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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.

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5 Comments

Peter Lang

May 01, 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.


 

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