Crispin Hull / Estate Planning should not be a Super Idea

crispin hull opinion

True story. How a millionaire avoided $10,000 in tax by a simple accounting transaction which is perfectly legal.

Follow this true case carefully and you will be as astonished as I was that Australia’s superannuation rules could allow such a thing.

Over 65-year-old Baby Boomer starts to wind down but still does work for four or five clients who pay him (yes, it was a man). His income has fallen a bit so he decides to sell one of his investment properties to give him some more spending money for holidays and restaurant meals.

He is up for a whopping amount of capital-gains tax which will push him into the top marginal rate.

So, he decides to put $27,500 into his superannuation account which has a balance of more than $3 million dollars. This will give him a tax deduction of $27,500, saving him 47 cents in the dollar, or $12,925. It is taxed going into the fund at 15 per cent so that comes down to $8800 in avoided tax.

The very next day he is allowed to take the $27,500 back out of the fund completely tax free. Remember then Treasurer Peter Costello’s beaming announcement that all money taken from superannuation fund by people over 65 would be absolutely tax free – even if it had been put in the previous day to earn a big tax deduction.

Our Boomer decides to leave in there for a couple of years (paying only 15 per cent on the earnings) until he decides to sell another property. That will round out the gift from the Tax Office to $10,000.

Yep, you got it. In one day out the next and a big legal tax deduction follows. Yep, you got it, you can have a superannuation account of $3 million and only pay 15 per cent tax on its earnings.

The superannuation system is riddled with these kinds of concessions. In all, superannuation tax concessions will soon cost the Budget more than $50 billion a year – about the same as the old-age pension.

The moral and economic case for hauling them in is unassailable. The only question is by how much and which concessions should be changed and which left. 

The detail is dangerous for the Government. Eyes glaze over when you talk about superannuation and tax. Most people have very little understanding of the detail and no time or inclination to get across it.

It therefore leaves the Government open to the Opposition’s chant: Labor is coming after your super.

The quicker Labor legislates the details the better. And better still if it says what it will do with the money saved. Say, split between Budget repair and adding dental to Medicare.

What is fairer or more important: attending to bad teeth and its consequences or giving a tax concession to a Baby Boomer with $3 million in superannuation?

The quicker Labor does something like that, 99 per cent will see that they would not be affected by the changes, but would benefit from dental benefits – which like Medicare itself would be electorally hard to go back on, though no doubt the Coalition would add dental care to its 30-year campaign to undermine public universal health insurance.

Opposition Shadow Treasurer Angus Taylor added his rarely heard voice to the superannuation “debate”. The Coalition would oppose any change, he said, without seeing the detail or engaging with the merits of the argument.

Funny how the Coalition demands more detail on something which is inherently broad brush (the Voice), on one hand, but takes a broad-brush approach on something which has a myriad of detail (superannuation).

The Coalition’s attitudes to superannuation over the past 40 years are replete with hypocrisy and class warfare.

It has always thought that superannuation with generous tax concessions should be the sole province of the business and managerial classes and the workers should be denied dignified retirement.

In the 1980s it opposed the Hawke Government’s laws to bring superannuation into industrial awards and applauded an employer challenge to them in the High Court. They lost.

They opposed the Keating Government’s signature universal 1992 Superannuation Guarantee legislation in the Parliament. It required employers to pay a percentage of each employee’s earnings into superannuation, beginning at 3 per cent and ultimately rising to 12 per cent.

They opposed every increase in the levy, usually arguing that employers could not afford it – as if it were the employers’ money. But now they argue, suddenly, that Labor is after “your money”.

They have constantly wanted to allow desperate first homebuyers or the Covid stressed to raid their superannuation – the former adding fuel to the housing market and the latter largely misspent on consumer junk.

They have objected to workers having some control through their unions of how the funds are invested. They hate the universality of the scheme. 

In short, they want to go back to the 1960s and restrict superannuation to business owners and managers who can use it as a vehicle for tax avoidance and estate planning.

Labor needs to get on with change before the typical scare campaign gains momentum and yet another of the many Howard Unfairnesses becomes beyond the reach of sensible reform.

There are a couple of ways at least that superannuation could be restricted to providing reasonable retirement benefits rather than inequality-entrenching estate planning. One would be to remove tax concessions on any earnings on funds above, say, $3 million. The ATO suggests there are only about 80,000 of these accounts – just 1 per cent of them.

It could be set at $2 million if you were serious about Budget repair, but the Coalition is only interested in Budget repair if the well-off do not contribute and the burden is placed on those most in need of help.

Another would be to legislate that any tax concessions made over the years upon the earnings of a fund designed for retirement die with you, because after than they cannot be used for retirement. So, the concessions would get repaid as tax on the way out.

The message should be: If you want to engage in estate planning or building up massive funds, do it with your own post-tax money, not on tax concessions designed to provide reasonable retirement income.

This article first appeared in The Canberra Times other Australian media on 28 February 2023.

www.crispinhull.com.au

Crispin Hull is a former editor of The Canberra Times and regular columnist.

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