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Super is about equity and fairness

Imagine a world in which all contributions to super during your working life were tax-free and imagine that the fund that invested these contributions was also free of taxes on their investment returns. Now imagine a world in which all withdrawals from that super fund in retirement, including income streams and lump sums, were taxed as income at normal progressive marginal tax rates.

Imagine how much higher those investment returns would have grown before retirement if the compounding over a working life of 30-40 years had operated on 100% of investments rather than the 85% remaining after a 15% tax.

Paul Keating’s original design for our super scheme in 1992 was almost this ideal system. Originally, contributions and earnings would be tax-free and retirement benefits would be taxed at 30% in recognition that this money is locked away for half a lifetime. But Keating was not prepared to wait 30-40 years before any tax was collected and so we ended up with a system whose design faults require frequent correction so that it encourages people to save for their own retirement through tax concessions, but also limits those concessions to curb the budgetary cost.

Since the system is now 30 years old, many people do not know or remember the history of this complex system.

How super works

There are two ways to contribute money to super. Contributions on which tax has not previously been paid include employers’ super guarantee (SG), salary sacrifice and tax-deductible contributions. These contributions are then taxed within the super fund at 15%. But for high income earners the contribution tax is 30%. Previously people over the age of 50, could contribute $100,000 of their pre-tax salary to boost their super balance prior to retirement but because of the cost to tax revenue, these limits have been progressively reduced. Today this type of pre-tax contribution is limited to $27,500 per year for everyone.

The other type of contribution has tax paid prior to transfer to super. These contributions include the proceeds of sale of investments, businesses or personal savings. These after-tax contributions are not taxed within the super fund. Both types of contributions are invested in an accumulation fund. The income earned by the fund is then taxed at 15% until the money is withdrawn, but not before retirement.

Source: Industry Super Australia

In retirement, the accumulated super balance can be transferred to a super pension fund where the fund’s income and capital gains are tax-exempt. Super pension funds have been tax-exempt since 1992 because tax has already been collected on contributions and accumulation earnings over many years. Accumulation and pension funds are two distinct types of super funds because of their different tax treatments.

The changes under Costello

Before 2007 there was no upper limit on after-tax contributions. People with sufficient resources were well advised to maximise these contributions because, when they retired, their super pension fund paid no tax on investment earnings. Those pre-2007 rules explain why we still have a few SMSFs with more than $100 million.

In 2007, Treasurer Costello introduced strict limits on these after-tax contributions. Initially the annual limit was $150,000 but in response to the howls of protest, he allowed a $1 million contribution for one more year. That was later indexed to $180,000 per year. These contribution caps have also been progressively reduced since that time and are now limited to $110,000 per year.

Costello also eliminated the tax that members paid previously on drawing their money out of a super fund. All withdrawals, including lump sums, from a super fund are now tax-exempt after age 60. That appears to be a generous concession but in fact members paid very little tax before these changes as explained here.

Until 2017, these large funds were held in pension phase in retirement to take advantage of its tax-exempt status. The pension fund paid no tax on investment earnings and the fund member paid no tax when they withdrew their pension. Their only obligation was to draw a mandatory pension determined by their age. For someone between the ages of 65 and 75, that minimum pension is 5%. For a fund of $10 million, that would have provided a tax-free pension of $500,000 per year which had to be removed from super, but it would then be exposed to normal tax rates.

The changes under Morrison

In 2017, Treasurer Morrison introduced the Transfer Balance Cap which limited the amount that could be transferred to a tax-free pension fund. It was set at $1.6 million and looks likely to increase to $1.9 million in 2023 due to inflation. Any excess money was required to be either removed from super altogether or transferred to an accumulation fund. Most chose the accumulation fund for the concessional tax rate.

For the government it meant increased taxation revenue from accumulation funds. For an SMSF of $10 million it meant a mandatory pension was then 5% of $1.6 million in the pension fund, or $80,000. The remainder ($8.4 million) was held in an accumulation fund and is still concessionally taxed (at 15%) with no obligation to make any withdrawals, although tax-free withdrawals of any size can be made after age 60. Unsurprisingly, the ATO reports that these large funds just continue to grow.

These large funds remain a legacy of an earlier time and eventually they will disappear because death is a cashed-out event but until then, they are perfectly legal and make ideal estate planning vehicles. Worse, they continue to distort the whole debate around tax concessions flowing to super.

Morrison also introduced the Total Super Balance Cap. Once a member’s super balance reaches this cap (presently $1.7 million), the fund cannot accept any more after-tax contributions. There will be no more extremely large funds in future but arguably this is an inter-generational equity issue. Older retirees had access to very generous tax concessions but for younger people it is now simply not possible to accumulate those large super balances, regardless of their circumstances.

