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Are more taxes on super on the cards?

The Prime Minister’s broken promise on tax cuts has prompted speculation about other possible tax promises that the government may be considering breaking. A perennial topic in that space is the belief that super is very lightly taxed and is therefore a prime candidate for special attention. This is because super in the accumulation stage is only taxed at 15% and investment earnings inside super funds in retirement are tax free. Moreover, withdrawals by members from those funds in retirement are also tax free.

How it works elsewhere

In most countries, contributions to a retirement fund are not taxed and the income earned by those invested contributions within the fund are also not taxed, but retirement benefits paid to members are then taxed as normal income at marginal rates in which high income earners pay a higher proportion of that income in taxes. This approach has two advantages:

  1. The nest egg can accumulate to a larger amount thanks to the benefits of compounding as there are no withdrawals from the fund over a working lifetime, and larger nest eggs generate more tax.
  2. Retirees face the same tax rates as other taxpayers and so there is no intergenerational envy over any special treatment they receive.

It is important to remember that super is a long-term project with contributions over a working life that can extend over 40 years and a retirement that can extend over 30 years. That means we need to take account of the cumulative effects of investment decisions.

Australia is different

In Australia, we do things differently and those cumulative effects make a substantial difference. Firstly, in Australia, all super contributions to super are taxed before being invested.

  • Employer contributions (SG and salary sacrifice) are paid into the fund as pre-tax contributions, because neither the employer or employee pays tax on them. These are called concessional contributions because a tax-concession is claimed on them. They are then taxed within the super fund at 15% before they are invested. Therefore, of a pre-tax contribution of $10,000, only $8,500 is invested.
  • Personal (after-tax) contributions, such as the sale of an investment or an inheritance are called non-concessional contributions because no tax concession has been claimed on them. They have been taxed at the personal marginal tax rate before they arrive in the super fund. As these are already taxed, no further tax is paid by the fund.

Secondly, all the earnings from the combined invested contributions are taxed within the super fund every year at 15%. Since no super withdrawals by members are permitted before retirement, these investment earnings are reinvested and subject to compounding.

The effect of this tax on earnings is to reduce the amount reinvested and that effect is also cumulative. Whatever the fund can earn on its investments, only 85% of it can be reinvested after the 15% tax (ignoring fees). If, for example, a super fund can earn 8% on its investments, only 6.8% is reinvested each year.

To illustrate this, imagine a non-concessional super contribution of $10,000. If this was treated the same as a contribution to a retirement fund as in other countries, and we assumed an investment return of 8% for 40 years, this would compound to $201,153. A sizeable nest egg.

Now let’s assume that this was a salary sacrifice concessional contribution. It would be taxed as a contribution at 15% in the fund prior to investment so that only $8,500 was invested for 40 years. When this is compounded at 8% over 40 years, the result is lower because it compounds from a smaller amount. It is now $170,980.

If we account for the cumulative effect of the 15% tax on investment earnings, the compound rate over 40 years is only 6.8%, not 8% on an initial investment of only $8,500, not $10,000. The retirement balance is then $110,585. That differential is entirely due to the combined effect of these taxes.

Clearly the result of such a projection is highly sensitive to the compound earning rate selected and the length of time for that compounding to take effect, but the result of these two super taxes (on entry and on earnings) is more substantial than a ‘concessional’ tax of 15% would suggest.

Instead of claiming that super benefits in retirement are tax-free, it would be more honest to describe these retirement benefits as tax-paid.

It is the fact that super is tax-paid that creates complications. For example, if there is money remaining in a super fund on death, there is an additional tax on the death benefit. That tax amount depends on the beneficiary. A spouse and dependent children can collect it tax free but adult children pay an additional death tax. More importantly the tax payable depends on the proportion, not the amount, of non-concessional contributions within the fund because that part of the death benefit is regarded as a return of the contributor’s own money. Because it has already been taxed as a contribution, it is therefore tax free as a death benefit. By contrast, the concessional component has only ever been concessionally taxed and is therefore subject to this death tax.

More tax, please

One might ask why, when designing this super system in 1993, Treasurer Keating adopted this complicated hybrid system compared to other simpler retirement savings systems around the world. The answer is simple. He was not prepared to wait 40 years before the government collected any tax from these retirement savings. The legacy of that decision, however, is that we now have a super system that causes much confusion and intergenerational envy.

