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Illogical tax tinkering won’t lead to a sustainable super system

Today, the Australian government announced additional taxation of high income funds in the decumulation or retirement stage of investments in superannuation. Arguably, the changes add more to complexity…

The Gillard government’s changes to the tax treatment of superannuation make for a more complex system, rather than a more equitable one. AAP

Today, the Australian government announced additional taxation of high income funds in the decumulation or retirement stage of investments in superannuation. Arguably, the changes add more to complexity than they do to equity, and they leave open the need for further changes to achieve a sustainable system.

In principle, funds invested into superannuation to provide income at retirement can be taxed at three levels. These levels are at the point of contribution, earnings during the accumulation phase, and at the phase of withdrawal for retirement. In addition to the current taxation of contributions and earnings, which are not to be changed, the government proposes to add a new tax on the withdrawals for the “fabulously wealthy” from July 1, 2014.

A progressive tax treatment is given to labour remuneration contributed to superannuation. For those with annual taxable incomes up to $37,000 a year, the effective contribution tax rate is zero; for those with incomes between $37,000 and $300,000 a year, a 15% marginal rate applies; and for those with an income above $300,000, a 30% rate applies. These rates are concessional relative to the progressive income tax rate schedule applied to wages and salaries, and to income invested in one’s own home, other property, bank deposits and shares.

Income earned on funds invested by the superannuation funds faces a flat tax rate of 10% on realised capital gains and 15% on interest, dividends and other capital income. This rate is concessional when compared with the taxation of personal investments in financial deposits and shares, for all but those with incomes below the effective tax free threshold of around $20,000 a year. These investments are taxed at the progressive personal income tax schedule. But, when compared against the effective tax rate on income earned on investments in one’s own home where the tax rate on imputed rent and capital gains is tax free, and for negatively geared property, the taxation of income earned on superannuation funds is higher.

Until the current policy announcement, funds withdrawn from superannuation for those aged 60 and over were tax free. This treatment applies to lump sums and to income streams, including annuities. Interestingly, the withdrawal of other personal investments in one’s own home, other property, shares, financial deposits and so forth are also tax free.

The proposed policy change is to add a new tax at a marginal rate of 15% on the income earned, or deemed to be earned, on superannuation funded pensions and annuities of more than $100,000 a year, or an accumulation asset of about $2 million. The new tax is to apply to defined benefit fund superannuation, including those of politicians, as well as to accumulation funds. The press release quotes Treasury calculations that in 2014-15 about 16,000 people or 0.4% of the projected retiree population will be affected.

Even against the criteria of equity, there has to be doubt about the sustainability of the new proposal and about other aspects of the taxation of superannuation. There is nothing magical — and very little logic — in the tax thresholds of $37,000 and $300,000 for higher tax rates on contributions to superannuation, or on the proposed $100,000 threshold for a retirement income stream. In particular, these thresholds seem unrelated to the progressive income tax rate schedule that applies to labour remuneration taken as wages, and to personal income taxation of savings placed in investments other than superannuation. It would be surprising if future governments, of any political persuasion, were not to fiddle with the thresholds.

There is a compelling case for a review of the taxation of superannuation, including the taxation of contributions, of income earned and of withdrawals, in a broad context of the taxation of labour remuneration and of different saving options, and the provision of retirement incomes. Ideally, a review would involve the community, and it would seek bipartisan support to achieve a stable and sustainable system to minimise opportunistic fiddles as has happened over the last decade. Yet such a comprehensive review clearly lies beyond the current election battle.

The Henry Review of 2010 provides one model. Other options include taxing superannuation similar to investment in one’s own home (namely tax contributions in the hands of the employee at the employee’s progressive personal income tax rate) with no further tax on earnings or on funds withdrawn for retirement income. Or, a consumption base tax treatment might be considered involving tax free on contributions and income, and tax withdrawals at the progressive personal rate. Consideration also should be given to caps on contributions and to aligning the ages of access to superannuation funds and the aged pension.

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27 Comments sorted by

  1. Michael Shand
    Michael Shand is a Friend of The Conversation.

    Software Tester

    So your criticism is not about what the government are doing, your criticism is that you think the tax system as it relates to super should be revamped all together.

    ie. criticising existing tax thresholds on super as illogical is not a criticism of the changes proposed by the current government, it is a crticism of the system itself

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  2. Lee Emmett

    Guest House Manager

    Tony Abbott's response to proposed super changes, as reported on 7 News website: "We will fight ferociously to stop this change from going ahead," he said, adding it was a government raid on people ... "Every time a government raids people's funds, there are shades of Cyprus about it."

    A government raid on people? The absurdity is typical of many of Abbott's pithy nonsensical statements which characterise the poor level of analysis and debate since he's been Opposition leader.

