A reduction in the super surcharge could see it eventually abolished, reports Michelle Innis.

A significant reduction in the superannuation surcharge - a tax on the rich - could add as much as $20,000 to an average retirement savings account.

But better news is that some industry analysts believe that once the first round of surcharge reductions are in place, the Government will move to abolish the tax altogether.

"Reducing the surcharge to 7.5 per cent indicates that the Government is on the way to phasing it out completely," says Sam Wall, Zurich's technical services manager. "It is a very expensive measure to implement and the revenue generated at 7.5 per cent won't cover the industry's cost of collecting it."

The super surcharge at its most punitive is a tax on those who earn more than $114,981 a year in adjustable taxable income. Federal Treasurer Peter Costello introduced it in his first budget in 1996, to prevent high-income earners from accessing excessive tax breaks through their super.

The surcharge is currently 14.5 per cent and was scheduled to fall to 13.5 per cent on July 1. But Costello announced last week it would be cut to 12.5 per cent in 2004-05, to 10 per cent in 2005-06 and to 7.5 per cent in 2006-07.

The Budget papers state that revenue from the super surcharge is expected to increase by $130 million or 10.3 per cent in 2004/05, reflecting growth in wages.

Wall says the levy, one of three taxes on super, is applied upfront. "Abolishing it means your net contribution to your fund increases," he says. "It makes salary sacrifice into super more attractive."

Over 20 years, an investor contributing $10,000 a year to a super fund earning about 6.25 per cent a year would be $18,617 better off with the surcharge at 7.5 per cent (see tables).

"It's a significant saving," he says. "And if the tax is abolished, fund managers may find savings because administration fees will be reduced. If those savings are passed on, all super fund members will benefit."

David Shirlow, the head of technical services at Macquarie Financial Services, says: "The extent the Government heads down the track of abolishing the surcharge depends entirely on its impact on revenue and affordability.

"It is a step in the right direction," he says. "It is a good move to reduce it and acknowledgement that further incentives are required if people on higher tax rates are going to be encouraged to top up their super with savings."

Shirlow says the reduction in the surcharge improves the appeal of super as a savings vehicle considerably "from a position where the incentive was relatively modest to one where it is more clear cut".

He adds that high income earners pay tax of about 40 per cent on super - which means there is not a huge incentive to lock your money away for long periods of time.

"Ideally the surcharge should be removed altogether," Shirlow says. "Although this would be a concession for high income earners only, at the end of the day there are reasonable benefit limits that ensure super concessions are shared."

Alex Dunnin, the director of research at Rainmaker Information, says an investor earning $100,000 with $50,000 in a super fund will be 5 per cent better off after 10 years, if the super surcharge is at 7.5 per cent.

"It's helpful but not earth-shattering," Dunnin says. "The surcharge was just a revenue raiser. It's great politics to introduce something like this and then cut it back or abolish it later."

He adds that the super industry will continue to pressure the Government to have the tax axed because measuring contributors' income and then determining the tax payable is costly compared with collecting a universally applied flat 15 per cent tax on all super savings.

"It is also a tax that is applied upfront so that means there is less money invested to earn interest," he says. "Therefore, reducing it is a positive."

But Dunnin says the Government and the Federal Opposition's focus on the surcharge and super fund entry and exit fees is hijacking the real debate on super.

"The real tax and fee heist comes from ongoing fees and charges," he says. "Investors have to make sure that they are in a fund that is making a decent return and has reasonable ongoing fees. That's the real killer."

He says a member of a high-fee fund, paying an entry fee of 5 per cent and ongoing fees of 2 per cent, will pay fees of $105,000 and total taxes of $74,000 by the time they retire (assuming they start investing at age 20 when they are earning $25,000).

"The total impact of fees and taxes will reduce their potential lump sum by 37 per cent to about $310,000," he says.

"The issue is that while entry fees and the surcharge are undesirable, they are not the culprit responsible for damaging super savings. The real culprit is ongoing fees and taxes."

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