 

Jon Kalkman is a former Director of the Australian Investors Association. This article is for general information purposes only and does not consider the circumstances of any investor. This article is based on an understanding of the rules at the time of writing and anyone considering changing their circumstances should consult a financial adviser.

 

66 Comments
Bryan
February 11, 2024

Yes Dudley, thanks for that??
Your note sums up the superannuation system for me and my ilk, whom I suspect like me read this stuff in an effort to understand/implement decisions to make our accrued assets last.
Alternatively they don't read, don't TRY and understand because it's all too intentionally convoluted, IMO. They then head off to "financial advisors" and have to trust in the advice their having to pay for.
There has to be a better way.

Rick
February 11, 2024

Even stranger was that the same tax rate on contributions and fund earnings was applied across all contributors, irrespective of their marginal tax rate. Consequently, they opened up the opportunity for greater tax benefits for high-income earners. This is entirely contrary to the idea of having a progressive tax system. The Howard/Costello Government saw this as a good opportunity to use a strong budget situation to continually expand access by the wealthy to the superannuation tax incentives. While more recent governments have started to limit the amounts of concessional contributions going to super, it's certainly well after the horse has bolted. There are very large amounts in super that constitute a tax haven for the rich instead of the "comfortable retirement" the system was supposably designed for.

George B
February 11, 2024

"the same tax rate on contributions and fund earnings was applied across all contributors, irrespective of their marginal tax rate" .
As well as limiting the concessional contributions going to super the "same tax rate on contributions" was addressed by the Division 293 tax which applies when a contributor's income exceeds $250k (in prior years the threshold was $300k). The "same tax rate on earnings" will be addressed by Division 296 tax to be levied on superannuation earnings above $3 million.

James
February 11, 2024

The progressive tax system is a two edged sword. It takes more away from the more highly paid with "forehand" sweep and thus mathematically gives more back should tax rates be cut/changed with a "backhand" sweep! The media, politicians and others disingenuously complain about the "unfairness" of this!

The progressive tax system ensures the wealthy contribute more, but when is enough enough? Why is it a "crime" for those who work harder or made their own luck through risk taking to have more?

Better surely that the wealthy provide for their own retirement and the less well off be looked after by a full or part pension, largely funded by taxes from the wealthier who already pay most of the NET tax?!

Dudley
February 12, 2024

"opened up the opportunity for greater tax benefits for high-income earners":

... who pay for everything, including the contribution free, tax free, capital free Age Pension.

Geoff R
February 12, 2024

"who pay for everything, including the contribution free, tax free, capital free Age Pension."

which they never receive...

a "universal pension" would at least mean those who have actually paid net tax would receive something when they reach pension age.

but as they said in "The Castle" - "Tell him he's dreaming"

John Abernethy
February 11, 2024

Thanks Jon

A very good factual review and thought piece.

Whilst the Government tinkers with superannuation and pension taxes it remains silent on defined benefits. The Treasurer stated that defined benefits will be subject to the same tax changes he gave no explanation as to how that will occur. When is defined benefit valued at $3 million? How will it be taxed on unrealised gains when it is indexed and the duration of life expectancy decreases as each passes in retirement? For those that have not retired what is the tax on their defined benefit capital value as the benefit is not drawn?

It’s a mess - hopefully one of the readers can clarify how it will work to ensure that fairness in pension taxation is consistent across all retirees?

The problem is that the true benefits paid and the true tax payer cost of paying defined benefits to hundreds of thousands of beneficiaries is not clearly outlined in any public document.

We can only guess that it is an enormous annual payout and an enormous unfunded liability because the Future Fund is underfunded at $212 billion. Think about that issue - 6% of Australia’s super funds assets is insufficient to pay pension liabilities to about 1% of Australian citizens.

My guess - and that is all it is - is that the tax payer is currently paying about $10 billion in defined benefit pensions to ex and retired Commonwealth public servants.

If that guess is true then out of the circa $330 billion of income tax paid ( 2023) then each income tax payer is being charged a 3% hidden surcharge to pay defined benefit pensions.

So when we talk about superannuation tax changes and tax changes generally, then we must at least understand the full range of tax benefits that flow across the community - and the cost of the current system with the covert benefits that flow to some.




Trevor
February 11, 2024

Perhaps convert the defined benefits funds to defined contributions? Fund it with the Future Fund and government borrowing to make up the shortfall?