    He then follows…

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    1. Lorraine Hunter

      Retired

      In reply to Craig Somerton

      What about the pilfering, errhhthievery from the military self funded superanuation fund (DFRDB) during the Whitlam era? Not many are aware that military members paid compulsery 5.5% into their super fund with NO government contribution (at least until 1985). The Whitlam crowd needed more money (as usual) and, although all retired personnel still receive a small fortnightly super payment, the actual pool was 'stolen' (what other word could describe this act). This fund of private

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    2. Peter Lang

      Retired geologist and engineer

      In reply to Lorraine Hunter

      Lorraine Hunter,

      Thank you for you (incomplete) comment about how the Whitlam Labor government stole from soldiers superannuation savings. That is about the same time as set up the climate of abuse for the soldiers returning from fighting the war we sent them to fight on our behalf in Vietnam. What despicable people they must be.

      I fear the same is about to happen again - once again Labor politicians are going to steal our savings, start class wars, and abuse those who have worked and saved the hardest for our country, while the politicians have contributed next to nothing to their super funds and get a pension fund worth in the order of $5 million so they can retire on guaranteed indexed pensions for life.

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    3. Lorraine Hunter

      Retired

      In reply to Peter Lang

      Peter Lang

      .....Yes, Peter, and continuing my previously incomplete post.....

      This fund of private savings made by Military personnel that had NO Government contribution at all, was raided and used for their usual waste programmes. The Government now loves to refer to this superannuation as a 'pension' which then, mentally, and cleverly, gives the impression that military personnel are receiving a Government sponsored pension fund. Not so. It was totally self funded with NO Govt contributions. It was eaten up in, spit out and instead of being the reward for years of service both overseas and at home, became the fodder for yet another mad scheme. And, as you say, it is rearing its ugly head again!

      IPA = Insidious Pilfering of Australia?

      No

      ITAMP = Insidious Theft from Australian Military Personnel

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    4. Henry Verberne

      Former IT Professional

      In reply to Lee Emmett

      Quite so Lee. Abbott's vacuous slogans sound good to a (mostly) uncritical media and probably to much of the general population who get their "information" from the OZ and its down-market stable mates. Abbott is not the friend of the average wage earner- he is the defender of wealthy interest groups- as will be apparent if he wins the next election.

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    5. Henry Verberne

      Former IT Professional

      In reply to Peter Lang

      Peter,

      oh please spare us the class rhetoric by the people who have been waging class warfare for just about ever!

      Most responsible commentators support the higher (minimal) taxes or demonstrably wealthy superannuants and is an overdue injection of fairness into the system.

      The Howard/Costello government created this unfair, fiscally unsustainable system and the proposed measures (which may not eventuate) will put Super on a more sustainable basis.

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  3. Peter Ormonde

    Farmer

    Good piece John.

    The iniquitous treatment of different classes of taxpers when it comes to super are far more outrageous at the contribution end rather than the payout end.

    I am hoping that this week's announcement was designed just to re-assure the punters and that something significant and effective along the lines you suggest will be contained in the budget to fix this mess.

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    1. Raine S Ferdinands

      Education

      In reply to Peter Ormonde

      The only sure way "to fix this mess" is to throw out this incompetent minority government=, Peter. Minority governments everywhere are a desperate lot.

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  4. Graham Hand

    Editor, Cuffelinks (www.cuffelinks.com.au)

    Another part of the announcement which we should applaud is the Council of Superannuation Custodians, responsible for ensuring future policy changes are in line with a new superannuation charter.

    On the same day as the Government announcement, Chris Cuffe made a similar proposal in his publication 'Cuffelinks'. To see how Chris thinks it will work, go to http://cuffelinks.com.au/superannuation/lets-kick-this-political-football-out-of-the-ground.

    In the same edition of Cuffelinks, the CEO of ASFA, Pauline Vamos, addresses some of the misleading statements made about superannuation.

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  5. David Arthur

    resistance gnome

    Perhaps we could ask ourselves: "what is the role of superannuation?"

    Is it to
    1) provide adequate incomes for people when they depart the workforce?
    2) provide investment funds for developing the nation?

    If 1 is correct, then surely there should be absolute limits on tax-favoured contributions so as to ensure an adequate pension in retirement.

    In that case, Centrelink's old-age pension should be used as a baseline against which these absolute limits are determined. Perhaps the way…

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    1. Peter Ormonde

      Farmer

      In reply to David Arthur

      There was another purpose behind the initial establishment of industry wide super - a deferred pay-rise. And another - an increased savings rate - which used to be appallingly low.

      As part of the Accord the Super Guarantee was seen as a means to provide workers with an increase in the "social wage" without triggering a tsunami of inflation. It was an attempt - a very successful one - to break a cycle of tail-chasing between wages and profit shares.