The current government proposals

The present government is now mulling a total cap on super across both types of funds to limit the tax concessions flowing to these very large accumulation funds in retirement. Reports suggest that if the limit was set at $5 million, it would affect 16,000 people. If the limit was set at $2 million, it would affect 80,000 people.

These people were not pleased with the changes in 2017 which introduced tax on some of their super for the first time. Given that these people followed the rules as existed at the time, they would not be thrilled with further legislation that forced them to remove any excess money from super altogether, especially as the government promised before the election to make no changes to super.

Misplaced envy about retiree tax benefits

A tax-free retirement is the result of Keating’s tax concessions provided to super funds which have existed since 1992, and not the Costello tax concessions flowing to individuals. Some would argue the whole point of compulsory saving inside a super fund that cannot be accessed for 30-40 years, IS a tax-free retirement. It actually represents a social contract. Unfortunately, it has led to considerable intergenerational envy about the tax benefits flowing to retirees, from people who do not understand how super savings are taxed. That envy would not exist if super funds had been structured differently in the first place.

If we wanted to design a better super system, we wouldn’t start from here, given the complicated patches that have been needed to fix a complex system. In any case, knowing what we know now, who would trust a government that promised tax arrangements on retirement savings to be delivered by some future government in 30 years’ time?


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.


January 09, 2023

The big difference between those who have enough super and those who don't, is the former do not have to deal with Centrelink. How unfair and inequitable is that?

December 10, 2022

Peter Costello seems to get rap in Comments when 'fairness' /changes to Super arise, yet I see his name & wish he was Treasurer managing national budget just by observing how he has managed Future Fund for Commonwealth employees super, with David Murray(exCBA) as Chair Trustees at start. One only has to look at results since inception to see the success with only a handful of staff. We should be green with envy re Costello's financial expertise. Incoming Treasurers should pick his brain no matter what political persuasion. Since old enough to vote felt position of Treasurer so important it should never be filled by elected politician but salaried for financial/business whizz like the David Murrays of this world to achieve surpluses unrestricted by politics. A successful result by a highly skilled manager to ensure it, would cover gripes of both the haves and have-nots on these pages---help when needed, reward on achievement, some left over for investors (taxpayers re hospitals etc), a bit like managing a bank for shareholders but how many would want a politician with no business acumen managing a bank?

SMSF Trustee
December 10, 2022


Costello has no direct influence over the outcomes of the Future Fund. His job is to govern it, making sure they run effectively, employ the right CEO, can pay their staff and comply with their charters. The performance results are due to the investment team and their expertise, not Costello's.
And the results actually mean nothing for public servants. The funds invested are in defined benefit schemes, so it's the budget that benefits when the Future Fund's returns exceed the formulae for payouts.

Other than those basic facts, I agree with you about his talents as a Treasurer and miss the days when we had someone like him. Mind you, he had a mining boom that helped!

As for David Murray Treasurer, no thanks! He's the twit who started questioning the imputation system a few years ago.

December 04, 2022

"Super is about equity and fairness". Well, let's debunk that in one fell swoop. It's not.

How can it be when the rules are forever changing ?

And by virtue of this, where people made decisions based on 'the rules' at that time, they are grandfathered, so they cannot lose. Try getting huge amounts of money into super late in your career (as you used to be able to under the 3-year carry forward rule, up to $540,000 over three years)

These were the limits:

FY 2013-2014 = $150,000
FY 2014-2017 = $180,000
FY 2017-2021 = $100,000 (now $110,000. Big deal.)

See the difference ? Now, you need to put money in earlier and cannot rely on putting it in later.

Super was defined by and for Boomers, that's why it allows them to still have access to a part-pension when their million dollar house isn't means tested. It is asinine. Now they are talking about 'having too much in super', so if you go over $1.7m (which, when we do retire, Gen-X probably WILL have that much), they want to tax you on it, but Boomers got it all tax free...Gen-X will be the REAL self-funded retirees, out of necessity.

There won't be an age pension when we retire, even if you can get access to it, you won't want it because it will be a pittance.

December 04, 2022

Re 'having too much in super'. There is a limit (Transfer Balance Cap (TBC), was $1.6M when introduced on 01/07/2017, already indexed to $1.7M & will increase further with inflation) on the amount that can be transferred from the super accumulation account (where earnings are taxed at 15% adjusted for franking credits) into a retirement phase pension account (in which earnings are tax free). At that point, the excess above the TBC can be withdrawn from super or remain in an accumulation account. This applies to everyone, including those that had started a retirement phase pension account prior to the introduction of the TBC. From the 2016 Budget papers: "Individuals already in retirement with retirement phase balances in excess of the cap at 30 June 2017 will be required to either: — withdraw these excess amounts from superannuation; or — transfer these excess amounts back into an accumulation account."