JohnS
February 11, 2024

If I was in a defined benefit super fund, there would be no way that i would convert it to a defined contribution scheme. Why would I want to take on "investment risk"?

Trevor
February 11, 2024

JohnS. I guess you’d have to not give them a choice in it.

John
February 11, 2024

Defined benefit pensions are not limited to former public servants. Many in the private sector also receive them. The proposed $3m TSB cap before extra tax will be levied on unrealised capital gains cannot be fairly legislated because there is no way to apply that cap to defined benefit pensions, where there is no underlying asset to value. When the $1.6m TBC was introduced, the government applied an arbitrary multiplier of 16 to DB pensions to ensure a previously untaxed pension above $100k p.a. would be subject to some tax. This hurt many mid ranking and above public servants in states (like NSW) where workers paid taxes along the way to ensure their DB pensions of any value would be tax free for life. Perhaps the best that can be done is to apply the same multiplier now such that DB pensions above $187.5k will be hit with more tax, because the deemed value of the non-existent assets funding it would exceed $3m.

Kym
February 12, 2024

Defined benefit accounts are able to capitalised when there is a family law split in train. It is likely the same methodology could be used to value these interest for Div 296 - an actuarial assessment. Not very "simple" which is one of Treasury's aims with the design of this new tax. They are also keen for it to be "sector neutral" so the defined benefits won't get a free pass or, it would then provide for another part of the sector where the "neutrality aim" can be debunked. The SMSF part of the super sector is not receiving a fair go but the numbers are low so not able to be "heard". When the politicians, judges, and the like find out how new taxes work on their defined benefits, then the tax gets some air time and it is surprising how the law can then be changed.

Lloyd
February 11, 2024

Tinkering with super is always going to happen. The politicians who see super as a “honey pot” can’t help but tinker. Unfortunately to further exacerbate the class warfare, seldom do the attacks on super ever touch those on defined benefit pensions. This I find abhorrent.

Disgruntled
February 11, 2024

Being GenX, I've been in Super since 1990, and have seen a quite a few changes to Superannuation rules, some I've liked, some I haven't.

Raising TTR age from 55 to 60, I didn't like. I'd be semi retired now.

Stopping people who were leaving the country permanently from taking their Superannuation with them another. I could be retired in Thailand, or somewhere else.

Rob
February 10, 2024

Skips the main debate. There are four possible points of taxation: 1. Contributions 2. Accumulation 3. Retirement 4. Death Most countries tax 3 out of 4, including Australia - with the $3m threshold come June 25, for some retirees in Australia it will be 4 out of 4! Remember Australia was "4 out of 4" pre Costello making retirement tax free in 2007. In so many ways the system was way simpler and arguably, fairer before those changes. Constant tinkering with the rules and moving the goal posts, lacks any ethical authority however both parties are guilty - Morrison/O'dwyer in 2017 and Chalmers in 2025. With the 2025/26 changes, the Transfer balance Cap of $1.9m won't take too long to collide with the $3m Threshold, at which point many more retirees will be paying tax - Labor will never admit it, but pretty clear, that is the plan. Suspect that is enough in this term but have no illusions, they are after your wealth!

Victoria
February 10, 2024

I currently pay up to 37% tax in the personal income tax system. It works out if you add in the medicare levy but then account for the tax-free and lower thresholds, that I pay around 30% overall personal taxon all personal income. In super, I will be paying 47% tax on taxable income within the super fund (based on 2022FY). I am ignoring the ridiculous definition of "Earnings" which most Australians do not understand. Australians understand taxable income. Because of the extension of the definition of "Earnings" to include unrealised capital gains, I will be paying up to a flat tax on taxable income within super of 47%. How is this fair? It is 17% over my current overall tax on personal taxable income, for a system that is supposed to attract a concession to make it attractive to save for one's own retirement. But the people in treasury and in government don't seem to understand what a mess they are creating and are not listening to the institutions that do understand the implications if this gets through. And the opening sentence is absolutely true.

Geoff R
February 09, 2024

I suspect the main reason for the new tax above $3m is to get people to take money out of super if they have "too much". As long as you take a big chunk out before 30th June 2026 to reduce your total balance below $3m it will not apply. Of course then the question is what to do with it - which I guess is a problem a lot of (less wealthy) people would like to have.

John
February 09, 2024

Hi Geoff R

I suspect the main reason for the new tax on balances above $3m is that they want to tax it.

