Contact: Gavin Clancy
Deloitte
Communications Manager
+61 3 9208 7759

Contact: John Randall
Deloitte
Partner
61-2-9322 7550

The Federal Government has played to middle and high income earners by announcing significant reductions in the superannuation surcharge rates, according to Deloitte.

The reduction in surcharge rates will be phased in over the next three years starting with a two percent reduction next year and a further 2.5 percent reduction in each of the next two years, with the superannuation surcharge to end at 7.5 percent.

Deloitte Tax Partner John Randall said the Treasurer, Mr Costello, would win praise for his announcement on the surcharge reduction.

“But he may find difficulty in pushing these reductions through Parliament, given the Senate’s obstruction when he tried to reduce the surcharge rate to 10.5 percent and could only deliver a reduction to 12.5 percent,” he said.

“The combination of changes in the taxation thresholds and the reduction in the surcharge rate is sure to lead to an increase in savings for retirement, and this is to be encouraged.

“Since the introduction of the surcharge, there have been significant compliance costs and disincentive to savings, not to mention the number of times the legislation needed to be changed to take account of unfair treatments and unintended consequences.

“This included changes to tax rates to ensure that superannuation contributions didn’t end up with a 64 percent effective tax rate.”

“There is a danger, however, that high income earners will defer investing in superannuation until 2007. They may be inclined to defer voluntary superannuation contributions until 2007, to take advantage of the lower surcharge of 7.5 percent.”

Mr Randall said however that even after changes introduced to alleviate the unfavourable tax position posed by the surcharge and the announced reduction of the surcharge to 7.5 percent; it would still be possible to have contributions subject to an effective tax rate of 53.1 percent.

“This is unacceptable. Memo to Mr Costello: ‘Don’t stop now. At the current rate of change, the surcharge can be abolished by the 2008-09 year’.”