Super tax changes will cost retirees, says Parametric
The possibility for government to increase superannuation taxes in response to the ballooning budget deficit caused by COVID-19 could severely hurt member balances at retirement, according to a research note by the global implementation specialist manager Parametric.
Raewyn Williams, Head of Research (Australia) and Analyst Josh McKenzie, in a short paper titled “Will retirees pay the price for superannuation tax rises?” argue that investment tax inside super may be a political “soft target” because it won’t be felt directly in most voters’ hip pockets, but it will come with an unfavorable “tit for tat” – the longer-term impact on retirement outcomes.
The authors suggest that the two most likely tax options are increasing the headline tax rate of 15% or reducing the capital gains tax concession from one-third. A third option, limiting the claiming of franking credits for Australian share dividends, is discounted as being too political risky.
Using the Productivity Commission’s asset allocation, returns, fees and other modelling assumptions in its 2018 report, they suggest a fund member can expect to retire after 46 years with an account balance of $682,146 at a 15% tax rate.
“The smallest tax increase (15% to 17.5%) causes the member to forgo (in today’s dollars) $40,509 in retirement savings. But if the tax rate is increased to 25%, then the member loses $150,448 in retirement savings, ending up with 22% less than expected outcomes under the current tax regime.
“The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member.”
Williams and McKenzie say shifting the tax dial to reduce the one-third CGT discount concession would have a much more “subdued” impact on a member’s retirement balance. This is primarily because, unlike increasing the 15% headline tax, a CGT change would only impact some assets inside super and would not erode members’ initial (taxed) contributions into super.
“A very small reduction (3%) in the CGT discount concession to 30% would shave a negligible $1,545 of the member’s retirement balance of $682,146. Even using our most aggressive assumption (the CGT discount more than halving to 15%), the expected loss to retirement savings is a modest $8,446.
“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.
“Faced with a raft of possible tax changes, the industry should favour changes to the CGT rules over a blanket increase in the super fund tax rate.”
Williams and McKenzie conclude that the possibility of tax increases should send a clear message to the industry – for funds to better manage the tax impacts of their investment decisions.
“Our research on the Productivity Commission’s report showed that a genuine after-tax focus could be more valuable to retirees than reigning in fees. So, what if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement outcomes? After all, good retirement outcomes are the raison d’etre of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.
“It reminds us that super funds have more in their armoury than they might think as the debate about potential super tax increases plays out. Lobbying against tax changes that will be most harmful to members’ precious retirement savings should be part of the industry’s response. But, behind the scenes, funds should also consider the value of genuine after-tax portfolio management in a higher-tax environment to limit the price paid by future generations of retiring members.”
For more information please contact:
Simrita Virk at Shed Connect
Parametric Portfolio Associates® LLC (Parametric), headquartered in the U. S. in Seattle, Washington, is registered as an investment adviser with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940. Parametric’s advisory services are offered and promoted in Australia by its affiliate, Eaton Vance Management (International) Limited (‘EVMI’). EVMI is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom and is located at 125 Old Broad Street, London, EC2N 1AR. Parametric and EVMI are both indirect, wholly-owned subsidiaries of Eaton Vance Corp. Parametric and EVMI are exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and pursuant to the Australian Securities and Investments Commission's (ASIC) Class Order 03/1100 and 03/1099, respectively. SEC and FCA rules and regulations may differ from Australian law. Parametric and EVMI are not licensed tax agents or advisers and do not provide tax advice in Australia or any other country. This material is intended for wholesale use only and is not intended for distribution to, nor should it be relied upon, by retail clients.
With $287.4 billion USD of assets under management as at April 30, 2020, Parametric is a global asset management firm offering investors a variety of portfolio solutions, including tax-managed centralised portfolio management, tax-managed indexing and factor investing strategies, as well as emerging markets and defensive equities strategies. Parametric Portfolio Associates® LLC is a wholly owned subsidiary of Eaton Vance Corp., one of the world's most dynamic global asset management companies. Assistant Minister for Superannuation, Financial Services and Financial Technology.