If they wanted you to take it out (and possibly spend on non tax generated assets or non assets ) they would have made it a condition of release.

Ian Lange
February 09, 2024

What to do with it - invest it outside Super. If you already retired, you will probably be under the low income as well as SAPTO limits and pay no, or very little tax. Put your $3 million in Super and the rest outside. Unless its a huge amount, you will most likely still pay no tax.

Dudley
February 09, 2024

"most likely still pay no tax":

Marginal Tax Rates 67+:
https://freeimage.host/i/J1zLbJj

Tax free threshold: $29,783
Capital: = 29783/ 5% = $595,660

Jon Kalkman
February 09, 2024

Nostalgia for the pre-Costello taxes is misplaced. Pre 2007 there was no limit on non-concessional contributions. That explains why we still have some funds with more than $100 million. Secondly, the tax on retirement benefits at that time only applied to the taxable proportion of concessional contributions (just like the death tax). Large funds paid little or no tax.

Post 2007, all this money would have been in a tax-exempt pension fund. The only requirement was, and remains, to draw a mandatory annual pension which is also tax free to the member but that pension increases with age. Since 2007, non-concessional contributions have been severely limited.

The Morrison Transfer Balance Cap in 2017 forced everything above $1.6 million back into an accumulation fund which, as we’ve seen, is taxed at 15%. That collects a lot more tax but is still very concessional compared to the 47% marginal tax outside super. Also there are no mandatory withdrawals from an accumulation fund so the fund can continue to grow until death. It makes an ideal estate planning tool.

The proposed tax on funds larger than $3 million, despite its flaws, is designed to make the tax inside large super funds similar to the company tax rate. It finally addresses the advantage that Keating built into the system that allowed older people to stash large lumps of money into this concessionally-taxed investment vehicle when that is not available to younger people.

It begs the question, why anyone needs an accumulation fund in retirement if super is supposed to pay income at that time?

Disgrntled
February 10, 2024

Howard and Costello allowed wealthy couples to deposit Millions into their Super prior to introducing the Tax Free component the following year.

Abolition of Reasonable Benefits Limit and aged based contribution limits.

Favourable tax rates, generous contribution limits turned Super into a wealth creation tool for many to take advantage of.

Limits on contributions make it harder but not impossible to generate large balances still. I have an Industry Fund Super with a high balance. I chose the direct share purchase option and have done quite well. Even allowing for the few I got horribly wrong.

I'm actually conflicted about Superannuation, on one hand the Capitalist in me screams from the roof tops, it's my money and I should be able to do with as I please.

The other part of me acknowledges the fact that the majority are hopeless with money.

The stupidity I see in the Superannuation System is in the newly defined purpose of Superannuation.
'to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.

Now, I am not yet of preservation age but have sufficient funds to easily allow me to retire on a generous Super Pension (higher than my wage) but I am not allowed to retire, even though Superannuation is meant for retirement.

When I reach 60 years of age I can cease an employment arrangement, access my Super and spend the lot, which is not using it for the retirement purpose it was intended for.

I can see within 10 years, maybe 5 government putting a stop to people withdrawing all their Superannuation and Compulsory Super Pensions or Annuities will become norm. Limits on Lump Sum withdrawals. The purpose of Superannuation clause hints at this already.
"to preserve savings to deliver income for a dignified retirement" Now the argument on this is to stop incidences like the Covid19 access but governments being governments, it's going to expand. Last of the baby Boomers and First of GenX are approaching preservation age. They have higher balances than Boomers, many are eying off those funds to pay of mortgages, become bank of mum and dad for kids to get into property.

Geoff
February 11, 2024

You can retire whenever you like. You just can't access your superannuation until you hit your preservation age. So clearly you don't have sufficient funds ... that aren't in super.

And the part of the statement about the purpose of super people should be concerned about is the "equitable and sustainable way" bit - that basically gives the government licence to do whatever the hell they feel like as long they say "it's to achieve equitable and sustainable outcomes". And they will.

Disgruntled
February 11, 2024

Geoff, you've clearly missed the point I was making.

They say Superannuation is meant for retirement, yet at preservation age you can access your Super upon meeting a condition of release and spend the lot. That is not using Superannuation for retirement, which is its intended purpose.

