Defending super reform, budget, big story clashes

5. In defence of big bang super reform

By Stephen Mayne

Michael Pascoe took a big swing at Peter Costello's superannuation reforms this morning but, with the greatest of respect, he couldn't have been more wrong.

Australia has long had a problem with excessive debt-funded consumption and low savings and Paul Keating's compulsory superannuation savings system was the first serious policy move to turn this around.

However, Keating almost killed the goose that was laying the golden egg because he over-taxed super, making saving through the family home and negative gearing a more tax-effective alternative. And there was something quite offensive about compelling citizens to put their money aside and then milking it for extra tax revenue.

The Howard Government made things even worse with the superannuation surcharge on income above $75,000 earnings, but that was abolished a couple of years back. Super needs to be assessed in the context of income tax rates, and the overall changes to the income tax scales from the Keating Government to the Howard Government will be as follows from 1 July this year:

Government	tax rate	threshold
Keating	zero	$5400
Howard	zero	$6000
Keating	20%	$20,700
Howard	15%	$25,000
Keating	34%	$38,000
Howard	30%	$75,000
Keating	43%	$50,000
Howard	40%	$150,000
Keating	47%	$50,000 +
Howard	45%	$150,000 +

By any measure these are quite substantial tax cuts, even after allowing for inflation and bracket creep, and they have served to make superannuation relatively less attractive.

Therefore, some catch-up cuts in super taxes were absolutely necessary, it was just a question of whether you provide relief on contributions, earnings or exit – all of which are slugged 15% at the moment. The government has chosen an option that costs $2 billion a year and dramatically simplifies a ridiculously complex system whilst not overly stimulating the economy.

There are marginal concerns about exacerbating the weight of capital in superannuation causing asset price inflation, but even that is preferable to excessive consumption which continues to suck in imports and blow out our current account deficit.

Super is now a better savings vehicle, although retirees are still best placed maximising the value of their tax free residence and the well-off still have a large incentive to take income as capital because the 50% discount on capital gains for assets held for more than a year has also become relatively more attractive thanks to the cuts in the two top tax rates.

Another good thing about super is that funds can't borrow to supplement investments. Concern that retirees will blow their lump sums and go back on the pension are marginal because both lump sums and pensions are benefiting from the abolition of the exit tax and Cossie is right to say that at $12,000 a year, getting the age pension is hardly a huge incentive to blow your lump sum.



6. Answering the big budget arguments

By Stephen Mayne

The budget has thrown up a number of key political debating points, so with the dust beginning to settle it's time to sit in judgment on who is right and who is wrong:

Interest rates

Budget measure: slightly expansionary and inflationary by reducing surplus from 1.5% of GDP in 2005-06 to forecast 1.1% in 2006-07.
The Commentariat: hopelessly split, ranging from Alan Kohler saying another rate rise is almost "inevitable" to Alan Wood's "unequivocal" claim it won't effect the RBA.
The defence: The RBA definitely won't lift rates on the back of this because we're still predicting a $10.8 billion surplus in 2006-07.
The truth: 90-day bank bill futures rose 4 points to 6.11% overnight, so the market clearly thinks the budget marginally raises the chances of a rate rise and there will be at least a 0.25 percentage point jump to 6% within three months. However, this is still marginal and the government would be politically damaged if they started forecasting $20 billion-plus surpluses.

Investing for the future in skills and education

Budget measure: Nothing new of note
The Commentariat: one of the biggest weaknesses
The defence: 32 new Federal technical colleges was the biggest single election promise in 2004.
The truth: Australia is one of the few western democracies reducing its education spending as a proportion of GDP and more should be done. Bribing the greys and families, Howard's two most important constituencies, is being given a much higher priority than skilling up the nation. When combined with the refusal to increased skilled migration next year, labour shortages will continue to delay or blow out big new resource projects.

Petrol

Budget Measure: no fuel excise relief despite rising pain at the bowser
Commentariat: one of the biggest weaknesses in the budget
The defence: we don't control oil prices and it's better to put money in people's pockets through income tax relief rather than "mucking around" with excise, as the PM termed it on AM this morning.
The Truth: the best way to relieve petrol pain would be to cut the 38c-a-litre fuel excise. Those who have limited income and drive long distances are really struggling, while wealthy greenies who don't own a car get too much benefit from the tax cuts.

Infrastructure investment

Budget Measure: $500m for Murray, more for roads and rail
Commentariat: one of the biggest weaknesses in the budget
The defence: look at the record road and rail investment
The Truth: More should be done, as numerous new resources projects are being shelved due to labour costs and infrastructure bottlenecks.



22. Big story clashes of our time

By Stephen Mayne

It's hard to imagine two bigger news stories on the same day than yesterday's big-spending budget and the Beaconsfield mine rescue, but Crikey subscribers have come up with plenty of other examples.

Peter Costello's effort isn't the first federal budget to be overshadowed. Malcolm Fraser's then Treasurer Philip Lynch brought down the 1977 federal budget on August 16 1977, the same day that Elvis died.

Similarly, then Victorian Premier John Cain resigned on 7 August 1990, five days after Saddam's tanks first rolled into Kuwait. These were the only two stories on the ABC news that night.

Then, of course, there was the shock death of Princess Diana on 31 August, 1997, followed five days later by the death of Mother Teresa, which was completely overshadowed.

And what about two legendary authors, Aldous Huxley and CS Lewis, dying on the same day that JFK was shot, 22 November 1963.

Finally, there was 3 February 1983, when Malcolm Fraser called a double dissolution election on the strength of Peter Reith's victory in the Flinders by-election, but within hours Bob Hawke had replaced Bill Hayden as Labor leader.

As we mentioned yesterday, Ansett collapsed on 13 September 2001, just two days after the twin towers were hit, and the extraordinary demise of Jeff Kennett in September 1999 coincided with the East Timor deployment.

Keep the submissions coming to smayne@crikey.com.au



25. Why incorporating isn't so attractive after all

By Stephen Mayne

Paul Keating's argument that the top income tax rate should be much closer to the 30% company rate is reasonable on the surface, but last night's budget does go some way towards eliminating the lurk.

This is because the company tax rate is a flat 30% from the very first dollar of profit. As the following table shows, anyone earning less than $142,875 a year is better off being an ordinary salary earner rather than an incorporated company.

Income/profit	Company tax	PAYE income tax
$6000	$1800	zero
$25,000	$7,500	$2,850
$75,000	$22,500	$17,850
$142,875	$42,862	$42,862
$150,000	$45,000	$47,850
$200,000	$60,000	$70,350
$500,000	$150,000	$205,350
$1,000,000	$300,000	$430,350

Whilst GST, super, dividend imputation, accelerated depreciation and capital gains tax all need to be taken into consideration, any small business operator should immediately give themselves a salary of $142,875 in 2006-07 and simply take any extra income as profits in the company. The equivalent figure in 2005-06 is $119,142, so we're talking a 20% increase.

Keating was right to point out that discounted capital gains tax has also become a major lurk. If I sold Crikey for a $1 million profit in 2006-07, the tax bill would be $225,000 or 22.5% - half the new top marginal tax rate of 45%. The same deal last year would have attracted CGT of $235,000, but if the sale had occurred before the CGT discount was introduced in 2000, the CGT would have been a hefty $470,000.

The huge disparity between receiving income as capital rather than salary or profit is now a far bigger lurk than the old small businessman incorporating to save a few bob. This explains why so many CEOs of listed companies are on huge equity schemes. If they hang onto the stock for 12 months they only pay 22.5% on any profits: far better than paying the reduced top rate of 45%.

Copyright © 2024 The Mayne Report. All rights reserved

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