No change to super should be urgent

Well it looks like more changes to Superannuation are coming with the Government set to define purpose of Superannuation and the later look at what to do about high balance accounts.

No consensus on what constitutes a high balance yet, is $2M a high balance? Is $5M a high balance?

When they define a high balance, then what?

Higher tax rates on earnings above defined rate.

Will you be able to withdraw amounts over set rate if you wish, even if under preservation age?

Employer contributions, if you have a high balance account will you have the option if you wish to take that payment as wages/salary. Makes sense to me to be able to if you wish.

Setting such a Cap in my mind draws a line in the sand by the government that X amount is sufficient to fund or part fund ones retirement. If you have more it does not need to be in the tax friendly Superannuation system.

If that is the case, amounts over should able to be freely available and there should be no obligation to continue adding money to the account.

Funnily enough, I spent 4 years studying retirement taxation in Australia. One thing I can say for certain is that there is a relatively simple fix for most of the criticism levied at large balance super. Tax super on withdrawal. Now that's not to say it's a simple solution to implement (the various rebates etc that need to be built in are difficult to draft), it would increase workload from a practitioner standpoint and is about as politically unpalatable as it gets (not to mention it plays havoc with govt revenue modelling). But fundamentally it solves two big issues. - Superannuation, is taxed the same, for everybody no matter how wealthy you are outside of the superannuation system (div 293 tax not withstanding) - High balance superannuation is taxed at a significantly concessional rate compared to personal tax The first it solves by assuming withdrawals are to be taxed at your personal MTR, even if you attach significant offsets, this much more adequately captures whole of wealth taxation (and much more fairly captures the decreasing marginal utility of a dollar). Those low wealth people still get access to their money at nil or very low tax, high wealth people bear the burden of it (which will annoy some but hey...). The second one, at first seems obvious, its being taxed on withdrawal at personal MTR (so replacing a flat taxed with a tiered tax) but it also runs a little deeper. It allows you to do things, like remove the transfer balance cap. Forget capping pensions. Yes, they're taxed at zero which seems a massive loss, until you realise that you need to take compulsory minimum withdrawals to access these concessions. The numbers obviously change with balances and earnings rates assumptions, but for most top MTR tax payers this turns to a net positive for the government ON TAXES alone after about 22 - 25 years. However, you also then assume that anyone in this situation is not eligible for the aged pension (and quite often the CSHC) so the tax net as a whole comes out significantly in front. We also have the infrastructure in place now to track where rebates, concessions etc would/should arise. Its not all that simple, some of the people I did my research with argued for removing of taxes on contributions, others argued they needed to stay in place (the govt revenue model changes drastically, which also changes its politcal palatability). Similarly for contribution caps, so even academically we don't all agree. Personally my view is that contribution caps need to be part of the overall plan, and perhaps contribution "hard caps" but the taxes on contributions are neither here nor there, they ultimately equate to a timing difference in receipts at the govt end. It's important for assessing whether the policy would get over the line politically, but it has little bearing on the economic outcome.

" One thing I can say for certain is that there is a relatively simple fix for most of the criticism levied at large balance super. Tax super on withdrawal."

Well, if you've read and absorbed the somewhat exhaustive conga line of comments on this article, let alone some of the referred linked articles from the erudite Warren Bird, you'd maybe think twice about saying it's a "relatively simple fix" of taxing on withdrawal, given that it's already been taxed to death and agreement let alone understanding are somewhat elusive and murky!

Not entirely fully sure what you're suggesting (the odd new paragraph wouldn't go astray for readability, no offence :) ) but if you're suggesting taxing superannuation money a third time, it's a losing hand. Sort of ruins the whole point of compulsorily locking away money and foregoing present consumption to have government decide to keep changing the rules and taxing it more. Mind you, maybe we'll all be funding social housing and who knows what else soon out of our superannuation. Never a dull day!

Dudley's all for getting rid of superannuation. Maybe he's right after all!! It would make life simpler for many.

SMSF Trustee, thank you but I was being flippant. I was asking those who advocate the introducion of tax on pension income streams to explain what kind of taxation system they would be happy with, how would it work? I.e. do they think it should be just like the PAYG system where tax is payable from income derived from capital gains on (sale of) investments and dividends and interest, or only on actual income drawn from the pension fund?

