A simple alternative to the $3 million super tax

Hope this isn't too late to reach the policy-makers grappling with concerted public resistance.
As taxation of unrealised gains is a major concern, with its being taxed again on realisation, why not apply the AMMA adjustment to revent unacceptable double taxation?
AMMA restates the taxable income derived from actual distributions received in the year. Any excess (shortfall) is then adjusted against the cost base of the investment when disposed of.
Thus, a $1000 excess attribution in one year will increase the cost by $ 1000 on sale, providing relief on CGT.
Sure, this ignores the time value of money, but it also works in favour when attribution is less than the actual income.
Div 296 tax as proposed can be paid by the Fund or the taxpayer, but by electing the Fund, the taxed unrealised gain can be clawed back to avoid being taxed.
The mental calisthenistics we must endure to enjoy paying tax... George Orwell couldn't have dreamt it up...

I'll be watching Four Corners tonight to see how the ATO lost millions to GST scammers through inadequate checks. Check details on ABC. The ATO should be fixing its own compliance mechanisms and cracking down on rampant tax fraud before trying to extract more blood out of struggling taxpayers and retirees. But which is easier?
Kerry Packer famously said "...as a government I can tell you you’re not spending it that well that we should be donating extra.”

Just a reminder that every dollar collected under this proposed legalised theft is a dollar not available to the pensioners them selves. So Less money in the hands of the "owners" = no money to spend but, of course, the government has more money to pee up against the wall elsewhere! Another reminder that super is the most regulated entity in Australia. The government regulates the amount of contributions, the types of investments, the rate of withdrawal and access generally. What appears to be the problem tmr Treasurer?

All these large super funds are in accumulation phase because they are in excess of the Transfer Balance Cap, which limits the amount that can start a pension. If the purpose of super is to provide income for a dignified retirement, it’s important to remember that, as David points out, pension funds are structured to provide income in retirement, accumulation funds are not. These funds have no requirement to make any withdrawals, ever. They can accept contributions until age 75, continue to grow without limit until death, and continue to be taxed at marginal rates.??

The Treasurer is using the recent purpose of super legislation as cover to claim that illiquid assets such as farms and businesses should not be in accumulation funds because they do not produce retirement income. But there has been no change to the super legislation to mandate cash withdrawals from an accumulation fund. Such a change would be extremely difficult anyway because everyone is in accumulation phase before they reach their preservation age and withdrawals from super in that phase are expressly forbidden. ??He can’t have it both ways.

Why is not possible to use a progressive tax scale on the taxation of superfund realised earnings?
We use it for personal income tax and it is accepted there.
Instead of taxing the fund earnings and allocating it to to the members, only impose the tax when it reaches the member account.

"Instead of taxing the fund earnings and allocating it to to the members, only impose the tax when it reaches the member account.":

Likely that the additional amount of tax paid by Industry Super Funds would be substantially less than the cost of compliance (daily accounting of tax to members) due to few members having >= $3M.

They have told Chalmers that the cheap way is to tax member unrealised gains, and he can wear the political damage (or find a more efficient tax) so they don't wear the cost.

"Some individuals who have a significant single asset in their superannuation fund (such as a single property or farm) are unlikely to support this direction":

They entered into that arrangement legitimately and should be able to exit without disadvantage - to transfer such assets, 'in-specie', out of super, regardless of age.

"consistent with the policies of the best pension systems in the world which provide regular retirement income":

The Australian Super system provides for capital withdrawals, not income payments or 'streams'

These individuals have bern poorly advised, or not advised at all. These investors do not deserve any consideration and they probably need to find a new advisor.

A basic tenant of investing is diversification. i.e you should not have all your eggs in the one basket. If their super account only has one asset, then they are breaking this basic tenant.

They have only themselves to blame.

"They have only themselves to blame.":

And a mooted change from taxation of realised income to additional taxation of unrealised income.

"They entered into that arrangement legitimately":
"poorly advised, or not advised at all":

I'm presuming that their SMSF Auditor(s) found their Funds to be compliant ('Sole Purpose Test'), and Government did not say they are not.
If non-compliant, then no tax 'concessions' and some nasty fines for them, and Auditor(s).