December 04, 2022

"Super was defined by and for Boomers, that's why it allows them to still have access to a part-pension when their million dollar house isn't means tested."

This is a government policy setting issue and an electoral bomb that few governments want to detonate. The bigger issue then, now that you have framed the issue, is not so much people getting a part-pension whilst the house isn't means tested, it's those who get a full pension with a multi million dollar house! These people could well fund their own retirement if they "ate their house" so to speak or where forced to downsize/relocate. Few politicians would be brave or stupid enough to "hoist their own petard" on this issue. Most "well off" SFR's just want to be left the hell alone and are happy to avoid welfare or being a burden!

I get your frustration though. The multi trillion dollar pot that is superannuation in Australia has and will ever be a tempting short term dip-into-the honey pot fix for cash strapped, over spending, indebted governments. Welcome to the club of the exasperated, distrustful and discontented!

George B
April 28, 2023

James you may or may not be surprised to learn that most of the so called million dollar houses were once modest homes when they were purchased by the boomer generation, many in working class suburbs. Successive generations have driven up the prices of these homes due to a variety of factors including a lack of supply, increased demand due to migration, access to relatively cheap money, etc. over which their owners had no say or control. They still can’t eat their modest house and should not be denied access to a pension which their taxes helped to fund particularly if their savings are also modest.

Geoff R
December 04, 2022

>they are grandfathered, so they cannot lose. some things are grandfathered, some are not. if you had more than 1.6m in Super when the TBC was introduced, that was NOT grandfathered. Years of planning for retirement based on the rules at the time blown away in an instant. No wonder people are reluctant to trust that Super rules won't just keep on changing - the government just cannot keep its hands of the glittering prize of more than three trillion dollars. >Super was defined by and for Boomers, that's why it allows them to still have access to a part-pension when their million dollar house isn't means tested. this has absolutely nothing to do with Super but I agree that the house should not be exempt from any asset tests. Note that self-funded retirees do NOT get a government pension. To be fair I think all government pensions should actually be a loan from the government which is paid back when a person either dies or sells their home to go into aged care. Young people have government loans for their education, so why not old people for their pensions?

March 10, 2023

It is already a pittance After paying tax here for 36 years and owning a house that needs to be demolished my wife and I receive $230.00 per fortnight each as we are entitled to UK pensions from from the 13years we worked there.
All I can say is toughen up, look at the corruption of all politicians and follow suit if possible.

March 10, 2023

And I paid taxes all my life too Bob, as will Gen X, Y and Z. No one is more special than anyone else in this but the boomers think they are...we all used roads, hospitals, schools, police etc. and that's what the tax system was for, not for pensions for those who have a house bought years ago (that is probably over $1m, land only).

December 04, 2022

Parliament of Australia: "At its broadest welfare can be used to refer to all of the programs and services that make up the welfare state. This can include health and education, as well as income support payments such as the Age Pension, Carer Payment, Disability Support Pension and Newstart Allowance."

"Welfare can also refer to a much narrower (and less clearly defined) category of spending on income support payments to people of working age. These welfare payments are means-tested benefits provided in cash. They go to people of working age who are not participating in paid employment or other activities such as education or vocational training. The term welfare can be applied loosely to spending that meets some or all of these criteria. It is a moral or political category rather than a legal or administrative one. It is often associated with the idea that recipients have not earned an entitlement to payments through contributions to the community."

Conclusion: "None of the above implies that public concern about the level of spending on working age payments, like Newstart Allowance and Disability Support Pension, is misplaced. Australians are entitled to ask whether more people on working age income support payments could be supporting themselves and their families through work. However, if public debate is to be informed by facts, there needs to be closer attention to the way categories such as welfare are defined."

December 03, 2022

This argument is often silly. I held some pretty important jobs in large organisations and I managed to reach 50 before I ended up in a single month when my bank account had any thing in it for several days before the next pay cheque. We had a home in the northern suburbs of Sydney, mortgaged to the hilt and had one car. I am now 77 and the super that keeps us going was truly the assiduous saving in the next decade until I was sixty. poor health shortened my super saving at age 61. Stop complaining you younger generations. The big accumulation times are after 45 / 50.

December 03, 2022

"Stop complaining you younger generations. The big accumulation times are after 45/50.". Coincidentally the age at which the younger generation has been turfed out or trained to feed themselves.

December 04, 2022

Tom - that situation ("too much month and not enough money") is nothing new and not particular to your generation.

Dudley - some of us left home and moved to the other side of the world when we were 22, so your generalisation is exactly that, and seems to be quite rife in the boomer generation about anyone after them.

