What does the election result mean for your super and the economy?

The election result has finally been decided.  A win, but what is predicted to be a difficult few years for the Coalition.  It is foreseen that the Senate will be challenging to navigate and according to economist Dr Andrew Charlton “the new government is inheriting some of their most challenging external conditions of any government in nearly two decades”.  He is referring the low rate of global growth currently sitting at 2.4%, a figure as low as any time during the global financial crisis.  Company profits are low, wages are not experiencing growth and the budget deficit continues to climb. The Government is looking for initiatives to increase revenue by proposing superannuation reforms which will see more taxes levied on superannuation fund accounts.  Economic reform is required with the total Australian Government debt currently over $459 billion.  An uncertain and volatile Senate could be delivered at a time when political squabbling and inactivity can least be afforded.

Superannuation

For many working Australians superannuation has been seen as a safe haven for their retirement.  Historically political parties have boosted and incentivised Australians to save for their retirement in order to lessen the stress on the welfare system.  However, before this election both major parties indicated that this is about to change. The Coalition has claimed that only 4% of superannuation account holders will be affected by their proposed changes; but the changes could see more Australians on the Government supported aged pension in the long term.

The group most likely to be disadvantaged by the proposed changes are those who are considering retirement in the next few years.  The changes the Coalition have proposed are:

• 15% tax on earnings from any withdrawal from superannuation for those aged 55-64. Previously this group has been able to withdraw tax free money from their superannuation.
• A $500,000 lifetime cap on the amount of money you can add to your superannuation outside of salary sacrifice. Previously this has no lifetime cap, but an annual cap of $180,000.
• To increase superannuation contribution tax rate from 15% to 30% for those who earn over $250,000.
• For those who have over $1.6 million in their superannuation account, they will have to pay 15% tax on any money over this amount.
• Salary sacrifice will be reduced to $25,000 per year, no exemptions.

It is likely that Australians could deduce that if both major parties are considering changing long established rules and inflict higher taxes on superannuation, then super is no longer the safe bet they once thought it to be.  The proposals could be seen as disincentives to save for retirement.  This could result in increased pressure on the aged pension; the converse of what superannuation is intended to do.  According to MLC White Paper, 43% of Australians do not believe they will be able to fund their lives post work. It is forecasted that a lump sum of $640,000 will be needed to sustain a comfortable lifestyle for a couple.  These changes in policy could see more Australians not achieving this benchmark.

Both parties had similar proposed policies before the election, so it is within the realm of possibility that the changes could have Labor’s support. However the unpredictable senate could help provide some shielding from these proposals.  It is therefore important that before jumping at changing your strategy, you are aware these are not yet confirmed changes.

The economy

For Australia to prosper economic reform is required.  Reform is needed in several areas in order to facilitate real fiscal change.

Tax Reform

The top marginal tax rate in Australia now sits at over 50% (it is 50.5% for those who do not have private health insurances and pay the deficit levy).  It is one of the highest rates in the world and the number of Australians being charged this hefty rate is only set to increase.  Inflation provides the net result of pushing tax payers up into the next tax bracket.  The Government’s ‘Rethink’ discussion paper forecasts that, in the years leading up to 2024-25, the number of Australians in the top two tax brackets will leap from 27% to 43%.  Continuing on with a high tax policy is a risk to the economy.  It decreases the responsiveness of the economy by reducing the incentive to work. Reform is needed in this area to help stimulate growth in the economy and lift spending.

Company Tax Cuts

The Coalition has proposed a company tax cut.  A move embraced by big business, but questioned by everyday Australians left wondering how it is fair that companies get a tax reduction and they don’t.  4 in 5 Australians work in the private sector.  The government maintains that the country as a whole can benefit from companies receiving a tax cut through developing business confidence by incentivising companies to invest and create jobs.  Other countries have successfully implemented similar strategies with the purpose of encouraging investment, leading to more jobs and overall more prosperity, for  example Switzerland (with a company tax rate of 8.5%), Singapore (17%) and the UK (20%).  Chief executive of the Australian Chamber of Commerce and Industry, James Pearson, for this reason has recommended the Senate passes the Coalitions tax cut proposals. He states that is would “encourage investment and create jobs” and “should be legislated as soon as the next government returns to parliament”.

Under the Coalitions proposal, it would see the description of “small business” changed from those with a turnover of less than $2 million (yearly), to less than $10 million (yearly).  These businesses would then get a 1% cut down to 27.5% this year, with more cuts planned over the next few years to reach a minimum of 25%.  It is probable that the outcome of this proposal will be decided by the minor parties in the lower and upper house.  With support possibly from the Nick Xenophon Team the reduction to 27.5% tax rate may pass.   This is a start to lowering company tax, but the worry is it may not be enough to invigorate the market and may see businesses divesting in Australia.

Australia’s credit rating

One of the greatest concerns for the financial markets is Australia’s AAA credit rating.  It projected to be under threat if the new Government and Senate make budget reforms difficult.  IPA Senior Fellow Dr Mikayla Novak remarked that, “the credit ratings agencies have put Australia on notice, saying any budget blowout resulting from political negotiations with the cross benchers will risk us losing our AAA rating”.  A direct result of this being an increase of at least 0.25% in the interest rates paid by the Government which in dollar terms would cost the tax payer at least $1 billion extra per year.  This is almost a 10% increase on current repayments.  At this point we are borrowing $88,000 per minute.  Moving forward the Government needs to implement improved, more fiscally responsible policies to stimulate the economy.  What we are currently doing is intergenerational theft; it’s a disservice to our children.  What we borrow today must be repaid in the future.

In order for Australia to prosper economic reform is required.  It is important that the political parties work together to facilitate real change in fiscal policy.  The last recession faced by Australia was in the early 1990s.  If continued growth is seen over the next 3 years in Australia then it will be the longest any country has gone without going into recession; this however seems to be unlikely.  With such a tight election and its resulting Senate it is the wrong time for political infighting.  Without economic reform it appears that our AAA rating may be downgraded, Government interest rates will rise, income tax rates could continue to increase and businesses may divest in our nation.  This does not provide a positive outlook for economic growth.

Should you wish to discuss the election result will impact your investment and/or superannuation portfolio please contact Certified Financial Planner Elliot Watson on 0409 931 984.

The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.