The system has become overly complex. The transfer balance cap is $2M. A couple each with $3M in super have an inordinate amount in super and tax free in pension phase. If any amount over the TBC were treated as excess and taxed at 30% it would encourage those with enough (assuming $2M is deemed enough) then those above the TBC have the choice to pay the higher tax or withdraw the excess. In addition increasing the tax on death of the total balance would seem reasonable for those above the TBC.

"The system has become overly complex."

Very true. Simpler then to cap superannuation at $ dollars, indexed of course, and then the wealthier will have to invest and pay taxes outside of the more generous superannuation system. That is, you no longer have to keep paying into your super fund. The less wealthy will be unlikely to hit the caps.

Otherwise, scrap compulsory super and pay a universal pension. But Labor's industry super fund mates wouldn't like that. They're a huge cash cow!

Either of these options is surely better than Chalmers' terrible proposal to tax unrealised capital gains. It's difficult to not suspect deceitful ulterior motives here!

Thanks David. I like the thinking behind this idea – it certainly would avoid some of the key objections to the current proposal. However you state that applying the minimum drawdown rates (MDRs) means that ‘the superannuation balance would gradually reduce during retirement’. Under the current MDRs this is not necessarily true – balances often increase for up to a decade after initial drawdowns before they reduce. In conjunction with your proposal, I’d suggest MDRs be reviewed to accelerate the rate at which balances must be drawn down, particularly in the 70-80 years age range.

I agree Nick. But that's why I suggest a starting age of 75, where the MDRs are a little higher. It also permits people to keep working (if they want to) without requiring a drawdown before 75.
Whatever MDRs are applied, the important feature is that money is withdrawn from super during retirement. Over time, that will change expectations and behaviour.

The simplest solution for the Albanese Government to raise more tax is to raise the tax on income in Super from 15% to 30% for balances above a certain high figure (ie. progressive income tax).

CGT would remain at 10% because Super is a long term investment and the decisions to invest in certain assets have been made on the basis that the assets invested in will get taxed at 10% CGT on sale. If this was to change it would need to be grandfathered just like CGT was when introduced by the Hawke Government in 1985.

Given Super is such a long term investment, whilst still unfair and retrospective, that would at least assuage the Albanese Government's desire for more tax income.

If the Albanese Government's desire is to punish higher performing SMSF's so as to support the lower performing Industry Super Funds and thereby support the Unions then the Unrealised Capital Gains tax is the way to do it.

A simpler solution would be to remove the tax exemption for superannuation in pension mode. Costello was being too generous when he introduced that measure, particularly when franking credits are fully refundable.

The pension payment would still be tax free to the recipient. In practical terms, apart from those who have the majority of their super in property, te only effect will be that they receive a reduced refund.

Ralph, super pension funds have been tax exempt since 1992. It had nothing to do with Costello. It was part of the original Keating deal. As David points out in the article, the social contract was; if you paid tax on contributions and tax on accumulation earnings, the super pension fund was tax exempt.

Costello’s changes only affected the tax paid the member on withdrawals from the fund and because prior it only applied to the taxable component (like present death taxes) and the 15% rebate, it meant that he forfeited very little tax revenue. Political gain for very little fiscal pain. That’s why no government since has sought to reverse that decision.

From no retirement system for all (public servants and the odd private employee excepted), we have built a worthwhile $4 trilllion pool, and a lot of workers to service it. Successive treasurers have found this honey-pot irresistible, and a few like Costello and Howard have made it more atrractive than necessary.
David's simple suggestion has the merit of simplicity and symmetry. Contributions are mostly mandated, so why not mandate withdrawals based on age and balances, so that the purpose of retirement - sustainable retirement - is targeted, not grandkids' bequest?
However as pointed out, there are valid criticisms because it is a patchwork quilt. There is a simpler way.
Beyond a nominated figure (X million, to be indexed annually), treat the excess balance as non-super, whether or not withdrawn and tax accordingly. Concessions will only apply to X.
This will address the problem of funds currently concentrated in large illiquid assets. Values in excess of X will be notionally treated as non-super, and normal not concessional tax will apply.
Sometimes we tend to over-engineer solutions. Think back to pre 1992, and this solution suggests itself.