Geoff R
December 04, 2022

Chris: "some of us left home and moved to the other side of the world when we were 22"

I suspect Dudley meant the age of the PARENTS was 45/50 when their children left home - hence allowing them to accelerate their retirement savings. Assuming parents had children at 25 or 30 that would correspond roughly with you leaving home around 22.

But I do understand some adult children do hang around being dependent for far longer.

December 04, 2022

"some of us left home and moved to the other side of the world when we were 22":

Pfft; I was booted out at 17, went bush and 'built the country'.

December 05, 2022

Well Dudley, I not only built the country too, I was entitled to nothing from it whilst also serving it (and a State) because as a 1st generation migrant, none of it was even mine to begin with. So I'll see you and raise you. Beat that and walk home to school uphill both ways.

December 06, 2022

"I was entitled to nothing from it whilst also serving it (and a State) because as a 1st generation migrant, none of it was even mine to begin with.":

None mine either - had to stoop to working for a crust.

Did you build super and equity and experience fairness?

December 06, 2022

With apologies to Monty Python - Four Yorkshiremen:

"Right. I had to get up in the morning at ten o'clock at night half an hour before I went to bed, drink a cup of sulphuric acid, work twenty-nine hours a day down mill, and pay mill owner for permission to come to work, and when we got home, our Dad and our mother would kill us and dance about on our graves singing Hallelujah.

And you try and tell the young people of today that ... they won't believe you.

December 03, 2022

What "considerable intergenerational envy"? The last Government gave us the ability for early withdrawal of some super and younger generations took this up in earnest. Fact.
So what explains their desire to remove early savings from super against "envy" of those who have accumulated big sums (+tax benefits)? It must be some other basis for envy (wealth gap? housing costs?) or is it a lack of confidence/understanding in the long term benefits of sticking with a tax concessional retirement savings plan like superannuation..
This is the broader intergenerational question that needs to be tackled.

December 03, 2022

The last Government gave us the ability for early withdrawal of some super and younger generations took this up in earnest. Fact."

The present government is intent on passing legislation to ensure that can never happen again!

As for housing costs, the biggest villain is government - Commonwealth, State and Council, for policy settings, taxes and development levies, and especially insufficient new land supply; not wealthier older people

December 03, 2022

How many businesses exist because of the success of the super system?

And how many people do these businesses employ?

Super funds, asset consultants, trustees, lawyers, accountants, financial advisers, insurance companies and thousands of others.

Collectively, how much tax do they pay?

December 01, 2022

"Simply not possible"?
A $30,000 investment in BRL Hardy that accepted scrip in the Constellation Brands takeover in now worth about $2.3million. Similar size investments in Apple or Microsoft would be even larger. Want to come onshore? $30,000 invested in the float of CSL is now worth $4.5M.

November 30, 2022

"Imagine how much higher those investment returns would have grown before retirement if the compounding over a working life of 30-40 years had operated on 100% of investments rather than the 85% remaining after a 15% tax.":

For many realistic comparisons, the net withdrawal cash flow is much the same whether taxed going in or in in or taxed on withdrawal.

December 01, 2022

Simplest comparison:

Tax on contributions and returns:
Return tax rate 5%
Real return rate 5%
Contribution tax rate 15%
Contribution rate $27,500.00
Future value $2,657,232.75
Withdraw tax rate 0%
Withdrawal rate 5%
Withdrawal $132,861.64

Tax on withdrawals:
Return tax rate 0%
Real return rate 0%
Contribution tax rate 0%
Contribution rate $27,500.00
Future value $3,126,156.18
Withdraw tax rate 15%
Withdrawal rate 5%
Withdrawal $132,861.64

Result: no difference.

Jon Kalkman
December 01, 2022

If we assume our investments inside super earn a return of 6% and the tax on the return is 15%, then the after-tax return is 5.1%.
Assume we deposited $100,000 into the fund and left it there will no other deposits.
The balance at retirement after compounding for 30 years at 6% is $573,439
If the compounding rate is 5.1% the balance is $444,714
All else being equal, the tax on super earnings in accumulation phase truncates the super balance at retirement.

December 01, 2022

"All else being equal, the tax on super earnings in accumulation phase truncates the super balance at retirement.":

Quite so. And similar tax rate on withdrawals truncates [ reduces ] withdrawals to a similar degree.

Net result in similar rate of taxation is no difference in net withdrawal.

December 01, 2022

Because, in accumulation you could be high growth yielding say 10% and getting the full 10%, ie not paying 1.5% tax. 1.7 times more money if investing over 40 years (ages 20-60)

November 30, 2022

The biggest flaw in the super system is that employees are not made to co-contribute, i.e. a percentage (say 3%) should come out of their wages. This way they would take more of an interest in the 1/2 yearly statements they get VS the current attitude "well that will be money for jam" when when I retire". It would also ensure people achieve adequate retirement balances and not be social security dependent at all.

