Messy surcharge will encourage retirement

The complexity of assessing the proposed new super tax may, once again, render it unworkable.

Reflecting recently on his time as federal treasurer, Peter Costello said he regretted his 1996 decision to introduce a 15 per cent superannuation surcharge on taxpayers who earned more than $70,000 a year. For a number of reasons, including administrative complexity and successive legal challenges to the legislation, that tax was abolished in 2005.

Eight years later, the Gillard government released draft legislation reintroducing a 15 per cent surcharge on the super contributions of taxpayers who earn more than $300,000.

While far fewer taxpayers will be subject to this tax, and major exemptions apply for the judiciary and senior state public servants in constitutionally protected funds, the new legislation is extremely complex and will again be a nightmare for the Taxation Office to administer.

On equity grounds, there is no justification for exempting the judiciary and senior state public servants. The bulk of the revenue collected will come from federal politicians and public servants who are members of generous defined-benefit funds.

Private-sector workers and public servants in accumulation funds will pay, at most, an extra $3750 a year in tax because of the low $25,000 concessional superannuation cap applying from July 1, 2013. Even when this cap is increased as proposed to $35,000 a year for some taxpayers, the maximum tax take will be $5250 a year per high- income member of an accumulation fund.

Federal employees, other than exempt members of the judiciary, who belong to generous defined-benefit funds (such as CSS and PSS) will face much larger and, in some cases, daunting tax bills.

The draft legislation indicates that the actuarially assessed annual value of employer contributions to these funds will be subject to 15 per cent tax with no upper limits. The actual tax assessments will depend on the actuarial methodology used.

Because of lower-interest rates and increased longevity, these assessments are likely to be much higher than those levied under the Costello surcharge. An accurate assessment of the value of a retirees defined-benefit pension, moreover, would require detailed information about their past salary progression and the age and sex of their partner. If undertaken, these assessments would add significantly to the cost of collecting the new tax.

Previous actuarial assessments of the notional employer contributions required to fund defined-benefit pensions suggests a value of about 60 per cent of superable salary for a federal politician and 30 per cent for a CSS member. In these cases, assuming a superable salary of $300,000 a year, the new surcharge would result in an extra annual tax bill of $27,000 for the politician and $13,500 for the public servant.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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