Written by John Abernethy, Chief Investment Officer
It seems clear that Australia is heading towards an adjustment to the rate of Goods and Services Tax (GST). Further it is likely that the scope of the GST could be extended so it is levied on a range of goods and services that were previously exempt. Financial products are one area that is being mooted.
As part of the GST restructure it has been strongly suggested that tax arrangements will be needed to compensate low income earners. Further it is likely that the company tax rate will also be adjusted downwards.
To understand what could result from the above changes we describe a scenario that could have a significant impact on the pension schemes of retirees. Indeed it is possible that private pension arrangements for most people may become unnecessary.

A possible scenario

Based on the low income compensation arrangements that were introduced with the “carbon tax” we can speculate that a lift in the GST may result in an adjustment to the tax free threshold.
For instance a GST lift from 10% to 15% should justify a lift in the tax free income tax threshold to $30,000 per annum. This is because low income earners will necessarily spend more of their after tax income on consumption. A consumption tax hits them hardest.
Concurrently, an adjustment to Corporations Tax may also be undertaken to take tax collection way from income and move it to consumption. A tax rate of 25% could be contemplated.
From these two changes there would be a dramatic effect on the requirement for and benefits of a private pension fund. To explain this we can consider the average retirement funds of an average Australian couple. Whilst it is hard to get exact figures we believe that an average retired couple, that accumulated super for 30 years, may have about $500k combined in their pension funds (i.e. about $300k for a male and $200k for a female).
Thus, this couple upon retirement could earn about $60k per annum tax free from their investments outside of pensions and that is before any other tax benefits from aged benefits etc. In passing we note that today this income approximates the full rate of pension for qualifying pensioners.
The important point to note is that $60k would approximate a return of 12% on the investable funds of this couple. This is a level of return that exceeds the current target for most balanced super funds given the hideously low interest rates that now exist. Further, a drop in the corporate tax rate will inevitably see the benefits of franking credits decline from a 30% franking credit to a 25% franking credit. More will need to be invested in equities to generate the same credits as today.
All of the above will put significant pressure on advisors to tell their retiring clients to cash in (lump sum out) their accumulated super for there is no tax or cost benefit in staying inside a pension fund. Indeed the maintenance of a personal pension fund will accrue compliance, administration, taxation and advisory costs that are not even tax deductible! So why have a pension fund if a better return can be had outside its stringent requirements?
All of the above leads to the conclusion that the changes that will occur in taxation and super will be significant in coming years. Further, we suspect that it will be a contributory national scheme that will be required to meet the retirement needs for the 65% of the population who will always need to draw upon part or all of the Commonwealth pension.