Yesterday the Government made some key changes to its superannuation tax scheme, after struggling to get the plan through the Senate. Paul Keating says the changes restore confidence in the retirement savings system.

In 2007, in a cynical measure to tie up and buy the “grey” vote before the 2007 election, John Howard and Peter Costello abolished the Keating Government’s “Reasonable Benefit Limits” in superannuation, which placed an upper limit to the tax benefits that could be obtained via the superannuation system.

To play to the “grey” constituency, Howard and Costello provided unlimited tax benefits to be available from superannuation and those unlimited sums of income were then only subject to tax at the concessional rate of 15% – where under the Keating Government RBLs, sums above the limits were subject to full personal rate taxation.

In other words, the Reasonable Benefit Limits placed a cap on what otherwise would become a tearaway capital accretion scheme taxed only at concessional rates.

The government and Treasurer Jim Chalmers have spent well over a year seeking to divine a method whereby the Howard/Costello runaway scheme could, with all reasonableness, be brought under control by setting new permissible limits and above which taxation applied at a higher rate.

Chalmers has led this work. And the work, of its essence, has been about the modality in setting a new upper limit for superannuation balances taxed at 15% and at a new higher rate of tax above this limit.

The stumbling block has been the policy difficulty and departmental advice that this could not be done — other than by taxing unrealised values — that is, taxing increments to value whether such value was realised or otherwise.

The Treasurer’s success in working through and resolving this impasse will now mean that superannuation accumulations will be successfully taxed, but taxed only on a basis of realisation, but more than that, taxed at a new limit and at a higher rate, restoring much needed equity following the Howard/Costello rampage of 2007.

Without a doubt, there has been great difficulty in setting new upper limits along with higher tax rates but obviously, the Treasurer and the government now believe superannuation funds will practically be able to tax only realised profits under the new regime, notwithstanding the difficulties, while at the same time setting into place the new limits along with the new rates.

Bringing equity and an important measure of tax justice to super’s current runaway arrangements, with the nomination of a $3 million limit taxed at 15% and 30% thereafter, is a huge policy achievement by the Treasurer, as is the added increment of a higher rate of tax on accumulations above $10 million.

It is reform of a kind that shares substance with necessity. Necessity that every government since 2007 has conveniently overlooked or simply regarded as too difficult.

Importantly, these decisions solidify superannuation tax arrangements in a manner the community can now rely upon for the long-term security of their retirement savings and, with it, their peace of mind.

Read more on the changes to the superannuation tax scheme.