November 30, 2022

Super isn't the only way of investing for the future. I would prefer people to start their own personal investments, outside of super, which they can control for their own benefit throughout life.

December 01, 2022

Your right Michael. People just seem to refuse simple and obvious answers. I've done this for a long time. If you bought at the wrong time in Jan 1987 then it cost $14,500 to buy 1000 shares each in ANZ, Westpac and NAB.Working on a cost of $4.50, $4.50 and $5.50 a share, slightly less than average annual income. Leave it for 40 years to compound.They' ve been running at around 9.5% average since then so your money grows to $550K approx over 40 years.Or on 31/12/2027 you'll have approx 8,000 shares in each of them. Check it out then at whatever price they are. Then you are collecting dividend income after that, probably a very reasonable income, perhaps $45 to $50k plus franking credits. CBA has been a goldmine for me. From the start the average growth is around 16% per annum,so your $5400 grows to around $620K as of now. The shares are probably worth just over that now, and of course the dividend income plus franking credits is good. Throw in CSL, Wesfarmers and mac bank and laughing all the way to the bank. I didn't buy any of them on IPO but 2 of them i have held for over 20 years, CSL is the odd one out. Nobody ever wants a simple and obvious answer.

SMSF Trustee
November 30, 2022

Lionel, a question to clarify. Are you suggesting that they should be compelled to make a non-concessional contribution out of their post-tax earnings on top of the super guarantee charge?

I'd be interested to know what leads you to think this would make one scrap of difference. And who you think should be accountable for enforcing/policing this compulsion. Surely you wouldn't try to make the employer responsible for taking money out after it's been paid to their employee or for checking up on them! There are enough potential and actual sources of tension in the employer-employee relationship without adding this to the list.

If not, then who? ASIC - how expensive would that be?

Think it through and you might pull back from this suggestion. It's certainly a long way from being a flaw in the system. In my view, it would add a major flaw if it were introduced!

And Michael, most people already do start personal investments. They're called bank accounts and then home loan repayments.

Andrew G
December 03, 2022

An investment is supposed to make money and eventually provide you with cashflow.
1. Bank accounts LOSE value over time. The interest rate paid is always below inflation, so over time your savings LOSE value.
2. Home loan repayments are not an investment. Your home is a liability - it costs you money each and every year whether you have a mortgage or not. Even a retiree witha fully paid off home, will be unable to keep it if they have no other income to pay for the annual expenses. Think it through and you might pull back from that idea.
3. People NEED to be accountable for their finances. If People choose not to contribute to their own Super, the the ATO could "tax" them that 3% contibution (like they tax us for Medicare contributions), and deposit it into the person's Super fund.

December 03, 2022

"Bank accounts LOSE value over time. The interest rate paid is always below inflation, so over time your savings LOSE value.":

Not all bank accounts and not always.

Over the last 30 years:
. CPI increased 2 times,
. best bank accounts, taxed 30%, increased 3 times,
. best bank accounts, taxed 0%, increased 5 times.

December 01, 2022

We have that system Lionel. Hawke Keating accord when we gave up a 3% pay rise.1986 I think. I was a shop steward and thought I will have to learn about this, I'm going to get some questions and be expected to solve everything for everybody. They've never taken an interest, I don't think they are going to start now. The 3 pillars, pension, super and whatever you did for yourself outside of that. Contributions can be made through the B pay stem if you want. Set it up with your fund and once you have the 2 numbers needed it takes about 1 minute to transfer from your bank account to your super account. You are constrained by the amounts you can put in annually or bring forward rules. You can also salary sacrifice up to the limit. It is a simple system.

Geoff R
November 30, 2022

Thanks for the article.

As many have stated, the whole Super tax treatment in retirement needs to be seen in the context of the welfare system.

One of the goals of Super was to reduce reliance on the government pension, basically because many (most?) people do not save and just spend whatever money comes their way.

So Super is forced savings with an intention to make people who work provide for their own retirement. However I have read that around 60% of retirees still get a government pension - so the rate of Superannuation clearly is insufficient. It is currently 10.5% and will reach 12% by 2025. I suggest they keep increasing it annually until it is 15% or 17%. This has the added bonus of giving annual pay rises without fuelling inflation.

If we are giving Super tax concessions in order to reduce the number of people going on the government pension it seems the zero tax in pension mode should ONLY apply to people who are not claiming the government pension. That way you can choose the tax-free concessions and look after yourself as a self-funded retiree, or leave your Super paying 15% on earnings and go on the government pension. Hopefully then the younger generation would then understand the only people getting the concessions (above and beyond what they themselves get) were those looking after themselves and not living on the government purse.

