Superannuation, Tax

CGT least harmful super tax tweak

CGT superannuation tax

Any superannuation tax changes made as a budget repair measure should be made to the CGT treatment for funds to minimise the impact on retirees.

Global implementation specialist manager Parametric has recommended any superannuation tax changes the federal government is considering as a budget repair measure should be made to the capital gains tax (CGT) treatment for funds to minimise the impact on retirees.

In their paper, “Will retirees pay the price for superannuation tax rises?”, Parametric head of research in Australia Raewyn Williams and analyst Josh McKenzie argue reducing the 33 per cent discount currently applied to CGT on superannuation assets would be the least disruptive course of action for individuals should the government use people’s retirement savings as a fiscal lever to repair the budget deficit caused by COVID-19.

According to the authors, doing so would end up affecting some but not all assets held in a super fund.

“A very small reduction (3 per cent) in the CGT discount concession to 30 per cent would shave a negligible $1545 off the member’s retirement balance of $682,146. 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 $8446,” Williams and McKenzie noted.

“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.”

The paper noted the other option, with regard to using superannuation for budget repair, was to increase the 15 per cent tax rate current levied on fund income, but suggested this would be too severe in its implications for superannuants.

In stating their case against this action, Williams and McKenzie predicted a fund member could expect to retire with savings of $682,146 after working for 46 years under the current 15 per cent tax regime based on financial parameters contained in the 2018 Productivity Commission report.

“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. 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,” they said.

“Faced with a raft of possible tax changes, the industry should favour changes to the CGT rules over a blanket increase in the superannuation fund tax rate.”

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