If Superannuation is meant for retirement and one has enough in Superannuation to retire on, that is, use their Superannuation for its intended purpose and retire they should be allowed to regardless of age.

Up until 2006 or 2007, you could start a Super Pension regardless of age but they stopped that.

It's absurd that I can't take a $200k a year from my Super and retire now, yet in 4 years I can take the whole lot out and spend it and continue working.

Rob
February 09, 2024

Victoria - no idea where you get those numbers. In Accumulation mode you maximum tax rate is 15% on Income and 10% on Cap Gains older than a year

Come 2025/26, assuming you have over $3m in Super, the game changes as you correctly point out including unrealised gains which is both unfair and ridiculous. The 15% and 10% still applies but the new tax kicks in on "the proportion" of "earnings" OVER $3m. It is literally and mathematically impossible for anybody to pay an "extra" 15% even if their Total Superannuation Balance increased from $3m to $100m in 12 months - they would go very close but never quite get to an extra 15% [circa 14.6%]! So not quite sure where your 47% comes from.

What is demonstrably true is that everyone impacted should model their own position and consider their alternatives outside Super. My own conclusion is that there is one real disaster scenario post June 26/26 - an asset or stock within a Fund, that soars one year, is taxed and then totally tanks the following year and never recovers. That suggests a good hard look at portfolio construction.

Graham Hand did a good piece on the tax complexity in March 2023....https://www.firstlinks.com.au/10-revelations-new-3m-dollar-super-tax

Alan
February 08, 2024

I worked for almost twenty years helping people navigate this complexity. Almost no one understood it well, most misunderstood key parts of it and accordingly many had missed taking the planning opportunities pre their retirement. Add to this the complexity of Social Security /Age Pension rules and the massive complexity of the Aged Care financial rules and we end up with many of 'middle Australia' left with their head spinning.

Aussie HIFIRE
February 08, 2024

Superannuation in Australia is a $3.5 trillion pool of money. Anyone who thinks that politicians aren't desperate to get their hands on more of that in order to pay for whatever takes their fancy wants their head read.

So the question shouldn't be whether more taxes on super are on the cards, it's which more taxes on super are on the cards. We've already seen this with the $1.6 million (now $1.9 million) cap on pensions which is at least indexed, the proposed tax on balances over $3 million which isn't indexed, and then the question is what else is going to be on the table?

John
February 08, 2024

All Keating forgot to do was change the sole purpose of superannuation to, provide a source of tax revenue and make it one off the ancillary purposes to providing retirement benefits to your members.

Disgrntled
February 09, 2024

Keating's purpose of Superannuation was to allow people to fund or part fund their retirement and to create a pool of national savings.

Kym
February 08, 2024

The original system had exit tax. The marginal tax was offset by a 15% rebate so worked out OK for most. It was Costello's ridiculous "Simple Super" in 2007 that stuffed up the system. It was always "too good to be true" and likely to be short lived. It did however last c.10 years.
That time was when the Howard government was all for middle class welfare and squandered surpluses from the easy economic settings. A shocking legacy.
Now we have super being the "winter store basket" every time the Budget needs a miracle. The shame of it is that politics overrides any chance of sound policy. The recent introduction of a new tax for individuals with $3m+ in super beggars belief. A tax on unrealised gains, why? The better response would have been to re-introduce exit tax on super drawings. As the article says, the higher the taxable income, the higher the tax haul. There is always the availability of tax rebates/offsets to ensure the lower end still vote for the government.
And now we have the spectre, or potential, of a mandated "retirement product" being introduced. In plain words, a portion of super drawn in an annuity style product. Another example of the nanny state approach to policy formulation.

Bruce
February 08, 2024

"You cannot strengthen the weak by weakening the strong
You cannot bring about prosperity by discouraging thrift.
You cannot help the wage-earner by pulling down the wage-payer."
Margaret Thatcher

CC
February 08, 2024

the Div 293 surcharge ( 15% ) tax on Super contributions for high income earners is conveniently ignored by the rest.
high income earners pay 30% tax on Super contributions, that they then cannot access for decades.
It's not the tax mega-haven that it's made out to be by some.

Alex
February 09, 2024

Good point

Disgrntled
February 09, 2024

It hasn't come into being yet.

It is to tabled in April. We may yet see modifications to the proposal.

Taxing unrealised capital gains may have sufficient opposition to be removed.
Even though the $3M limit is not indexed, it will be left open to be adjustable in the future.

