In August 1996 Prime Minister John Howard introduced a superannuation surcharge which meant that higher income earners paid a surcharge on their superannuation contributions.  It was an absolute nightmare and cost more to administer than it raised!

We are back in this territory again, with proposals to tax a person’s superannuation contributions at their marginal rate, less a rebate.  As the Association of Superannuation Funds of Australia (ASFA) pointed out in the weekend Financial Review, the effect could be that people would be pushed into higher tax brackets.  This is because the Henry Review recommendation was that superannuation contributions would be added to your income for tax purposes.

Think about a person earning $79,000 a year.  If their employer made a contribution for them of $8000, that $8000 would be added to their taxable income and thus increase it to $87,000 a year.  This would put them in a higher tax bracket; and any interest, all net rents, or any other extra income would be taxed at 39% instead of their current tax rate of 34.5%.

It gets worse!  Imagine the reporting that would be involved.  The tax office would have to report your taxable income to the superannuation fund, then your superannuation fund would have to make a report to the tax office of how much in superannuation contributions were made on your behalf so that a rebate could be calculated!  Then of course comes the question of who will pay the rebate and to where.  To the fund or to the employee?

As I have said repeatedly, tax reform is complex.  I think the May Budget will be a very interesting one.