribute to super.  It may even work as a motivator to utilise your caps if you have some spare cash.

Why not tax earnings on super in retirement?  Just like the income you earn on your personal investments and subsequently pay tax on, why not do the same with super in retirement?  A low level of tax on all earnings in retirement still makes superannuation a great vehicle to accumulate wealth, but all withdraws must be tax free.

Granted some of these ideas may mean more tax to some and less tax to others, but it can level the playing field and make super a little easier to understand without the complexities.

If you knew that there was no tax on super on the way in, a small amount of tax on the earnings during your life and no tax on the way out, would understanding super be easier?

If the Government stopped tinkering and provided a secure and certain environment around super and made the rules simple, would you contribute more to super?  I would love your thoughts.