Also I do wonder about putting a cap on total Super funds of $5 million or whatever. Say you have a good year and your shares go up and you now have $6m. So you are forced to take out $1m but the next year the market crashes by say 40% and you now have only $3m (60% of $5m). As you were forced to take money out can you now put it back in?

November 30, 2022

Depends on how you look at it. My simplistic view is the reduction in tax that young people will pay is great. 60% of people receiving a full or part pension is great, far cheaper than 100% of people receiving. When the system matures the baby boomers will be dead. Take the start date at 2000 when the 9% came in( 2002?). I would think anybody starting work then will retire at the age of 70. Or the start date is 2025 when the SGC is 12%. The system that workers of the future will be in hasn't started yet. They start work at 20 yrs old and contribute for 50 years. 2075 when they retire. People seem to spend the whole of their lives thinking if I can save $1 in tax I must be better off. The opposite is true, if I'm paying $100K a year in tax the after tax return is great. They seem to think if I can make it more complicated it must be better, it isn't. 

December 04, 2022

Wrong! Superannuation is private money. It belongs to the person who put it aside and reserved it to fund their retirement. It has been created by the self-sacrifice and diligence of the individual. It has no part of the 'welfare payments system' which is government [tax-payer's funds] although it may, altruistically, help to off-set [reduce] the government's obligation to pay an 'aged pension' to retirees.

November 30, 2022

Good article Jon.
The Total Balance Cap stops after tax contributions however the fund balance can keep increasing on performance which can still result in overall balances in excess of plus $3 mio maybe even more with today's average wage.
On the issue of Equity and Fairness, it continues to amaze me that Government super funds. public servants, politicians etc. are left out of the discussion. These include perks such as employer contributions in excess of 17%, defined benefits and salary sacrifice amounts well in excess of the current limits just to name some.
Saying these are preserved just doesn't cut it.

Graham Wright
November 30, 2022

The current superannuation fund is a total abuse of the original day one superannuation scheme. Keating denied workers the cost-of-living pay rise they argued for secured that amount as contributions to a superannuation fund for those who contributed via this wage entitlement contribution. He built in rising contributions for subsequent years and established the contributions within the Industrial Awards system. Keating also planned that the superannuation fund would be drawn down in a way whereby a good manager would spend the last superannuation with his/her dying breath.
It was subsequent Govts of various persuasions who converted superannuation into a tax minimisation and estate planning/management program. In doing so, the emphasis has moved from supporting a great supplement or replacement for the aged pension to being a carriage carrying the maximum estate upon death, forward to one's estate beneficiaries.
The horse for a course has become a herd of mustangs. I have closed down my SMSF some years ago and don't regret not having he trusteeship responsibilities and the ever changing regulatory regime.

November 30, 2022

The govt pension. What is it now over about $40K p.a.. Considering all the other benefits as well that pensioners receive. An SFR couple would need about $1.5 million in capital to generate that amount (safely and conservatively). Therefore better off spending it all at least 5 years before retirement.

November 30, 2022

Age Pension + approx deemed earnings on Assessable Assets without assets drawdown:
= (26 * 1547.6) + PMT(2.25%, (92 – 67), -419000, 419000)
= $49,665.10 / y
To have asset value increase with CPI some additional risk required.

"better off spending it":
Better off stuffing it in capital efficient home improvements for ~7% tax free capital gain.

November 30, 2022

The analysis misses one critical change. Pre Costello fiddling, there was a "maximum" you could withdraw in Pension mode as well as a "minimum"..

Scrapping that "maximum" means that any sensible person can withdraw 100% of their Pension F on their deathbed, thereby avoiding Australia's "death tax in drag" - the individual controls the tax paid, rather than the Govt. If you had $100m in your account, other than sudden death, it is not going to be there when you die!

Labor has previously floated an idea of a tax in pension mode over a threshold - $75,000 as I recall. For all the noise and all the bluster, is a dramatically simpler solution to indexed Caps and Maximums.

It remains, of course, true that retirees who have planned their futures in good faith according to the rules should not be retrospectively taxed!

Greg Hollands
November 30, 2022

Not a bad summary Jon, but you overlook one small, but important issue. In relation a super fund being an "ideal estate planning vehicle" you omit the small problem of leaving a super fund benefit to a "non - dependent" in the financial sense does incur a significant tax penalty. Better off to know when you are going to meet your maker - draw out the benefits before you die - and all is ok. But if you miss the signs, the ATO waits with an open hand to pay for your error!

November 30, 2022

"draw out the benefits before you die":

Draw out the annual minimum plus any additional amount that when invested in own name results in personal marginal tax rate of 0% - allowing for variability of returns.

