When rumours started floating about a superannuation wealth grab this year, many dismissed the idea out of hand. Some even laughed. Superannuation was untouchable, they said. The government coming after your super sounded absurd to many.
Yet in a world of tightening budgets, the ridiculous becomes the likely. In no time at all, the conversation shifted. Now, we find ourselves facing the very real prospect of major superannuation reform.
Whether we like it or not, super tax concessions are heading for change. Adjustments that could see tax breaks on super drawn back drastically.
These reforms could come in the form of capital gains tax exemptions on investment properties. Or they could arrive at the expense of concessions for high income earners. Or both…
Take investment properties as an example.
If you sold a house for $500,000, it’d count as part of your overall income for the year in which you sold it. That would qualify you as a high income earner. And it’d make you liable to pay 30% tax on your super contribution for that year.
Now let’s imagine that tax rate rose to 50%. You could be paying up to half of your super contribution in taxes for the year in which you sold that house. That could mean paying in excess of $14,250 in taxes on your super. And that’s only for people who plan to sell assets, but remain below the $300,000 high income threshold.
If you qualify as a high income earner every year, that’s a significant hit on your superannuation in the long run. Over the course of 30 years, it amounts to $427,500 in superannuation taxes.
It’s a large sum of money, as I’m sure you’ll agree. But it’s an example of what super tax break changes could do to your wealth.
In the grand scheme of things, it doesn’t really matter where it starts from. But once the ball gets rolling, nothing will be off limits. One way or another, retirement plans will change. Your super won’t take you as far as it once did. And your standard of living will suffer.
As these changes come into effect, a new strategy will be key. One in which you take a more hands on approach with your super. Where you shop around, seeking funds that offer you a better deal in the form of lower fees.
We’ll look at this in more detail below. For the moment though, I want to keep your attention on super taxes.
Business backing for super tax concession reforms on the rise
2015 is something of a turning point in the discussion over super tax breaks. Unlikely rumours have morphed into serious debates. Business, government and community leaders are all having their say. And what they’re saying is that super taxes must change.
Last week, KPMG hosted a summit on super tax reform. The summit had a simple aim. It asked the delegates where they wanted to see reforms go. And it ranked them on a scale of low, medium or high priority.
The survey broached issues like bracket creep. Stamp duties and land taxes also dominated discussion. But the biggest issue raised was that of super tax breaks. On this, the delegates were unanimous in their agreement.
Over 90% of delegates saw super tax breaks as medium or high priority issues. That’s a high number. Especially in the context of other tax reforms. Consider for a moment their stance on corporate tax rates.
You’d imagine a survey of business leaders would lean towards corporate tax cuts, right? Well, it didn’t. Just 51% said company tax rate cuts were either medium or high priority.
In other words, superannuation tax breaks are a bigger concern than corporate taxes. It’s not something you’d expect to see.
Of course, this might have something to do with the Aussie corporate tax landscape. Just 12 Australian companies contribute a third of all tax income. Among these are your big four banks, and the two big miners.
Corporate taxes concern bigger multinationals. But they’re less important for domestically oriented businesses. Most of these 12 companies conduct their business right here in Australia. All of which is to say that they’re not going anywhere.
Of those, the only ones calling for corporate tax cuts are the miners. That’s not surprising in the least. They’re not as domestically concentrated as the banks are, for instance. Which explains why Rio Tinto [ASX:RIO] still wants a 25% corporate tax rate (down from 30%).
But I’ve strayed from the point. What’s key is that the business community is closing ranks around super tax concessions. It wants them reduced. And it wants to leave you with higher taxes, and smaller super balances. The ultimate loser in this war is you, the hard working Aussie retirees.
But there is something you can do about it.
It all starts with fees.
Adopting a hands on approach with your Super
The next few years may see new laws addressing super tax concessions.
There’s not going to be much you’ll be able to do about this. It’s coming because the powers that be won’t let this opportunity slip for them. There’s an easy opening for a cash grab at stake, and they aren’t going to miss out.
What you will have control over instead is who you place your super with. That’s important because high fees plague the super industry. Some funds offer relatively low fees. Others are shamelessly high, often filled with hidden charges.
That’s what you should be looking out for in the coming years. Funds that work for you, not fund managers. Funds where your super isn’t abused by the type of supervisor that gets paid regardless of performance.
To be fair, the industry is moving in the right direction. New regulations, increased competition, and technology have driven down costs.
Yet the total fee-take has also risen in line with the growth of the industry as a whole. Aussies paid $23 billion in super taxes in the year to June. The total amount in fees collected rose by 7%.
Nonetheless super fees are down 40% over the past five years. Though you may not know it. Not if you’re in a fund with existing high fees, anyway. If you’re waiting on your fund to do your work, you’re missing out. Your fund isn’t going to offer you lower fees through sheer goodwill.
Instead, the onus is on you to seek out these funds.
If you’re sitting on a larger balance, you have even greater incentive to switch. People with significant balances often don’t pay entry fees when changing funds. As clients of high potential value, super funds want your business. Which is why they’re happy to negotiate on fees. When it comes to attracting high value clients, funds don’t skimp on discounts.
At the same time, you could ask for better rates with your existing fund. You don’t need a massive balance for this either. Many funds will negotiate your fees even if you sit on as little as $100,000. That’s the upside at least.
The downside is that people are still losing lots of money in fees. And you could be too.
Even with a $50,000 balance, you’re still probably paying high fees. You’re potentially losing $2,000 a year on average. For those with $250,000, that figure rises to $3,000 in fees.
You can see why shopping for a better deal makes sense. There are plenty of low cost options on the market right now. You only have yourself to blame if you feel your fees are too high.
As super tax breaks roll back, finding gains will be of greater importance. Fees are the obvious place to look first. They’re an easy, efficient way to save money. But they also require that you make some effort. Otherwise you’ll remain stuck paying fees higher than the industry average.
The choice is yours.
Contributor, Markets and Money
PS: It’s clear the superannuation industry is rife with abuse. And it’s not just government policies getting in the way. You’re more likely to be a victim of hidden fees and charges.
Yet as Markets and Money’s Bernd Struben says, it doesn’t have to be that way.
Bernd is the Managing Editor of Port Phillip Publishing. He has more than 20 years of professional finance and management experience. Bernd’s written a free report to help you devise a plan to protect your money.
He’ll show you how to take control of your own destiny. How to make your super work for you…
In the report, you’ll learn why you should never leave your savings in the hands of fund managers. They get paid regardless of their performance. Bernd will also talk you through four core principles of successful investment philosophies. A strategy in which your super works for you, building the wealth you’ve always dreamed of.