Super taxes: winners are…Challenger shareholders!

If any further confirmation was required that we are living through the superannuation version of “Dumb and Dumber”, Friday’s announcements should have provided it.

The best that can be said for the “reforms” announced was that they were nowhere near as damaging to good policy as appeared possible a short time ago, which is why industry associations have generally reacted positively. It could have been so much worse.

But in terms of making much progress on the stated intention to improve “equity”, they are a dismal failure. A reform which affects 0.4% of the population – before they restructure their affairs around the reforms – is going to have little or no impact on overall system equity.

Before we drill down into the changes, let’s be realistic about them:

– At present we have a couple of press releases. To say they are unclear in important respects is putting it nicely. Some of the details – such as the taxation of capital gains on pension divisions – are close to incomprehensible.

– Nothing is going to be legislated this side of the September Federal election. The betting markets put the current odds of an ALP win at ~10%, so the reforms may well never see the light of day.

So where did we land compared to the Tria predictions: Taxing super and unintended consequences .

Unexpectedly the Government went for a version of what we outlined as option 4 – a higher earnings tax for high balance members, defined as pension members earning income above $100,000, implying a balance above $2m. This also captured the idea of a reintroduction of reasonable benefit limits, which we highlighted in our last edition.

But it’s absurdly complicated:

– The $100,000 income limit (before a 15% earnings tax kicks in) is defined as cash earnings such as interest and dividends; ie it excludes capital gains.

– Capital gains will become progressively taxable. The key idea here is that a sunset has been placed on tax exempt capital gains, with even assets currently held and still unrealized becoming taxable after 2024. Capital gains on all assets acquired after 2014 will become taxable – presumably added to interest and dividend income for the purpose of the $100,000 limit.

A sunset clause on tax exempt capital gains for pension members, even one 10 years off, is a pretty big policy change, and seems to be primarily an attack on SMSFs which are most able to maintain assets from accumulation to pension division and permanently avoid capital gains tax. Direct property investments, due to their size and indivisible nature, may be particularly impacted.

This is going to be a nightmare to administer if it is ever legislated, but a dream for accountants and financial planners to help their clients restructure around it.

Given the issues the Government was looking to address, it would have been smarter to simply start taxing the pension division at the same rate as the accumulation division; ie 15% with a 10% rate of long term capital gains. It would have raised a lot more revenue, have been vastly easier to implement, and at least as arguable as where they have landed.

The good news? The partial restoration of concessional contribution caps to $35,000 for 60 year olds in July, and 50 year olds from 2014, is positive, as is the vague intent to move it there for everyone in 2018. Not exactly generous; in real terms this is only a modest increase from today’s $25,000.

The best news? Surely for Challenger shareholders. Thanks to 2 short paragraphs proposing the extension of concessional tax treatment to deferred annuities, Challenger shares were up 4% on Friday in a market which was down 0.5%.