Would they advocate getting rid of the minimum draw down rule?

Would they also advocate getting rid of this year's pension payment amount being tied to the value of the fund as at the end of last financial year?

So, if I have to pay tax on income earned from my fund (I draw 5% from my SMSF totalling $37,000 pa), do I pay tax on earnings (dividends & interest) AND capital gains AND the income I draw? If so, there's not going to be much left to live off. The only real winners in the super system is the govt. just add up the taxes you pay on it during your working life (and death), they don't deserve any more of it.

Bryn, you should seek an adviser to make sure, but from what you've said:
- you have $740,000 in your SMSF (for 5% to be $37,000 - so 20 x 37)
- which is well below the threshold for tax free pension phase
- so if you are over 60 and have declared your SMSF to be in pension phase then there is no tax paid on the earnings in the fund
- and you don't pay tax when you take the money out. Super taxes are paid within the fund.

If you aren't earning 5% per annum and thus the $740,000 is being run down over time, then at some point you will get below the threshold for the assets test and will be able to get a pension payment from the government as well. Your income already meets the income test.

BTW, the taxes you paid during your working life were not to pay for your retirement. They were to pay for the services that you and all the Australian community received while you were working. They don't entitle you to anything in your retirement, but we have an amazing system in this country where you can earn money like you are and pay no tax on it in your retirement, yet still get the benefits of community services in your later years. I'd stop thinking that the government is 'winning' here.

A tax on super balances over $5m is coming for sure. Maybe the cut-off will be less than 5. Grattan suggests 2. That will encourage even more money to be redirected to investment in the tax-free family home (of both the superannuants or their kids/grandkids). Happy kids.

“I could go into retirement soon, and I could be earning, let's just say, several hundred thousand dollars a year upon which I would pay absolutely no tax”

Jeremy has made the classic mistake of confusing his super fund’s assets with his own. The hundreds of thousands of dollars he mentioned, are earned by his super fund, not by him. A super fund is a separate entity, much like a company, with its own assets, rules and tax return. As a shareholder of CBA, it’s $10 billion profit has no impact on me until I get a distribution from those profits. I certainly wouldn’t count the company’s profit as my income.

We need to differentiate between the tax paid by the super fund as a separate entity, from the tax paid by a member when they receive a distribution from that fund. You may control the entity as director or trustee but you cannot mix its assets with your own.

Super funds in accumulation phase pay 15% tax on concessional contributions and investment earnings. Super funds in pension phase are tax exempt. These tax arrangements have remained unchanged since the start of compulsory super in 1992.

The tax paid by members of a super fund when taking a distribution from that fund was changed by Peter Costello in 2007. Many people hold him responsible for a tax-free retirement, and technically that is true because all distributions from super are now tax exempt, but those taxes collected very little revenue previously. So it was fiscally painless and politically popular. No government since has wanted to reverse this decision for that reason. See here.

www.firstlinks.com.au/myth-costellos-generosity-tax-free-super

So when Jeremy Cooper advocates higher taxes on super, is he suggesting that the rules that have applied for 30 years to super funds should be changed when people have set their retirement plans to those rules, or is he suggesting that we reverse the Costello changes in 2007?

I suspect Jeremy is concerned about the multi-million funds that predate 2007, and that both Costello and Morrison legislated to curtail. He needn’t worry. These funds will soon disappear because death is a cashed-out event and they will stop distorting the whole debate around the tax concession that flow to super.

John K, Jeremy is not mistaken. Regardless of the package he is holding them in, his super assets and CBA shares are his own, 'not someone else's', eg, if he has a million in his own super investments or CBA, he can plan and live very differently to someone with only $100k.
The poorer working income tax payers are supplementing the aged care, age pension and health system of us wealthier superannuants, who will pay minimal tax during our long retirement years of the above support from poorer people than ourselves.... Ageing population makes it unsustainable.
Not enough workers (lifters) per each of us retirees (leaners under the current system).

After having worked in SMSF space for three decades as an accountant / advisor and now as an auditor. I have seen the change happening firsthand

Earlier large SMSF was not a problem - but compound income has made it a problem.