That is an elegant solution but it has a problem. The assets held in a super fund are not the property of the individual and any tax payable is the responsibility of the fund, not the individual. Moreover, the tax paid by the super fund is a flat rate of 15% whereas the marginal tax paid by the individual is progressive. Therefore, the amount above X cannot be taxed at a different rate within the existing accumulation fund.

The super fund doesn’t know the member’s marginal tax rate. If this amount was removed from the fund to be taxed at individual marginal rates, it would be caught in the contribution rules when returning it to the fund.

That suggests that the amount above X should be held in a separate tax entity with its own tax rules, just like pension funds and accumulation funds, holding the same investments, are differentiated by their different tax rules. It might mean a separate fund, still managed by the super trustee, but called something other than “accumulation” and taxed at, say 30%, or removed from the super environment permanently.

Or make like Div 293, Div 296 or excess NCC’s, the liability falls on the individual. We already have a system in place that does this Jon.

The funds report TSB and TBC so the amounts can be worked out by the ATO from multiple funds.

Of course we can’t as the antiquated management systems of the union funds in the master trust structure can’t calculate fund income. We are now back to taxing unrealised gains.

This whole mess stems from antiquated union funds and Chalmers unreasonably not demanding they get with the program and update their systems.

Gotta protect my union buddies (funders). Good on ya Jim. Keep making the system more convoluted to serve your union masters interests rather than the country’s.

The solution is very simple and it involves how you look at things. And it also applies to imputation system

When you work your employer estimates your tax and remits that estimate to the ato. He can be fairly accurate by assuming that you will earn the same income each week for the year. If the estimate isn't correct then when you put in the tax return it is fixed

With companies, they don't have that total income estimate so just arbitrarily take 30% as a with holding tax. Again when you put your tax return in, it is fixed. Perhaps the perception with imputation system can easily be fixed by companies showing gross dividends and the tax that was with held

With super it could operate similarly. A 15% with holding tax on contributions and earnings, and when the super is withdrawn (retirement) the super is taxed as income and the tax with held is treated as prepayment of the tax. If it's too much then you get a refund.

The government could probably be able to sell taxing the fund in pension phase because the individual member will get that back eventually

"when the super is withdrawn (retirement) the super is taxed as income":

No tax paid when withdrawing capital from bank account.
No tax paid when withdrawing capital from super account.

"the individual member will get that back eventually":

With or without interest and inflation?

Your suggestion would certainly solve the issue you raise for Accumulation Accounts (Pension Accounts already require forced minimum withdrawals). And it DOES raise additional Superannuation tax as it forces the Superannuant with an Accumulation Account to realise the assets that they are forced to withdraw annually from their Super, and thus pay 15% CGT when they do so.

It does however remain both retrospective and unfair as Superannuants have saved, rather than consumed, for decades to the laws of the time. And they have operated under the legislated aims for Superannuation at the time (the Albanese Government changed these in their first term).

Even the Hawke/Keating Government's introduction of CGT in 1985 was grandfathered to avoid being both retrospective and unfair.

I am struggling to remember a greater collection of views which completely miss the point. No one should have a problem with increasing the tax on higher super benefits. Most sane and knowledgeable people including Bill Kelty and senior ex treasury bureaucrats condemn the unnecessary introduction of a flawed concept of taxing unrealised gains. This is under what was originally the Income tax Assessment Act now the Tax Act. Where is the income??? .
There is no income and the methodology relies on the circumstances of one entity to impose a tax liability on an individual. So the throwaway lines peddled by the treasurer of carrying forward losses simply cannot apply to the individual taxpayer. The treasurer said he widely consulted and he did not and there is an avalanche of evidence of organisations being invited to the table to discuss only to be told a discussion of the taxing of unrealised gains is off the table.
34% is not mandate however if wants to use our convoluted electoral system one could then say 64% said no.
Why this stranger from the truth refuses to budge is because he is on an errand with Wayne Swan and they believe that this tactic will break up SMSF's and the industry funds will be rid of the major competitor.
More rivers of gold to the Industry Funds.

