(Editor's background comment: Stuart Forsyth is a former Assistant Deputy Commissioner for the Australian Taxation Office. While at the ATO, his responsibilities in superannuation included managing the active compliance and risk and compliance areas. He left in November 2014 to become a Director of McPherson Super Consulting and SuperIQ. He wrote the following letter to The Australian Financial Review on 24 April 2015 but it was published in a highly abbreviated form. This is the full version provided to Cuffelinks. It's important to know this background because Stuart was at the ATO when the previous version of the Labor Party policy on taxing earnings on super funds in pension phase was considered.
Note the importance of understanding the difference between earnings in pension phase, and pension payments from the fund. The two tax implications are often confused.
A reminder of the Labor Party proposal: "Ensure earnings of more than $75,000 during the retirement phase are taxed at a concessional rate of 15% instead of being tax free.")
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In your [The Australian Financial Review] headline article on 22 April 2015 there is the following statement: “The reintroduction of tax on earnings, which was abolished by the Howard government in the 2006 budget, would raise about $1.4 billion a year and $9.2 billion over a decade”. This statement is wrong. There has never been a tax on earnings of superannuation funds that are in pension phase. This would in fact be a new tax. It is important that we get the detail right as this affects not only the retirement income of pensioners, but the complexity of what is already a very complex system.
There is some excuse for your correspondent in the fact that the Labor Party seem to be the origin of the error as they say in their Press Release:
“In particular, the tax-free status of all superannuation earnings, introduced by the Howard Government in 2006, disproportionately benefits high income earners and is unsustainable.”
What the Howard government did in 2006/2007 was to make most pension payments received by those over 60 years of age tax free.
When previously in government, the Labor Party proposed a similar change to the current Press Release and industry advised them that it would be complex to administer and impossible to understand at the member level. What they seem to be proposing is a new calculation of a notional share of the taxable income of the fund that could have applied to a member’s account as if it was not in pension phase. This would then be adjusted for capital gains and then aggregated by the ATO. Any liability would somehow be advised to multiple funds and amended potentially on multiple occasions. In other words, this is close to being beyond rational explanation and would create a new and somewhat strange compliance burden. Nothing in superannuation is simple and this policy although it sounds simple would in fact be extremely complex to implement. Costs to implement would be prohibitive both at the Government level and the industry level.
By rushing to announce this recycled policy the Labor Party has locked in behind a poor option when better options exist which would produce less complexity while still meeting the policy outcome of collecting more tax from pensioners with higher balances.
Stuart Forsyth is a Director of McPherson Super Consulting and SuperIQ.