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Government Ends Speculation on Taxing Super Benefits
By Chris Campbell

In Federal Parliament yesterday, Prime Minister Julia Gillard ended speculation on taxing superannuation benefits for those aged 60 and over. The Prime Minister reaffirmed the government's 2010 promise that they will "never remove tax-free superannuation payments for those over 60" she said.

Since this story broke last week, there has been a tremendous backlash reported in the press from not only the superannuation industry, but both sides of politics including former Labour Minister for Superannuation Nick Sherry, and the architect of tax free superannuation former Liberal treasurer Peter Costello.  Both strongly supported the continuation of no tax or limit on superannuation lump sums or pensions for those over age 60.

What about pension fund earnings?

Unfortunately speculation does not end there as the Government still has its eye on Treasury's recent estimate that superannuation tax concessions cost the Government upwards of $30 Billion  per year.

The Henry Review of Taxation in 2010 included a proposal to tax pension paying funds on their earnings at 7.5%. Pension paying funds currently pay no tax on investment earnings or realised capital gains. At the time, the Government neither accepted nor rejected this proposal.

A recent ATO report stated that more than 50% of the reported earnings of superannuation funds in 2011 were tax exempt investment earnings of pension paying funds. Accumulation funds pay tax at 15%. As the population ages and more members move to drawing a superannuation pension, this exemption on fund investment income will grow.

As tax revenues decline, pension fund earnings become an attractive target to tax in some fashion. For the Government, continuing a nil tax rate on unlimited amounts of fund investment earnings and capital gains becomes a matter of affordability.

Accumulating Super Funds: Could tax rate of 15% be at risk?

Other speculation considers raising tax on contributions and earnings of superannuation funds that are accumulating benefits during your working life, above the current 15% tax rate. Given that the rate of tax on personal investment earnings is as high as 46.5%, superannuation funds are still likely to maintain a tantalising tax advantage, even if the tax rate did rise above 15%.

What can you do?

With a long federal election campaign ahead, rumours and speculation including tax changes to superannuation will no doubt continue. It will be important for superannuants to remain calm and seek professional advice before taking any action.

Pension paying superannuation funds currently pay no capital gains tax on investments when they are sold. If you have accrued large unrealised capital gains, you may wish to consider disposing of these investments say prior to the Federal Budget in May 2013. Again, seek advice before taking any such action.

Important Note: This Bulletin contains factual information about superannuation and tax related compliance matters and does not take into account your personal circumstances. The Corporations Act 2001 deems that making, increasing or decreasing superannuation contributions, or paying pensions or lump sums to be financial advice. We are not licensed to provide financial advice. Consider seeking advice from a licensed financial adviser.