Thankyou thankyou thankyou Max, for recognising the elephant hiding in the corner - taxing unrealised gains. Are you and I the only people here of the 64% who didn't vote red, who can calculate the problems with this idea? But, there's also the icing on the Swan/Chalmers pie in your face: not allowing a claw-back when the asset that has previously suffered tax on an unrealised gain, has now reduced in value, but no relief or refund of tax due to the fall in value. And, and, and, imagine the extra workload by administrators and auditors constantly commissioning expensive valuations on assets so as not to be attacked by the ATO for letting a taxable unrealised gain through their clumsy fingers. It is obvious to me that Chalmers et al have no commercial experience; have never run a business, managed tax and money of their own - just sitting there with the world's once greatest treasurer and ignoring basic maths and business nous. Noone in this government is fit to run a raffle.

Believe Treasurer Jim Chalmers already has put it out there for consideration with industry experts/ advisors(IE -Gratton Institute and others) for future tax(in other words Death Tax) on Super Balances, personal and OR SMSF over say est-$1.5m to be invested in Govt set up Fund (like Infrastructure Fund where an Annuity will be paid until Death, then reverts to Govt and NOT the deceased Estate

Many people might consider that a retired couple with each member using a pension fund with a TBC starting with $2 million providing tax-exempt pensions from a fund that is also tax-exempt, are already enjoying quite generous tax concessions. In addition, a retired couple can have approximately another $1 million invested outside super generating tax-free income thanks to the Senior and Pensioners Tax Offset (SAPTO), gives them access to a tax-free threshold of more than $60,000 together compared to the $18,200 threshold for workers.

In that case many people might question the need for any accumulation funds at all in retirement.

"compared to the $18,200 threshold for workers"

Actually its closer to $23000 if you include the LITO, so that would be $46,000 for a couple

"$1 million invested outside super generating tax-free income thanks to the Senior and Pensioners Tax Offset (SAPTO), gives them access to a tax-free threshold of more than $60,000 together":

Income: 2 * 31887 = $63,774 / y
Income tax: 2 * 1489.92 = $2,980 / y

A dismissive tax saving compared to paying for but missing out on:
Age Pension: 26 * 1732.20 = $45,037.20 / y

While exceeding Age Pension requires accumulating and investing after tax capital of:
= 45037.2 / ((1 + (1 - 0%) * 4.3%) / (1 + 2.2%) - 1)
= $2,191,810

Contradicting yourself and your love of crazy formulas---always the concern of "inflation tax" which happens to everyone.
$2,191,810 to receive the equivalent of a couple age pension ???
You firstly agree that $1,000,000 that if invested outside super they can clear up to $60,000 --lets reduce that to $50,000---already more than age pension
Another $1,000,000 in super probably another $50,000.
Yes, then allow for inflation and also growth of super and investments they should be able to maintain about
$100,000 per year for a long time.
I know this is achievable because it is very close to our situation for the past 10+ yrs

C'mon Franco,it's money,it makes fools of people.Hide sheer incompetence with complexity.
5% gross yield would be 5 X 2.1
4% gross yield would 4 X 2.1.Just get it roughly right and move decimal points around.

Incompetence,complexity,and get it precisely wrong .Sure as night follows day and day follows night ,always in that order.

"You firstly agree that $1,000,000 that if invested outside super they can clear up to $60,000 --lets reduce that to $50,000---already more than age pension":

You omitted the erosion of capital by inflation.

To make good the erosion requires some return to be reinvested (not consumed).

The real return rate is:
= ((1 + (1 - 0%) * 4.3%) / (1 + 2.2%) - 1)
= 2.055%

Real return:
= 2.055% * 2191810
= $45,042 / y
which is equal to the Age Pension.

"I know this is achievable because it is very close to our situation for the past 10+ yrs":
Nominal, not real.

"Incompetence,complexity,and get it precisely wrong .":
Innumeracy results in imprecise inaccuracy.

"I know this is achievable because it is very close to our situation for the past 10+ yrs":

Not reinvesting the inflationary part of the nominal return, is equivalent to government drawing down your capital at the rate of inflation.
= 2.2% * 2191810
= $48,220 / y
More than the Age Pension.