November 30, 2022

Guess the only complication is the increasing percentage of money you need to take out as you age vs not knowing when you will die. Bit of a guessing game.

November 30, 2022

The problem with the argument that there should be no further legislation is that Governments are elected by the populace to legislate. That's what they do. So to excise a field of policy from legislation places those who benefit from existing laws above the legitimate role of a Government. Moreover the argument that because something is legal it is forever sacrosanct and above legislative change does not apply in other areas. Plenty of things that were once widely accepted and legal, such as not wearing seatbelts are now illegal and plenty of things that were not once widely accepted and illegal such as same sex marriage now have legal recognition. Times change.

The matter of very large balances is as John has written a transitory one, albeit one that will take some time in the absence of intervention by the Government to play out. However there is little to no evidence that those who established the superannuation system intended it to result in balances well beyond a reasonable expectation of what is required to fund a retirement. It follows that any move by the Government to reduce such balances is simply a matter of correcting an unintended consequence of previous policy. A lot of legislation, across many areas of government, falls into that category.

February 24, 2023

Seatbelt laws are not retrospective. Cars built before these laws can still be legally driven without seatbelts. Same sex marriage laws are not retrospective. A same sex marriage before it was legal is not recognised.

November 30, 2022

Jon, your comment about Costello’s changes to super, making all withdrawals during retirement tax free not being the problem are arguably wrong. Prior to Costello’s change you not only had to start withdrawing your super at age pension retirement age, but it was also taxed as normal income, less the deductible amount and the 15% tax rebate. This meant that those with much higher super balances had to withdraw a pension and pay tax at marginal rates (less the rebate). Being able to leave large amounts in super with only 15% tax on earnings, enable those who are better off to use super for estate planning purposes, not retirement income.

The system would have been much better and fairer without the 2007 changes, but, as with many things once they get changed it is hard to reverse them, so the Liberals came up with a different idea and made things even more complex.

At the time Costello made the changes many commentators argued that they were not affordable and were unfair as they mainly advantaged the better off anyway (as you rightly pointed out the vast majority of people did not, at that time, have enough retirement income for their to be any benefit in making pensions tax-free).

It is quite clear that something needs to be done about funds with higher balances (in my opinion $3m about the right mark) as those who have that much in super should not be getting such generous tax concessions.

Super tax concessions are only part of the problem as the current welfare system is riddled with inconsistencies and subsidies to those who really don’t need it eg child care subsidies, seniors health cards and paid parental leave for those with well over median incomes, while those with low incomes who rent could do with a bit more rent assistance.

November 30, 2022

Yes Jenni, low income earners and the unemployed could certainly do with more assistance.

December 04, 2022

Jenni, Rod, Wrong! High income earners already pay high taxes. [These taxes are then redistributed, often to low income earners and unemployed people as "assistance"]. Low income earners or unemployed people pay little or no taxes. What is needed is for the unemployed to get paid employment [earned income] AND for lower income earners to get better [higher] paying employment if they want more income. Getting "government assistance" simply perpetuates the poverty-inducing-dependency that "welfare" always causes. Some "incentive" [ hardship?] is necessary to motivate people "who want more" to strive a little harder "to provide it for themselves". Making a personal contribution, creating wealth, not merely consuming it, is what improves society. Welfare erodes and destroys initiative, capital and people. Everything that is "given" to someone by the government is something that was "taken" from someone else by that same government! ... Be that money, rights or anything else you care to think of!

Tom Sowell : "I have never understood why it is "greed" to want to keep the money you have earned but not greed to want to take somebody else's money."
Tom Sowell: "Since this is an era when many people are concerned about "fairness" and "social justice," what is your "fair share" of what someone else has worked for?" [ Like their own 'superannuation' for example!].

So much for "Super is about equity and fairness" ... Wrong! That is what the "Progressive" taxation system is about !

Jon Kalkman
November 30, 2022

Jenni, if you click through the embedded link in the article, it takes you to an article I wrote in 2018 in which I explain that the pre-Costello taxes only applied to the taxable portion of the withdrawal which was in the same proportion as the contributions to the fund. So if your fund was worth $10 million, of which only $200,000 was concessional (pre-tax) contributions, tax was payable was only on 2% of the withdrawal - and yes the 15% tax rebate and tax-free thresholds applied to that as well.

And that same tax arrangement still applies to the tax on death benefits. In other words, large funds don't pay much in death taxes for the same reason they didn't much tax before 2007 - their taxable portion is so small

But it highlights the advantages of making after-tax contributions to super, but very few people do that.

November 30, 2022

Give them one year to withdraw n tax whatever in excess.

