Yesterday was a good day. We had a win.
And by 'we', I don't mean me. Or The Motley Fool. And I don't even mean our members and readers, though collectively, we made our voices heard.
I mean the national 'we': present and future Australians.
See, the Treasurer decided he'd made mistakes in his plans for increasing taxes on Super. And, to his credit (though I'm not sure it wasn't an electoral, rather than policy-motivated, decision), he's reversed those mistakes.
And, I'm happy to say, in exactly the ways I'd called for.
See, in May of this year, I wrote pretty strongly about the Treasurer's plan to increase taxes on larger Superannuation accounts.
And, if you're new here, no, I wasn't just sticking up for the fat cats or the big end of town.
At the time, I wrote:
"… let me start by saying, very clearly, that I think it's reasonable for people with more than $3m in Super to pay more tax on that Super. Not as a 'punishment for success' as some people claim, but because if you have more than $3m in Super, it's reasonable for you to contribute a little more to the national project, particularly compared to the alternative of slugging workers more, for example.
"(There are lots of other ways to raise taxes and/or reduce government spending, by the way, so it's not as binary as the previous paragraph sounds, but my point stands.)
"If you have $3m in Super, and you're retired, the returns earned by your first $1.9m worth of assets are completely untaxed, and the remaining $1.1m is taxed at 15%. If you earned 10%, you'd pay no tax on the first $190,000 of earnings and $16,500 on the next $110,000 for a total after-tax income of $283,500, and an average tax rate of 5.5%. A nurse earning $100,000 would pay 50% more tax (almost $23,000) and have an average tax rate of 23%.
"I… don't think that's the right balance.
"So, I'm okay with large Super balances having higher taxes levied on their earnings."
But what I did go on to write was:
"So there we have it. A tax change that is addressing the right issue (in my opinion) but that is doing it badly. The wrong solution to the right problem is still the wrong solution (and there are others available).
The policy was to introduce a new 30% tax bracket for Super accounts worth more than $3m.
But that $3m wasn't going to be indexed. That was strike one.
Strike two? The tax was going to be levied on increases in asset prices, even if the assets weren't sold. Whereas we ordinarily pay capital gains tax when we sell, the plan was to send out a tax bill on the basis of a paper gain.
And strike three was that the tax changes were going to be backdated to the beginning of the current financial year.
As I wrote at the time:
This change, if legislated, would be bad for […] three reasons; because it's retrospective, levied on unrealised gains, and using a threshold that's not indexed. Each, on their own, would be bad policy. Together, it's atrocious."
The great news is that the Treasurer has listened. No, maybe not to me (though I hope I added my voice meaningfully to the chorus), but to all of us who said the policy was a bad implementation of a perfectly reasonable policy objective.
He has backtracked on each of those. And that's great news.
We will, if his new plan is implemented, have a fairer taxation system, which provides for more reasonable treatment of Super, compared to labour income.
It's still incredibly generous, though. And even more generous than I originally wrote, because the $1.9m 'pension phase' cap is now $2m.
So, even after this change, someone with $3m in Super will pay no tax on earnings from the first $2m, and only 15% on the earnings of the next million.
If they earned a hypothetical 10%, they could draw down $300,000 in income, and pay only $15,000 in tax, for an after-tax income of $285,000.
By contrast, the ATO says that's the same tax bill paid by someone who earns a gross income from working of… $81,000.
Super was designed to provide for a comfortable retirement, and to lighten the burden on the Federal aged pension.
The mooted changes were bad policy, not because they left Superannuants in the poorhouse, but because the policy implementation was bad.
So, as I said, the good news is that the government has removed the clumsy implementation. That's a huge win for anyone that cares about good policy.
I was accused of 'sticking up for rich people' and for 'letting perfect be the enemy of good'.
It was neither, of course, and this result is exactly the right outcome, because it improves fairness, but importantly does it the right way.
Those still complaining are just complaining because they want to pay less tax in retirement.
Which… is their right. Just don't let them tell you that it's for other reasons.
Super is still a very important policy tool for both retirees and the Federal Budget.
And it's still a very worthwhile – and even after these changes, very tax-effective – way for individual Australians to save for retirement.
Fool on!