Franco, a net of inflation return of 2.055% does indeed imply an account balance of $2.2m required to return $45k p.a. in perpetuity (figures in current day dollars). But that is theoretical, and doesn’t mean doom and gloom.

1. Those figures assume capital is never run down.
2. An individual’s personal inflation could well be less than 2.2% initially, would probably run-off with age, and may even turn negative in later years.
3. A decent fund could probably do better than earn a gross 4.3%.
4. Doesn’t take the age pension into account.

So doing some spreadsheeting. Here’s the results of some different scenarios, all commencing with a $2.2m fund.

1. Run the fund down to zero over 30 years would yield approx. $99k p.a. in year 1, inflating at 2.2% p.a.
2. Change the earnings rate to 5% and inflation to 2%, and run the fund down to zero over 30 years would yield approx. $111k p.a. in year 1, inflating at 2% p.a.
3. With an earnings rate of 5%, inflation at 2% for ten years, 1% the next ten, and 0% the next ten, and run the fund down to zero over 30 years would yield approx. $118k p.a. in year 1, inflating thereafter.
4. As for 3. (including income stream commencing at $118k) but allowing for expected couple’s part age pension to commence after 15 years, applying current day indexation to pension amounts and assets test, would leave a fund value of approx. $600k at end year 30, adjusted for inflation (so in today’s dollars).

Not so bad after all.

Interesting ideas on reform that is needed. Unfortunately our treasurer seems hell bent on pursuing a complex approach for whatever ideological reasons. And just as we set upon a productivity/tax reform talkfest. There is no logical thought process happening here and I despair what positive value will be achieved.

A really simple approach would be to make all balances above $3 million be removed from the super system - say once every three years. If balances subsequently fell below $3mill they could be topped up. Simple, and fair?

So if you own a farm or commercial property within your super fund you are forced to sell it, pay all the associated selling costs and tax, and then can buy it back? That may be simple as a concept, but much more involved when you actually have to do it.

As for fair, fair can be defined essentially however people want.

You could sell, say, 20% to your family trust or to you as an individual.

I agree with Tim. If the SMSF has a valuable property in it, then a portion of it could be sold to a family trust or to the individual.

In the "old" days (1980s) we had complying and non-complying super funds with the latter paying 47% tax from memory. But both funds could own an asset (eg a farm) so that Tim's proposal would be easy to implement.

The so called legislated objective of superannuation is targeted towards bureaucrats not superannuation funds. The objective of superannuation is to try and restrict advice from the bureaucrats to lawmakers (i.e., parliamentarians) regarding changing superannuation for political motives.

For superannuation fund trustees, the trustees still operate under the sole purpose test. This being the provision of retirement benefits for members or death benefits for the members' beneficiaries.

It is also worth noting that when the Age Pension age was originally set at age 65 in 1909, this was effectively the life expectancy of a 16 year old male. This age now would be around 83.

When Treasury released their Comprehensive Income Product for Retirement paper, there was a many references to the age of 83, even though the paper did not say why this age was used.

Imagine the shelf life of a new policy proposed by the PM / Treasurer that has the age pension eligibility change from 65 to 83. It would probably last as long as a policy that would, say, have all Canberra bureaucrats mandated to work from the office rather than home.

David: a quick edit? I’m sure you did not intend to say “Some individuals who have a significant single asset in their superannuation fund (such as a single property or farm) are unlikely to not support this direction, …”. I think you meant “… very likely to oppose …”.

Editor: typo corrected

Completely agree David

The fact that an 85 year old with say $5M in super/pension is only required to draw out 9% from the pension balance is completely out of whack with the purpose.

If they were forced to draw out $450K , then at least some of the surplus will end up in a taxable entity

9% of $5m is $450k so you have solved your own question! At 85 males, are 4 years past their average age of death, so most well advised 85 year olds will have already pulled most, if not all their Super

Rob - the $5M individual can't have all of it in pension .......lets say there's $2M in pension , then they are only required to draw $180K or 3.6% of their Total Super Balance

The current system is inhererntly designed for wealth transfer

Don't be so sure - I am aware of people out there with in excess of $4m in Pension Mode. Cap is purely the start point - a Pension account can grow to any value

That's true, because they might have had a spectacular year in the returns from their fund—but of course then the pension payments would be increased because they're based on the balance of the previous 30 June.

