Super Fund Tax

By Jason Fittler

At present our government has a major deficit problem, so they decide to roll out the age old we “need to tax you more” line. 

I am sure that King Arthur would role this line out to the Knights of the round table as well; their excuse would no doubt be the threat of invasion.

So this week we have seen the good old lets increase tax on superfund’s line. So what is the plan and how might it affect you?

The plan is in two stages:

1. Tax super contributions made by people who earn more than $250,000 per year at 15%. Please note this already in place for those who earn more than $300,000 per annum. So it is just dropping the entry limit.

2. When in pension phase your income inside superannuation is tax-free, so the proposal is to tax your superfund earnings above $75,000pa at 15%.

These measures will only affect a small portion of people as the average full-time wage is $74,724 or was in 2013. The average high-income household takes  home around $94,500 a year. So if you are making over $250,000 which equates to a take-home pay of $156,500 per year, who are now considered to be very wealthy.

But this, of course, would depend on where you live. If in Sydney, you are most like just be scrapping by. But if you live in a small town you could be doing very well.

The next step is a tax on the income you earn once in pension phase. Again this will depend on how you invest inside of superannuation.

If you invest in the stock market, then you can expect an average return of 7.5% per annum so you can have up to $1 million in super.

If however you put it all in cash earning 2.5% per annum you could have up to $3 million in super. This policy would mean that people would make stupid investment choices based on the tax that they will pay.

Neither of these rules will affect government employees, such as the politicians. They are in government super plans where contributions are untaxed as such the new rules proposed will conveniently not apply.

Please note that the Treasurer has openly stated that no changes to superannuation taxation will happen this term as such the above issues will not affect you if at all, until after the next election.

Franking Credits

There is also talk about taking away franking credits. This comment is so stupid it is not worth mentioning, but we have all witnessed common sense go out the window if votes are up for grabs.

Franking credits were brought in to stop double taxation, for example, Company A makes $100,000 profit pays tax at 30% ($30,000). Company A then pays a $70,000 fully franked dividend to Shareholder A with a attached franking credit of $30,000. Shareholder A declares $100,000 income (being $70,000 cash dividend plus $30,000 franking credit) on his tax return. Shareholder A pays tax at 49% (yes Medicare levy is now 2%) being $49,000 and gets credit for the franking credit of $30,000 and has a tax bill of $19,000 ($49,000 less $30,000).

Without the franking credit, Shareholder A would pay tax on $70,000 at 49% being $34,300 with no credit to offset this amount. This would make the tax payable on the initial $100,000 profit of $64,300 or a tax rate of 64.3%.

Would you invest in anything that pay 64.3% in tax? No, and nor would anyone else.