Governments squandering taxpayer money has always been an irritant. That’s why in 1991, across the lounge rooms of Australia, we rose as one and cheered when Kerry Packer served it up to the Senate Inquiry.
‘I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.’
Packer spoke on all our behalf.
We could say ‘nothing’s changed’ over the past 24 years. But it has. The waste has increased.
Consider the welfare largesse of the Howard era. The mindless spending of Rudd-Gillard-Swan and their debt legacy.
All these chickens have come home to roost. The latest Federal budget is awash in red ink.
What else? There’s overly optimistic growth figures. There’s a government more intent on retention of power than reduction of debt. We have an opposition who have absolutely no shame about their debt mess and unfunded promises.
And a Senate with Jacqui Lamby, Glenn Lazarus…well, enough said.
Put this all together and it means there’s ‘a snowflake’s chance in hell’ of a surplus being achieved anytime within the next decade.
With every passing day there’s a growing likelihood a global recession will hit our shores. A government short on income and long on expenses is going to act (not talk) on reducing tax deductions and welfare payments. The cuts will be much harder than most expect.
Given that superannuation and the age pension are front and centre in the retirement plans of society’s largest demographic — baby boomers — these two areas are obvious targets for the government to attack.
Moral of the story — best to get what you can, while you can.
As a boomer myself, superannuation is my favoured savings vehicle. Others are different. Superannuation evokes different responses relative to the age of the member.
Boomers and retirees, on balance, speak favourably about superannuation.
Under 50s, not so much.
Under 30s couldn’t care less.
Superannuation is a tax effective savings vehicle and an even more tax effective pension payment vehicle.
Those under the age of 50 tend to have a reluctance to make maximum contributions to superannuation due to concerns about government changing the rules about how and when you can access your money.
There is no question this is a definite risk. And, the younger you are, the bigger the risk.
Most boomers do not have the overheads of generations X and Y. Also, the timeframe to access the magical lump sum — tax free — is much shorter. The same level of legislative risk does not apply.
Generally speaking this is why superannuation is a tax and compounding gift to boomers. I can hear it now — ‘there’s those damn boomers benefiting again from the system’. Yes, it’s true. We boomers have had an inside ride — on education, housing, employment — compared to the following generations. But that’s the system…rightly or wrongly.
My guess is that the dream run…is going to end.
So make the most of it and use the rules (while they last) to your benefit.
For those aged over 55, a big potential benefit is the ability to convert your superannuation fund to an account based pension.
The earnings of a fund in pension mode are taxed at the most attractive rate of all — NIL. That’s right, a legal tax free haven right here in Australia. There’s plenty of talk about introducing a 15% tax on pension fund earnings above $75,000.
However as the rules stand today, the tax rate is NIL, nothing, zero. And that’s on as many pension dollars in earnings you can generate. How good is that?
Which is why it’s unlikely to last beyond the next election cycle.
All this generosity was courtesy of Howard and Costello. Those were the good old days — when boomers were still a few years away from being a tax drain. The government had an embarrassment of riches from the mining boom and Howard desperately wanted buy votes at the expense of the then fresh-faced opposition leader — Kevin Rudd.
It’s highly likely the tax attractiveness of superannuation, as we know it today, has a definite shelf life. Having said that, none of the changes, designed to reduce your tax benefits and increase government tax revenues, are likely to happen overnight. But little by little, governments (of both colours) will shave a bit away here and a bit more away there.
With each slice of the budgetary knife you’ll need to reassess whether superannuation is still the savings and income vehicle of your choice.
But for now, it’s a matter of making hay while the sun shines and legitimately reducing the level of your donation to the Canberra spend-a-thon…if your age and financial situation warrants that approach.
Personally, my money is where my mouth is…this financial year, my wife and I have made the maximum concessional contribution. The taxes saved — between our personal tax rates and the 15% tax on the contributions — is much, much better in our pockets.
When the rules change, then we’ll change our tax minimisation strategy…if need be.
But in the interim, my view is (to quote The Big Fella himself):
‘I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their heads read.’
Superannuation is a much maligned investment choice. The reality is, that for now, it is the best low risk tax effective investment vehicle in Australia.
Every year you can take advantage of the tax savings on offer, is a good year.
Sure the tax breaks may not be as generous in a few years time…but you cross that bridge when you come to it.
In the meantime keep as much of your earnings as possible for you. Believe me when the debt supercycle implodes and governments apply more restrictive access to the age pension, you’ll be glad you stockpiled money when you could at their expense.
Editor, Gowdie Family Wealth