The four points of the plan are:
- Division 293 tax to apply to everyone on the highest tax rate bracket
- No-one in the 19% tax bracket to pay contributions tax
- Introduce lifetime contribution caps in addition to annual contributions caps
- Limit tax-free status of income supporting a pension via an asset cap
Currently Division 293 tax increases the contributions tax for high income earners, those earning more than $300,000, by 15%. Under Mercer’s plan this would extend to people earning more than $180,000. Based on the the 2014/15 tax rates these people would pay 30% on their contributions and have a marginal tax rate of 45%.
Mercer recommends that “nobody pays more tax on their concessional contributions than they do on their income”, and a key part of this would be changes to the Low Income Superannuation Contribution (LISC), so that the contributions tax for someone on the 19% tax bracket or lower would be 0%. However this is unlikely to find favor with the Government, given the announced intention to repeal the LISC as part of the Minerals Resource Rent Tax repeal.
Mercer also recommends implementing a lifetime contributions cap while keeping the annual contributions caps to “limit the cost of the tax concession in any one year”:
“for example a person’s annual cap could be increased by half the unused amount from the previous year but with a limit of say three times the annual cap in any single year. A similar approach cap could apply to non-concessional contributions thereby removing the existing complex three year rule.”
Point four of Mercer’s plan is a limit on the tax-free status of income supporting an account-based superannuation pension by imposing a limit of $2.5 million in pension assets per person. According to Mercer’s plan “assets in excess of this amount could be commuted (i.e. paid out) or transferred back into the accumulation section of the superannuation fund and therefore be subject to the normal 15% tax on investment earnings”. The cap would be indexed, and “special consideration” given to annuities and defined benefit pensions, along with a five year transition period. However this part of the plan is likely to run into the same difficulties as the previous government’s plan to cap the income supporting a pension eligible for concessional tax treatment at $100,000.
According to Mercer this four point plan “would create a fairer superannuation system and reduce the cost of tax concessions to the Federal Government”. Dr Knox, Senior Partner at Mercer said that:
“The taxation of super can be improved for the benefit of everyone. What’s important is that any changes are made after looking at our retirement savings system in its entirety and the impact of altering the tax model could have on the future costs of funding the age pension.”
It seems this plan was released with the intention to feed into the process for the Government’s Tax White Paper. More details of the four point plan can be found on the Mercer website.
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