Tougher regime but saving has appeal
Tuesday's budget, as would only be expected in an election year, contained no nasty surprises to upset ordinary taxpayers.
Thanks to the intervention of former minister Simon Crean, who warned against retrospective changes to the superannuation rules, all the adverse changes to the super rules had already been announced. And even these only affected a relatively few higher income taxpayers.
Resource company investors have also escaped the threatened claw-back of generous depreciation and investment allowances. The company tax changes have been directed mainly at overseas companies paying little or greatly reduced company tax bills in Australia through internal company transactions.
It may still not be safe to plan ahead for the new financial year because of the election in September and the resulting uncertainty whether the new government will proceed with the two positive superannuation measures contained in the budget.
The first is a rise in the annual concessional (tax-deductible) contributions cap from $25,000 to $35,000 for taxpayers aged 60 or more from July 1.
The second proposal, if enacted into legislation, will remove the worst abuses of the penalty tax regime on annual contributions in excess of the concessional caps. This reform is long overdue and will, from July 1, allow people to withdraw from their super fund all excess contributions and pay only their marginal income tax rate plus an interest charge. They now can face penalty tax bills as high as 93 per cent in certain situations.
Despite this improvement, overall the superannuation tax rules are now much tougher than they were when Labor was elected to office. Compared with previous years, older taxpayers now have much less scope to make catch-up contributions when they can afford them.
Despite this, for taxpayers willing to take the risk that future governments will not adversely alter the rules, superannuation remains an attractive savings option because of the higher marginal tax rates introduced this year. As part of the changes that raised the tax-free area almost threefold to $18,200 a year, the government increased all marginal tax rates. Above $37,000 a year, the marginal rate is now 34 per cent (including the Medicare levy) rising to 38.5 per cent at an annual income of $80,000.
After paying the 15 per cent contributions tax, the saving for putting money away for retirement is thus either 19 per cent or 23.5 per cent. The tax advantages of negative gearing were not changed. For investors prepared to risk borrowing, the tax savings are even higher because there is no 15 per cent contributions tax levied on the tax deduction.
Negative gearing is now for this reason even much more attractive to taxpayers earning more than $300,000 a year who are subject to a 30 per cent contributions tax rate in measures announced in the last budget. The reduced borrowing costs resulting from recent interest rate cuts also boost the attractions of negative gearing relative to super.