I am not sure that the author really understands the way the Australian superannuation system works. Wealthy retirees can only convert $2 million of their superannuation balance to a pension (where they are forced to withdraw it and receive more favourable tax treatment) and can choose to either leave the rest of their super in accumulation phase where it is taxed at 15% or can withdraw it if they want and pay tax on the earnings in their own name. That's why they keep the money in accumulation phase, because it has a lower tax rate there than it would in their own name or in other structures outside superannuation.

If the proposal is to force retirees to withdraw from both their pension and accumulation accounts in retirement, then there is likely to be additional tax generated within super as those retirees would likely be forced to sell assets over time to make the pension payments, so there would be tax of 10% or 15% depending on how long they had held the assets for before the sale.

So that’s two misunderstanding’s of how the system works in a relatively short article.

Hi Aussie HIFIRE, I believe the $2mil you are referring to is the TBC as it stands now, if so ,in retirement mode retirees have a “personal” TBC which could be more or even less than $2 mil depending on other things such as lump sum withdrawals and fund earnings, I guess the gist of the proposal would be to mandate a min withdrawal on all accounts including accumulation accounts above their “personal” TBC thereby gradually reducing their (TSB) total super balance and avoiding wealth transfer which is against one of the stated aims of super.

I can assure you that the author understands super in Australia very well! The only issue I have with his proposal is if people are forced to receive a payment over age 75, super funds don't hold bank account details for accumulation fund members. I wonder if therefore the super fund would have to pay the amount to the ATO who could then remit it to the person (as I know the ATO has my bank account - I got a tax refund today!) David, any comment on this practical issue? Note that banks are closing down cheque accounts, so they cannot be used.

I agree to a point, but this is not enough. This used to be the case pre Costello's "reforms", but you had to take a pension at age 65 (then the pension age). In addition pension income was split into taxable and non taxable portions, based on whether contributions were made from pre- or after-tax income, with a 15% rebate for the taxable portion. When this system was abolished it was noted by some commentators that it would make the system unsustainable and really only benefited the well off as the 15% rebate (plus the seniors rebate) meant that most people would pay little or no tax on their super pensions anyway. Also, being able to recycle your super money to reduce the taxable portion is another problem, but harder to fix.

The current system benefits the well-off most and is being used for purposes other than what it was intended eg estate planning or tax minimisation. That said I think the way the Government has gone about this change is way too complex and unnecessary. Simpler alternatives exist eg why not split the amount over $3m into a separate accumulation account and tax income on it at 30% like they did with the pension limit.

David - there are four potential taxing "points"
- Contribution
- Accumulation
- Pension mode
- Death

Australia currently taxes three out of four. With Sec296, any large account will be hit four out of four [particularly galling on unrealised gains]. The whole concept of Super has been massively successful in building a huge retirement "savings pool" but, in so doing, it has become unbelievably complex for a large section of the population that is financially illiterate. The naive stupidity of the current proposal, is that it will raise Revenue of circa $2.4bn and it simply won't, so we are going trough all this nonsense and all this noise, for no significant Revenue gain, while at the same time trashing the whole concept of saving for an independent and predictable retirement. Why?

“Why”. Because they’re incompetent

" In most of the developed world, contributions to pension funds and the resulting investment income are exempt from tax. The only taxation paid is on the benefits (lump sums or pensions) paid to retirees."

Given that this is the case, how is it that the suggestion (gaining momentum) to tax super funds in pension mode too is remotely equitable? (I'm not talking about the proposed tax on funds >$3M here) I'm no actuary, but surely taxing super on contributions, earnings and withdrawal makes the benefit of super marginal at best? It would be interesting to see the numbers on this, as obviously taxing contributions and earnings is a significant drag on compounding in the accumulation stage. I still maintain (like Peter Costello) that government has a spending problem, not a revenue problem!