Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 107

Labor is proposing a complex ‘new tax’

(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.")

______________________________

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.

 

5 Comments
Peter Lang
April 30, 2015

Excellent explanation. Thank you. I guess this proposal is highly unlikely to get legislated.

The only sensible change I can see would be to change the superanuation system from taxing contributions and zero tax on pension payments to zero tax on contributions and include pension payments in taxable income like any other income. That’s how Canada does it and it seems much simpler to me.

But I think any change would have to apply prospectively only, not retrospectively. If a significant change is to apply retrospectively, then all defined benefit schemes should be converted to defined contribution schemes and included. The defined contributions schemes should be valued at the member contributions plus earnings on contributions at the long term government bond rate.

Leon
April 30, 2015

To me the problem is that the proposed policy clouds investment decisions. For example, if I had a hefty capital gain in a share portfolio and wished to take some profits I may decide against it because to realise the capital gain would push me over the threshold.

Damien
April 30, 2015

I recall Bill Shorten making a comment in the last few months of the Rudd/Gillard/Rudd government that they were either looking at or had introduced legislation that would restrict ongoing changes to the superannuation system.

Stuart Forsyth
May 07, 2015

Damien that was proposed but never put in place. The detail as I recall it was to have custodians that would oversee policy in this area and provide a buffer to knee jerk change. Good idea as it would add certainty especially if we could set some principles.

Bill
April 30, 2015

I heard that comment about reintroduction of tax on pension earnings and could not recall for the life of me when that was ever the case. Thanks to Stuart for confirming it was never the case. The fact that Labor doesn't know the difference between tax on earnings within pension phase and tax on pension payments is scary. It's a pretty good retirement system right now. We're lucky to have it with this ageing population crisis looming, but watch the tinkering to make it more complex and further out of reach for the average person.

 

Leave a Comment:

RELATED ARTICLES

How to shift into pension mode

Are you paying tax by not starting a super pension?

Selling your holiday home? You may be able to pay less tax

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.