The two-fer retirement tax break

Peter Costello's superannuation tax proposals are astonishingly radical. Quite apart from the savings coming from eliminating the tax itself, his plan will serve as a demonstration project for the proposition that the simpler the tax system, the lower the total cost burden to the taxpayer.

Australia's taxation of retirement savings has been cobbled together over the years. It has not evolved in any Darwinian sense. It has been fashioned in the manner of Frankenstein's monster with bits and pieces of this and that added together and taken away over time with inconsistent goals, methods and outcomes, intended and unintended. It is a monster of legislation that can only be called a scheme if you stay clear of a dictionary. Only with the greatest of restraint could you characterise it as incomprehensible.

Although every element of the tax is complicated by numerous exceptions to numerous rules and numerous conditions to be applied in numerous of instances, the basic idea is that retirement savings is taxed (1) when you put it in the retirement savings vehicle, and (2) as it grows in the vehicle, and (3) when you reclaim it.

You'd swear that the boys at Macquaire Bank had structured it.


And the permutations on the incidence and amount of the tax as you take it out would befuddle Einstein.

So what the Treasurer has done is entirely eliminate the tax on retirement savings withdrawals for people over 60. In a stroke that cut all the red tape. Quite apart from the savings of the tax on the withdrawal, cutting the tape amounts to substantial savings in its own right. As the Australian Financial Review reports (ticket, ticket), "Data collated by a government standing committee concluded that retirement advice would usually cost Australians $3000 to $10,000 depending on its complexity."

And this has negative flow-on effects to those fine folks who expect to retire on your savings, the financial advisory industry, as that AFR article explains.

Financial planners stand to lose millions of dollars in revenue and might be forced to merge in order to survive as a result of the reforms to the superannuation regime.

Treasurer Peter Costello took the savings industry by surprise when he scrapped taxes on super payouts for retirees over the age of 60. The changes will increase the average income of retired Australians but not of the nation's 15,000 financial planners, who attract a huge share of their business from retirees con fused by the current rules on reason able benefit limits and lump sums.

Mr Costello told ABC Radio yesterday that many people would now not need financial advisers to take their money out of super when they stopped working. ``One of the reasons why people have been going to financial advisers is the end rules have been so complex,'' Mr Costello said. The proposal will also hurt plan ners because it reduces the relativebenefits of some annuities, a class of post-retirement investments that pay large commissions.

"This is likely to shrink the industry dramatically as business dries up," KPMG tax partner Guy McAliece said.

Financial planners, however, say they welcome the changes and they can now concentrate on helping clients make investment decisions rather than avoiding traps set by the government.

Financial Planning Association (FPA) manager of policy and government relations John Anning said there was still scope for advice to add value to a client's financial position. "Super will become simpler ... but that doesn't mean it will be a simple regime."

He said the FPA supported the simplified system and even submitted three proposals last year to the government calling for an end to reasonable benefit limits (RBL), which was a reform included in the budget.

The expected decline in financial planners' workload is a blow to the advice industry, already under pressure from the corporate regulator, which has accused it of being swayed by commissions and in many cases of recommending in-house products.

Data collated by a government standing committee concluded that retirement advice would usually cost Australians $3000 to $10,000 depending on its complexity.

"Under the proposed plan, the 100,000 Australians who turn 60 each year and choose to retire would have a much simpler system to face when deciding how to draw on their superannuation. They would no longer need to pay for expensive financial advice on the tax treatment of their superannuation benefits," the budget papers say.

In a note to financial-planning clients yesterday, Deutsche Asset Management said: "The proposed changes have broad-reaching implications for financial planners and clients who would ordinarily seek advice in relation to their superannuation affairs.

"Financial planners (and indeed financial planning businesses) that have centred the advice and/or business around the complexity of superannuation may need to go through a period of re-engineering, should these proposals go through as per the discussion paper."

The director of policy and research at the Association of Superannuation Funds of Australia, Michaela Anderson, said advisers would need to get back to advising clients on investments rather than interpreting tax legislation to remain viable.

"If people are 60 and there's no tax payable and the vehicle they can use is much simpler, then, yes, they don't need an interpreter," she said.

ING Australia chief executive Paul Bedbrook said planners would need to broaden their skills to attract clients because they might lose business through the reforms.

"People don't go and get advice just for super," he said. "But they will have to broaden."

Avenue Capital Management's David Hyde rejected suggestions that planners would find the going tough under the new regime.

Although he conceded that much time was spent on RBL strategies, he said there had never been a greater need for planners.

He thought there would be a shift in the emphasis on advice from post-retirement to pre-retirement planning.

"You still need to understand the tax rules," Mr Hyde said.

"I think this is one of the evolutions in the industry's path."

The lesson from this is that the government could have generated significant cost savings to taxpayers even if they had simply taxed all withdrawals at one rate regardless of circumstance or condition. Now if they can only apply this lesson to fringe benefits, and the rest of the tax "system".

Simplification saves taxpayers' money. And it saves many a poor young person from having to sell her soul to the accounting profession.