What The Hell Is Going On With Your Super, And Why You Should Care

'Sorry... What?'

09/06/2016 12:16 PM AEST | Updated 15/07/2016 12:53 PM AEST

Election 2016: Super nabs another victim

It's the policy that caused Julie Bishop's 'gotcha' moment on Tuesday. It had Sarah Hanson-Young apologising, and, earlier, had Malcolm Turnbull explaining himself again.

Now, Liberal donors and party members are reportedly retreating from their supportive voices and pockets.

So what on earth is going on with the superannuation policy causing these super slip-ups, and why the heck should you care about our politicians getting down to the bottom of it?

About $25 to $30 billion is taken from Treasury each year for superannuation tax concessions. Basically, if Australians weren't putting their money into a super fund to receive tax breaks, these collective billions would be going into the budget.

High-income earners are the main winners, with 38 percent of the tax breaks going to the top 10 percent of income earners.

Economist Michael Rafferty, an Associate Professor at RMIT, told The Huffington Post Australia both major political parties have put forward similar superannuation policies "clawing a little bit back" from superannuation tax breaks. The Coalition's policy, which will be implemented on July 1, 2017, will reap $6 billion over three years.

"This is money that's coming out of the budget, every day, that is going to high income people so there's less money for education, for the health system, for roads," Rafferty told HuffPost Australia.

"Unfortunately, that's not the way it gets talked about."

So if it's such a big issue, why hasn't it been addressed (and talked about) already?

The problem both major parties have when making policy changes around superannuation is their links to beneficiaries -- whether they're individuals or businesses. For the Coalition, many of their voters are the high-income earners reaping the benefits from tax breaks.

For the ALP, they have strong links to unions which benefit from industry super funds.

I don't really understand how the superannuation system currently works at the moment, so the changes don't mean much to me. Help?

"Essentially our retirement system has two components. One is the retirement income component and the other is a tax advantage savings component," Rafferty said.

At the moment, any retirement savings you have are untaxed while any funds in the additional savings are taxed 15 percent (or 15 cents to the dollar) which is much lower than the income tax rate (up to 47 cents to the dollar).

Everyone earning an income has 9.5 percent of their earnings put into a superannuation fund.

"If you have retirement savings at the moment, they're untaxed. If you've saved during your working life... the idea of it becoming taxed seems a little bit wrong," Rafferty said.

"But here's why. People who have large amounts of surplus money have been able to take a policy which looks reasonable and pump huge amounts of money into it. There are quite a lot of people who have huge retirement income savings invested in the stock market, which is untaxable.

"People can be earning $250,000 on their retirement. And when money is taken out of retirement savings, no tax is being paid. They're not paying any tax on the way in either."

So what are the big changes and who do they affect?

Okay, lets break it down into three major changes.

The $1.6 million cap: This impacts the first part of a superannuation account which we mentioned earlier, called the retirement income component. This comes from the 9.5 percent of your income, which is automatically directed into the account by your employer.

Currently, there is no cap on the amount of money you can put into this component that is not taxed. However, the Coalition will cap this amount from July 1, 2017 to $1.6 million. And any excess amount will go into the additional tax advantage savings component (which is part two of the fund -- for more about this, read on), but remember this component is taxed at 15 cents to the dollar.

Additional contributions: These are the extra sums of money you can choose to put into your savings account on top of the 9.5 percent automatically paid into your account by your employer.

These additional contributions are referred to as 'non-concessional contributions'. They remain in part two of the super fund with the 15 percent tax rate, but once you retire there is no longer a tax rate on these additional amounts.

The Coalition have capped the additional contributions to $500,000 in a lifetime, which is much smaller than the $180,000 currently allowed each year. And what has infuriated many Australians is this cap has been backdated to the middle of 2007.

Transition to retirement: So this is the policy change which caught Julie Bishop out, and it's all about the "preservation age".

"This is a complex maze that people need good tax accountants for," Rafferty said.

It was introduced by the government to help out Australians on the verge of retirement who suddenly lose a job or move to part time work and want to chip into some of their retirement savings to act as a buffer.

From the age of 56 to 60 (depending on the year you were born), you can start withdrawing a maximum of 10 percent from your retirement savings account tax-free. And you can also continue to add to your retirement savings account tax-free.

"You're basically going to get tax free income from your super, and can make tax concessional contributions into your super," Rafferty said.

"Who are the people benefiting from this? It's not often the guy who has lost his job as a bricklayer. It's basically someone who's earning a high income -- they start this recycling from their superannuation account. It's like a family trust in that sense."

What the Coalition has proposed is to remove the tax-free withdrawal in this phase, so there will be a 15 percent tax on funds being taken out.

This is the change reportedly bothering blue collar workers, but it will also reduce the amount of high income earners using the system to recycle tax-free funds withdrawn and then contributed to their retirement account again.​

So what now?

Well, the election is keeping these policy changes in the spotlight, with some Liberal MPs concerned about it losing support for their party. The ALP is on the attack, but their arguments lie more in the Coalition's dysfunction than the policy itself, because they are also trying to cut back on tax breaks.

Rafferty believes any of these changes are still too timid.

"During the Howard/Costello period these tax concessions were opened up in the most amazing fashion," Rafferty said.

"Literally rivers of gold were pulled out of the Treasury into these tax concessions and all that's happening is some of them are being closed off. You can call it 'retrospective', you can call it a 'tax hike' but all it is doing is closing off massive loopholes that were opened up a decade or so ago."

But sometimes, all you can see on the surface is a policy being used as ammunition during an election campaign, and some golden eggs.

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