GST rise would put savers in firing line

Whatever the outcome of the tax reform debate, the prospects of savers other than investors in the family home are looking very bleak.

Not only are low interest rates and volatile sharemarkets likely to be around for an extended period, making life more difficult for savers, they now face the prospect of being big losers in any increase in the GST tax burden.

The government has already clarified its position that lower-income households will be protected from the adverse effects of any rise in GST. Presumably this will be, as in the past, by changes to personal income tax thresholds and rates, and increases in the age pension and other welfare payments.

This compensation process will, of course, reduce the net gain from the tax reform process but also increase the attractions of receiving the pension and similar payments.

Unlike private sector employees accumulating savings to fund their retirements, with some exceptions, the key decision makers, mainly politicians and public servants, are automatically compensated via their superannuation arrangements. Increases in the GST reflected in the consumer price index trigger automatic half-yearly rises in their retirement pension.

Current and future retirees relying on their savings for their retirement income are unlikely to be so fortunate, unless they also receive a part age pension. Obtaining and retaining a part age pension ensures full compensation for any inflation, including any spent from increases in the GST.

After the new pension asset-test rules apply from January 1, 2017, a married homeowner couple will receive no age pension once their assessable assets (excluding home) exceed about $820,000. This capital sum is not sufficient to guarantee an annual CPI-indexed income of $34,000 which is the current age pension.

There's already a strong incentive for future retirees to reduce their savings or over-invest in the family home to qualify for a part age pension. This would be strengthened by any rise in the rate or coverage of the GST.

There's always the possibility that a GST increase could increase investment returns because of higher inflation. This would help savers by lifting their investment earnings but recent experience of worldwide low interest rates reduces the probability of this happening.

Continuing speculation about changes to the superannuation tax concessions doesn't help encourage voluntary contributions and adds to the general unease about achieving a comfortable retirement.

One thing is certain. Despite the government's actions to limit future access to the age pension, achieving a part age pension will be a key objective for many future retirees, especially if the GST is increased.

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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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