Parametric head of research (Australia) Raewyn Williams and analyst Josh McKenzie have argued in a research note that investment tax inside super may be a political “soft target” because it won’t be directly felt in voters’ hip pockets, but it will come with unfavourable longer-term impacts.
The analysts have suggested that the two most likely tax options are increasing the headline tax rate of 15 per cent or reducing the capital gains tax concession from one-third.
A third option suggested was limiting the claiming of franking credits for Australian share dividends, but the analysis discounts its likelihood as being too politically risky.
Using the Productivity Commission’s asset allocation, returns, fees and other modelling assumptions in its 2018 report, the Parametric analysis has suggested a fund member can expect to retire after 46 years with an account balance of $682,146 at a 15 per cent tax rate.
“The smallest tax increase (15 per cent to 17.5 per cent) causes the member to forgo (in today’s dollars) $40,509 in retirement savings,” the report stated.
“But if the tax rate is increased to 25 per cent, then the member loses $150,448 in retirement savings, ending up with 22 per cent less than expected outcomes under the current tax regime.
“The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member.”
The paper has said shifting the tax dial to reduce the one-third capital gains tax (CGT) discount concession would have a much more subdued effect on a member’s retirement balance. Unlike increasing the 25 per cent headline tax, the CGT change would only impact some assets inside super and not erode members’ initial taxed contributions.
“A very small reduction (3 per cent) in the CGT discount concession to 30 per cent would shave a negligible $1,545 of the member’s retirement balance of $682,146,” the analysis stated.
“Even using our most aggressive assumption (the CGT discount more than halving to 15 per cent), the expected loss to retirement savings is a modest $8,446.”
Other more muted changes to the super CGT rules are also possible, such as extending the current one-year holding period rule (for CGT discount eligibility) to three years, capping carry-forward capital losses or limiting the types of assets eligible for CGT discounting. Faced with a raft of possible tax changes, the industry should favour changes to the CGT rules over a blanket increase in the super fund tax rate.”
Ms Williams and Mr McKenzie also warned the possibility of tax increases should send a message to the industry, for funds to better manage tax impacts of their investment decisions.
The analysts’ research suggested that an after-tax focus would be more valuable to retirees than reigning in fees.
“What if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement incomes?” the research note said.
“After all, good retirement outcomes are the raison d’être of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.”
The pair wrote that super funds thus have “more in their armoury than they might think”.
“Lobbying against tax changes that will be most harmful to members’ precious retirement savings should be part of the industry’s response,” the analysts wrote.
“But, behind the scenes, funds should also consider the value of genuine after-tax portfolio management in a higher-tax environment to limit the price paid by future generations of retiring members.”