Personally, I think Superannuation should be capped at $3M It was never meant to be a wealth creation tool.

Regardless of who you are, $3M is enough to fund or part fund ones retirement. If you need or have more money than that it doesn't need to be in Superannuation. There are plenty of other investment opportunities out there.

If you have more than $3M in super and this legislation does get through, if you're at or over preservation age there are avenues to get funds out if you choose to.

If you're under preservation age and you exceed $3M you should be allowed to take the excess out if you choose to.

James
February 09, 2024

"Personally, I think Superannuation should be capped at $3M It was never meant to be a wealth creation tool."

What if Labor decide the $3M is too high and it changes to $2.5M or $2M? Still happy? The threshold is not indexed either (another unjust flaw), and will capture many more people than Labor has admitted to, as younger generations experience a full working lifetime of super contributions at 12% plus!

And realistically for most people, aside from their PPOR, superannuation does represent most of their wealth!

Alex
February 09, 2024

I think you are confusing Div 293 tax with the new tax that would apply to the income on super with balance over $3m. Div 293 tax has been around for years, and the threshold was even reduced from $300k to $250k at some point to limit the tax benefits that higher earners can access.

"Personally, I think Superannuation should be capped at $3M It was never meant to be a wealth creation tool." - Well, it's misguided to see super as a 'wealth creation tool' to begin with. Super is simply a tax-friendly structure where people can put aside their investment for retirement - if the underlying asset is a dud, it's not going to create wealth per se, even if it comes with a favourable tax rate/treatment.

Dauf
February 10, 2024

The system would be simpler if there was simply a cap on how much you can have in super…full stop! Seriously, why should any citizen get tax free for anything over $3 million? $2.5 million? $2.0 million, whatever the sensible number is. Per person just pick the number. 25-30 year annuity on $3.0 million if you earn 10% is >$250 K pa each person (if its a couple its twice that). Seriously, why a tax break for that style of living?

You do away with all this stupid rubbish of Transfer balances etc, taxes on bits above $3million. If you invest that well that it goes over, just take some out, spend it or invest it elsewhere, give it to kids, tax some tax. It really is crazy

George B
February 11, 2024

"The system would be simpler if there was simply a cap on how much you can have in super…"

Dauf there is now a cap on how much you can have in super (currently $1.9m and indexed annually to inflation). The complications are there to deal with people who had balances above the cap when the rules changed. It’s a grandfathering of sorts which allows the excess above the cap to be retained in an accumulation account.

Disgruntled
February 11, 2024

George B, That is incorrect information. There is absolutely no limit to how much one can have in Superannuation.

The $1.9M you speak of is for the Transfer Balance Cap maximum for when starting a Tax Free Super Pension.

You can keep as much as you want in your accumulation account. There is no compulsory requirement (yet) to even start a Super Pension.

At present rate, I could well have an 8 digit balance not including the cents by the time I reach preservation age.

George B
February 11, 2024

"George B, That is incorrect information. There is absolutely no limit to how much one can have in Superannuation."
Disgruntled I think you will find that if you have a Total Superannuation Balance which is equal or more than the general Transfer Balance Cap on 30 June of the previous Financial Year, you are not eligible to make Non Concessional Contributions. This means that only people who had significant balances above the cap when the rules changed can ever have an 8 digit balance.

James
February 11, 2024

"This means that only people who had significant balances above the cap when the rules changed can ever have an 8 digit balance."
You're perhaps discounting massive capital gains from property or someone whose luck or investing acumen is beyond normal comprehension! Good luck to them!

Disgruntled
February 11, 2024

George B. Changes to contribution limits don't put a limit on how much you can have in Super.

I don't contribute any extra to Super.

Someone with an SMSF who buys property with Super can see the value of property/properties grow in value of time .

I could in theory buy $100k of an ASX stock that is in its infancy for 10 cents a share and in 2 or 3 years be worth $5 a share as an example. As there is no limit to how much you can have in Super, both of those examples show how it is possible to still gain a high balance without contributions.

Yes the second is an extreme case but certainly of the life of Superannuation buying stocks cheap and selling at a profit and moving on to another cheaper stock and selling at a profit grows your balance over time. If you have quality dividend paying shares that you don't want to sell, you can use the dividends to buy stocks that have potential give more growth than the dividend paying ones. Rinse and repeat.

