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Australia:
Tax reform package and superannuation
The Government released its long awaited Tax Reform package in August. Central to the reform is the introduction of a 10% Goods and Services Tax (GST) from 1 July 2000. In conjunction with the GST, there will be cuts in personal income tax rates, along with a range of other measures primarily designed to soften the impact of the GST. The package contains no major reforms as regards superannuation; the opportunity has not been taken to improve, or simplify, its tax basis.
Superannuation tax rates have not been reduced, even though all but the highest marginal personal tax rates have gone down. Unless superannuation tax rates are revised, the relative tax effectiveness of superannuation at the middle income levels will be reduced. The effective tax rate on superannuation, ignoring the surcharge but including both contribution and benefit taxes, is of the order of 29%. At the middle income levels (between A$20,000 and A$50,000), the proposed marginal tax rate plus the Medicare levy is 31.5%. At high income levels (above A$75,000), the tax effectiveness of superannuation is unchanged, as the top marginal tax rate was not reduced.
The Government stated that the tax reform plan would build on the ‘very significant measures’ it had implemented to, amongst other things, ‘reduce the tax burden’ and increase the ‘fairness’ of the taxation system. The surcharge on superannuation contributions was listed as one of these ‘very significant measures’. It appears, therefore, that the surcharge will stay for some time yet.
The savings rebate, announced in the 1997 Federal Budget and introduced from 1 July 1998, will be abolished from 1 July 1999. This has implications for members making contributions out of their after tax income. The savings rebate would have been some compensation for the fact that after tax contributions made after 1 July 1999 will be subject to preservation. The removal of the savings rebate, and introduction of preservation, may discourage members from making contributions out of their after tax income.
‘Salary’ sacrificed in return for fringe benefits will count in income testing for certain tax and social security purposes. It is not clear, however, how the Government will determine what is a salary sacrifice fringe benefit, as distinct from a benefit provided to an employee not in exchange for sacrificing salary.
From the 1999/2000 tax year, employers will be required to include the grossed up taxable value of an employee’s fringe benefit on the employee’s group certificate where the value of the benefits exceeds A$1,000. Consequently, this amount may readily be included by the Tax Office in the income used to determine the surcharge tax rate. This measure is consistent with a warning given by the Commissioner of Taxation shortly after the surcharge was announced, that if it was perceived there was widespread use of salary sacrifice to reduce incomes below the surcharge threshold, means to counter this would be devised. The GST will impact on many aspects of a superannuation fund’s operation (eg the ability to cash excess franking credits). Watson Wyatt believes that before the new tax measures are introduced, however, the issue of superannuation taxation needs to be addressed and will be making representations to the Government about the issues involved.
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