      But unfortunately it established a level…

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    2. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to David Arthur

      "surely there should be absolute limits on tax-favoured contributions so as to ensure an adequate pension in retirement"

      There were. Peter Costello got rid of them in 2007. I guess few people know much about superannuation taxation history.

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  6. wilma western

    logged in via email @bigpond.com

    The govt has been quietly cutting back on unjustified tax arrangements that favour those with plenty of money and the ability to pay for the necessary advice and structuring of their affairs at the expense of ordinary wage-earners. It seems that the approach has been "a step at a time", with some successes and plenty more to do. The super issue is really attempting to undo the arrangements put in place by Howard and Costello , unjustifiably favouring the well-off. Thanks to recent media criticism and Crean and co going public it looks as though they've decided they don't have time for reform to separate super issues from the budget.

    But of course most of the media cry "squibbing the issue" or "more chaos". Just like Abbott frothing about the terrible govt raiding people's income to pay for their budget!! How infantile can he get?

    How many noticed that shadow treasurer Joe Hockey did not condemn the govt's suggestions - regardless of Tony's brainless noises.

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  7. Raine S Ferdinands

    Education

    Gillard is entitled to more than $2million (defined benefits scheme) while Swan's gets a whopping $5million; all this tax free for life. Based on this, they certainly will receive more than $100 K annually, yet they will not be taxed like the rest of us?? The worse part is that they never contributed a cent towards their super … merely robing taxpayers money. Politicians make decisions and policy changes on our earnings without any impact of these policies on their earnings and super. If policies…

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    1. Peter Lang

      Retired geologist and engineer

      In reply to Henry Verberne

      Henry,

      You are incredibly gullible if you believe that spin - from the most incompetent and corrupt government this country has had in at least 60 years.

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    2. Michael Hay

      retired

      In reply to Raine S Ferdinands

      Raine, this is probably why our politicians will never look at a more equitable way of collecting tax revenue. If everyone was taxed at the same rate for earnings above (say) $50,000, then the rate could be set at a level which would provide sufficient income for the Government to work with. Then there would be no need for you or I or any government to tinker with the money left over. We could save it, spend it, give it away or hide it under the mattress.
      And all this complicated nonsense would vanish into thin air and never be heard of again !

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    3. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Raine S Ferdinands

      "they certainly will receive more than $100 K annually, yet they will not be taxed like the rest of us??"

      No, they pay income tax on their pensions. Amazing how people come up with such misinformation.

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  8. Colin MacGillivray

    Architect, retired, Sarawak

    "..... a sustainable super system"
    Is it possible for any nation, excluding oil emirates, to fund their population for more nearly half their life? If a person is born and (educated by the state) to age 18, works to 65 and lives to 85, they will have worked for 55% of their life.
    Funded retirement was invented when life expectancy was less than 10 years after stopping work. Is it viable for 20 years' retirement to be funded by the state or indeed self funded by an average individual?

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  9. John C Smith

    Auditor

    The Accord and the super we are talking about was brought in by Haw-Keats to reduce marginal tax rates of high income earners and to tax low income earners from the first dollar they made.The advice came from the richest mates of them. At that time no divident imputation, highest marginal tax rate of 70%. Supe contributions were tax free up to a certain amount or you got a rebate for contributions. Income within a fund was tax free.
    The present system is just a dream and has lead to higher wage demands.

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  10. Chris O'Neill

    Victim of Tony Abbotts Great Big New Tax

    "Income earned on funds invested by the superannuation funds faces a flat tax rate of 10% on realised capital gains and 15% on interest, dividends and other capital income. This rate is concessional when compared with the taxation of personal investments in financial deposits and shares, for all but those with incomes below the effective tax free threshold of around $20,000 a year."

    Well not particularly concessional for those earning $20,000 to $37,000 a year. The marginal tax rate in this range is 20.5% including medicare levy. If you account for the management fee in Super funds then the marginal tax rate is lower than the taxes and fees paid by Super funds.

    Bottom line: people earning less than $37,000 a year are worse off with Super than without.

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    1. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Chris O'Neill

      "Bottom line: people earning less than $37,000 a year are worse off with Super than without."

      That means, of course, they would be better off if their Super investments were in their own name rather than in a Super fund. The government would be a little bit better off too. The only loser would be the Super fund.

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  11. Chris O'Neill

    Victim of Tony Abbotts Great Big New Tax

    "Or, a consumption base tax treatment might be considered involving tax free on contributions and income, and tax withdrawals at the progressive personal rate."

    This is more or less the way things used to be before Keating came along and started the huge shemozzle we have now simply to make a grab for tax cash years earlier than the tax would have fallen due otherwise.

    Keating brought in the 15% up-front contributions tax because he saw it as a budget-balancing opportunity. The Super tax system then had to be put through various contortions as supposed compensation.

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