I have a couple of stocks in my Super that I anticipate being worth 5 to 10 times what I paid for them by the time I'm 60.

If they look like not performing, I'll sell them and move on. If the do perform, I'll likely sell at least some of them to take advantage of other opportunities.

This is achievable because there is no limit to how much one can have in Superannuation.


I think there should be, but I'll take advantage of the fact there is not.

Martin
February 11, 2024

True, but they get a tax deduction at their marginal rate for any taxable contributions. Given their marginal rate is 47%, they still benefit from making contributions.

Steve
February 08, 2024

Thanks Jon. Agree it would produce a more level playing field and remove some of the arbitrary thresholds (i.e. transfer balance cap) built into the system. Would be a brave politician to go to the over 65 brigade and announce that super pension income will now be subject to marginal rates. Have to be some sort of grandfathering I would imagine. The problem with grandfathering changes is that someone has to be standing at the head of the queue when the fall impact of the legislative change takes effect. That will probably be super members in the 40-50 age bracket.

JohnS
February 08, 2024

If you were to restore the pre-costello treatment of super pensions, it would overcome the transfer limit issue. Pre-costello, you got a 15% rebate on your pension payment. With the new marginal tax rates for up to $45k being 16%, when you net off the $18200 tax free plus the rebate against the marginal tax rate, you would probably find that you could get close to $60k tax free. It means a very large super balance to pay $60k (sustainably - my guess at least $1.2m), and with the average super balance being about $300k you would still have the little bloke getting a tax free pension, but the big super balance accounts would pay tax. In so doing, you eliminate the need for the super benefit transfer limit, and also the super surcharge tax on balances over $3m. Its actually a simple solution, and its logical. You pay 15% tax with money going into super, you get that tax back (like a franking credit) when you take it out. If you are getting a BIG pension, then part of it is taxable Many problems solved, easily and logically

Jon Kalkman
February 08, 2024

Pre-Costello, the tax on retirement benefits only applied to the concessional portion of that pension or lump sum (just like the death tax). Large super funds only got that way by large contributions of personal (non-concessional) contributions, and pre-Costello, those contributions were uncapped.
Therefore large funds only had a small proportion of the retirement benefit that was taxable AND, as you say, that tax was entitled to a 15% rebate. The result was that the tax on retirement benefits collected very little revenue. That is why it was easy to do fiscally and no government since has sought to return to pre-Costello taxes - because they produce very little revenue.

Jim Butler
February 08, 2024

I found the first sentence offensive and false.

Greg
February 08, 2024

I found it 100% correct.

john
February 08, 2024

Huh ??

Anthony
February 08, 2024

Why is it offensive?There have been 2 promises broken already.One is the new tax on Super and now changes to the Income Tax Rates.

Dan
February 08, 2024

Yes stage 3 tax rates which are currently legislated with labour support until 2 weeks ago.

Geoff R
February 08, 2024

"There have been 2 promises broken already.One is the new tax on Super and now changes to the Income Tax Rates."

Also you forgot to mention the two measures on Franking Credits (one relating to capital raisings and the other relating to off-market share buybacks) when they had promised to not touch franking.

So of course people are wondering what is next and speculating on the taxation of trusts and getting rid of negative gearing and CGT discounts. I haven't heard people speculating on death taxes and raising the GST yet but I am sure that speculation will come - along with more taxes on super.

George Hamor
February 08, 2024

It's certainly not offensive and it's absolutely true.

Brett Crabtree
February 08, 2024

Jim.......it is inoffensive and a fact. 

OldbutSane
February 08, 2024

Agree Jim and what's more the Liberals played around with the three phase legislated tax cuts themselves, but no one called them out on broken promises. The worst of that was extending the low middle income tax offset, then increasing it, then abolishing it, so that most taxpayers, last year paid more tax than they had in the previous few years. If course, the effect of that decision wasn't felt until the ALP won Government, so they got most of the media blame on that.

Rich
February 08, 2024

Most people forget about the 17% tax on the taxable component if left to a non dependant beneficiary. Most super funds do not want to inform people of this fact

OldbutSane
February 08, 2024

Rich, you need to be more careful with your word use. Super cannot be left to non-dependants, it can only be left to those who are superannuation dependants as defined in the legislation. Some super dependants are entitled to receive the benefit tax free, others eg most adult children must pay tax on the taxable component. If you are half smart it is not hard to convert your taxable component into after tax, using the withdraw and recontribute strategy, especially now that you can do it to age 75 and/or by keeping large after-tax contributions in a separate accumulation account.