December 11, 2022

"Give them one year to withdraw and tax whatever in excess." Tell'em they're dreaming.....or what about blowing it all and applying for the most generous Age Pension system in the world. Fairness and Equity can be defined as providing for those that couldn't provide for themselves. And no those accessing the Age Pension (~70% of retirees) is not expected to decrease rather those eligible for full access to it. Most of whom have not contributed to the tax base irrespective of their own misperceptions

November 30, 2022

Jon - great summary, thank you. Social contract is the key phrase for me: don't break it ! If you (Labour, Libs, whoever) do want to change significantly then recognise that this is a new social contract and quarantine / protect all existing schemes / pensions that were signed up to under the old social contract. I know, I'm dreaming ....

November 30, 2022

Excellent summation Jon!

Especially this:

"Unfortunately, it has led to considerable intergenerational envy about the tax benefits flowing to retirees, from people who do not understand how super savings are taxed. That envy would not exist if super funds had been structured differently in the first place."

November 30, 2022

It is completely unfair to retrospectively change a Superannuation tax system when people have foregone consumption, saved and worked hard at their investments, all the time abiding by the rules of the day including having their Super money locked up for decades until they can access it at 60 years old. These are people who "pay now, play later". Unfortunately there are many who "play now, pay later" and then expect taxpayers to look after them in retirement or, in some cases, throughout their lives in one way or another. Any changes to the taxation of Superannuation should be grandfathered as they have been with every other change in taxation, including Mr Keating's introduction of the Capital Gains Tax which correctly only applied to assets acquired after 20th September 1985 - that was an inter-generational transfer if ever there was one as it initially enshrined the nation's wealth with those who had it pre-1985. Succeeding generations had to acquire their wealth paying CGT on every asset they realised (except the family home) as they went along. Two steps forward, one step back. Given low interest rates, even now 3% pa investment returns are hard to obtain without taking the risks of loss of capital. If you could get 3%pa risk free, a $5 million Superannuation balance is required to earn $150,000pa before tax on these earnings in Super. After tax in Super that could reduce, depending on how the Super balance was built up, to $135,600. Note that there is no "pay rise" here for inflation, which will ultimately eat the capital reducing its' value in real terms as the superannuant ages and inflation compounds year after year over time. And this is the person who has worked hard all their life to earn the funds to contribute to their Super, all the time paying high taxes on their income to support those who draw on Australia's tax payers each year for their various benefits. And, if you have contributed to Super at any time from your personal tax paid investments, you have paid capital gains tax when you have sold assets to contribute the funds to your Superannuation. If the government was to change the rules retrospectively they will need to refund (with punitive interest) the tax that has been paid in good faith. This should include transaction costs. Retrospectivity would destroy faith in the Superannuation system. Why bother to save and invest for a good retirement? Better to spend and enjoy life free of the hassles of saving, investing, risk taking and spending thousands of hours adapting to constantly changing Superannuation rules. And even then, not being able to access your Superannuation until you turn 60 years old. In any case, inflation over time will reduce these apparently high Super balances, just as inflation worked to reduce the inequities of the introduction of the CGT in 1985. The real target of all this should be the hundreds of thousands of Federal and State politicians, public servants and those who worked in big corporations, who receive risk free CPI adjusted pensions each year for life. These required NO or LIMITED contributions by the recipient and increase as the lucky recipient gets older, require no time spent on investment and administration, no risk and no ongoing investment stress. Some of these pensions already exceed $1 million per year! Reining in the huge growth in Defined Benefits Pensions outlays in the Public Sector is where the Government should be concentrating its taxation resources if there is to be any material impact on the Budget. That would be a much more equitable and fair target than Superannuation.

December 03, 2022

Excellent summary Angus, especially this; "In any case, inflation over time will reduce these apparently high Super balances, just as inflation worked to reduce the inequities of the introduction of the CGT in 1985. The real target of all this should be the hundreds of thousands of Federal and State politicians, public servants and those who worked in big corporations, who receive risk free CPI adjusted pensions each year for life. These required NO or LIMITED contributions by the recipient and increase as the lucky recipient gets older, require no time spent on investment and administration, no risk and no ongoing investment stress. Some of these pensions already exceed $1 million per year! Reining in the huge growth in Defined Benefits Pensions outlays in the Public Sector is where the Government should be concentrating its taxation resources if there is to be any material impact on the Budget. That would be a much more equitable and fair target than Superannuation." Try discussing this issue with any friend/family member career public servant and see what a ferocious reply awaits you.

Geoff R
December 04, 2022

Well said Angus. Note that there is no "pay rise" here for inflation, which will ultimately eat the capital reducing its value in real terms. Another aspect of this is that if/when GST eventually is increased to 15% or more, those getting welfare payments/pensions will get a raise as "compensation", whereas self-funded retirees will effectively have their saved wealth further diluted.


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The net cost of superannuation concessions is not so gross

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