Welcome to Firstlinks Edition 334

(Repeat post)

I seem to recall that many years ago, when super commenced, that contributions were tax free and the earnings within the super fund was also tax free.

I have an issue with the graph
Lifetime government support provided through the retirement income system

and in particular the part dealing with contributions and earnings tax concessions. I suggest that the problem of super tax concessions can be attributed solely to peter Costello when he made pensions from a super fund tax free.

Under the initial system (super funds didn't pay any tax on earnings or contributions) the member of the super fund paid income tax on the pension that was drawn from the super fund.

effectively, if you put money into super, you didn't pay any income tax that year, but when you withdrew the money from the super fund (ie drew a pension) you were then taxed on the income received. putting money into super was therefore not a tax reduction scheme, but rather a tax deferral scheme.

then paul keating changed things. he put a 15% tax on contributions and a 15% tax on super fund earnings. BUT, when you drew a pension from the super fund, you were taxed on the income, but you got a 15% tax rebate on that income (the 15% number is no coincidence, the super fund paid 15% tax on contributions it received, and its earnings, but when the member was paid the pension that came back to him).

It was sort of a withholding tax - keating obviously needed to improve the budget bottom line, and getting 15% off the super fund did that (in that year) but the government would pay for it later (when the super fund started to pay a pension) because the income generated from the pension would be taxed effectively 15% lower than ordinary income. The government got the money now, and gave it back later. Sounds a bit like the franking system that keating also introduced, company pays 30% now, but when it pays out a dividend, then the individual pays tax on the whole dividend (grossed up) but then gets a rebate for the 30% that the company had already paid - effectively, if you ignore timing, the company pays zero tax.

The next big change to the super taxation system was Costello. he made pensions from super funds tax free. Now for someone who drew a pension of about $40k it made no difference to their tax at all. Marginal tax rate for the individual was 16.5% (including medicare) and they got a rebate of 15%, so effectively zero tax. But for a person who was on a high income (and MTR) they used to pay tax at their rate (say 46.5%) less the 15% rebate, so when Costello made super pensions tax he gave nothing to the low value super pension account holders, but a lot to the high value ones.

if the government were to reverse The Costello tax free super pension change, and started taxing pensions again (less the 15% pension rebate) then all of the problems of tax concessions would be eliminated. High income earners would still get a bit benefit in the short term (paying only 15% contributions tax instead of their MTR) but would pay for it later when then started drawing a super pension. By reversing the Costello change, all that super would do is postpone a tax payment (by evening out income over a lifetime rather than just over a working life). Its not too far distant from what farmers can do with income equalisation.

hope these thoughts are helpful. happy to discuss further if you wish

I'd love to see all the assumptions behind that first chart, for example, does it include tax paid on super contributions, where non-concessionals are after 45% tax.