John
February 09, 2024

When I die, tax-wise it will be better for my inheritors if I die a slow painful death from cancer than for me to have a peaceful passing from a heart attack. At least with the former, I would have time to withdraw any funds attributable to concessional contributions, to finesse the current death tax.

Steve
February 08, 2024

Yet other countries like the UK & US have universal pensions, not means tested. So the reliance on income from super in retirement is less one-sided....

Malcolm WA
February 08, 2024

Please recall that the Keating 15% tax was to balance the National budget. It was not generosity a d no doubt would have been added to if Keating had not lost in 1996 to Howard.

Kevin
February 08, 2024

If you want to have an income of ~ £10,500 or US $19,000 after social security payments for an entire working life,then go for it.US is taxed as normal income.UK is taxed as normal income,that pension is below the tax free threshold for the UK.

Strangely people in the UK complain after having good rises in the state pension due to the triple lock system.Same as Australia,to get more money in my pocket I will have to pay a little bit more tax.I'll choose not to have more money in my pocket thanks.

Other than that the systems are the same.The wide variety of acronyms in the UK IRA,SIPPS etc The financial industry loves an acronym to make things look complicated.The US with 401K,403K,IRA,Roth,IRA etc. Live on a basic pension in any of those countries and life may be a struggle.

Do what govts have been telling you to do since the late 1970s and 1980s and life will be better.The dependency ratio has gone against the huge number of baby boomers and the next two generations that pay for their pensions and health care.

The true picture would be see what an annual income of $100K in each country would leave you after tax.

USA is the IRS for the treatment of pension income .The UK is HMRC. A huge brainfart in each country as they refuse to see the obvious,if I pay a large amount of tax,I have a large amount of money in my pocket.

Kevin
February 08, 2024

Second line,social security payments should be social security taxes.

Dudley
February 09, 2024

USA Marginal Effective Tax Rates
https://taxfoundation.org/wp-content/uploads/2020/02/Marginal-Tax-Rates-01.png

OldbutSane
February 09, 2024

Steve, remember that these are contributory pension ie workers are required to contribute to a state run pension scheme, so it would hardly be fair to income or asset test them. Also, the naximum amount they pay is hardly generous and is fully taxed on receipt.

Steve
February 09, 2024

All good replies fellas but my main point was that in these countries you get something off the govt in retirement; whether you forego some tax by having a tax free income (in Aus) or get taxpayer money as a pension, you are financially benefitting from the govt in retirement. Of course rates etc are impossible to compare as the tax systems are totally different (eg US has tax deduction on mortgage up to $750,000, tax rates vary by state and county etc). Max pension in the US at std retirement age (67) is around $46,000 (about $70,000 AUD!). Also social security tax has a ceiling, above about $170,000 you no longer pay the 6.2% social security tax (12.4% if self-employed!) - imagine the outcry here if people earning more than $170,000 got a 6.2% reduction in their tax rate! Of course for most people state pensions are supplementary, which is why these govts also encourage personal savings as well.

Dudley
February 08, 2024

"How it works elsewhere":

FutureValue, earnings tax 0%, earnings 5%, inflation 4%, to 67, from 25, contribution tax 0%, contribution 27500 / y;
= FV((1 + (1 - 0%) * 5%) / (1 + 4%) - 1, (67 - 25), (1 - 0%) * -27500, 0)
= $1,414,805.34

Net retired Payment, withdrawal tax 30%, earnings tax 0%, earnings 5%, inflation 4%, to 97 from 67, initial capital 1414805.34, final capital 0;
= (1 - 30%) * PMT((1 + (1 - 0%) * 5%) / (1 + 4%) - 1, (97 - 67), -1414805.34, 0)
= $38,159.45 / y

"Australia is different":

FutureValue;
= FV((1 + (1 - 15%) * 5%) / (1 + 4%) - 1, (67 - 25), (1 - 15%) * -27500, 0)
= $1,031,717.15

Net retired Payment, withdrawal tax 0%, ...;
= (1 - 0%) * PMT((1 + (1 - 0%) * 5%) / (1 + 4%) - 1, (97 - 67), -1031717.15, 0)
= $39,752.83 / y

The difference in outcome depends on withdrawal tax rate.

 

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