Please note that the amounts over $1.7M will always pay tax @15% and franking credit at times are not present to be refunded.

The question of two age groups paying two different tax rates is not wrong, however not analysed properly.

Assume a retiree has $5.1 M in SMSF and $1.7 M is tax free - say 1/3rd and the remaining is taxable. If we further assume a return of 5% or $255K only $85K is tax free and the remainder $170 K pays 15% tax or $25.5K

If we have allowed the trustee to have the first $85 K tax free - another person will pay only $48K tax - which is only 28% and for the whole $255 K the tax is $85K or 33% as compared to 10% ($25.5/$255K) for a retiree.

What is to be noted here is that higher balances of super will result in lower overall tax. If this money comes out, it may be taxed at a higher rate - or another possibility is that there will be no tax all.

Assume if I am getting $250K per year from my $5 M SMSF investment and I am paying 10% tax - if forced to withdraw - most likely I will pump it back for my children and grandchildren or give it away to kids to get rid of their mortgages.

Hence the monies will be back and still be in 15% tax environment (In my SMSF - which I still control) or zero tax if mortgages are paid off - reducing banks profits and the ultimate tax they pay to Treasury.

In my opinion, no Government should be allowed to change super rules - if it very hard for $30M (UHNW) trustees, they may even ship the monies overseas and that is not a good overall result.

Sometimes to do nothing is the smartest move.

"amounts over $1.7M will always pay tax @15%":

Not so. The Transfer Balance Cap is applied to cumulative transfers from accumulation to retired ['pension'] accounts. Retired accounts can grow or shrink to any size.

"the monies will be back and still be in 15% tax environment":

More common would be senior retired couple with most income within super retired account taxed 0% and a marginal personal tax rate of 0% due to not working and little invested personally. Their personal taxable income would have to exceed $31,926.20 each for their marginal tax rate [>= 19%] to exceed that of income in an accumulation account [15%].

So "the monies will be back and still be in" not 15% but 0% "tax environment.

Super was never propsed to be a tax shelter for high income individuals, There should be an upper limit to how much can be held in super not an open opportunity to minimse tax. If the current status is retained then advisors and tax agents will only be doing there job for their clients if they utilise super to minimise tax

What seems to be missing from our system that causes a lot of this debate is the need for a "tax gradient"

The article says "that I'm nearing retirement. I could go into retirement soon, and I could be earning, let's just say,
several hundred thousand dollars a year upon which I would pay absolutely no tax "
...the number of SMSF's (or any other retiree type) that has an amount in super that can earn "several hundred thousand dollars per year" has to be less than 5% of all fund holders.
Manoj's comments are spot on, but again ...what % of retirees are sitting on a $5M SMSF ? ...probably 1% of all retirees.
So set the bar (not the SMSF cap - keep that system going) at $1.9M say ! ...and any $ earned by the balance of the fund over that amount gets treated the same as any other income by any regular citizen as far as tax goes.

Well, I know I was writing to Bowen, polititians and journalists trying to explain that Bowen's plan was totally inequitable and needed to be adjusted if it was to be implemented. If the country could no longer afford to allow franking credit rebates then so be it, but to allow them to some sections of the community and deny them to other sections, based primarily on whether they were likely to be Labor or Liberal voters was the mistake. Still available as a source of budget savings to the government if implemented fairly. Watch this space, I expect.

It’s ridiculous to compare retirees with a younger generation because by definition retirees have had a working life of asset accumulation.
A more valid comparison would look at the standard of living of young families today, with the retired cohort 40 years ago. We could talk mortgage rates and childcare and home prices etc. but young families always do it tough and retirees are always more comfortable because the kids have left home and the mortgage is paid off or very nearly. Therefore Jeremy’s argument fails at the first hurdle.

Then we could talk about why super is tax-free in retirement because, as Jeremy admits, this is still a source of great confusion.

Exactly, the comparison is unfair. We have accumulated assets over 50 years. But boy did we do it tough when starting out as a young family - breakfast at home on Saturdays and not lining up at a coffee shop!

It was almost a reasonable discussion until J Cooper came up with a totally false and impossible statement (and he knows that) "...I could be earning, let's just say, several hundred thousand dollars a year upon which I would pay absolutely no tax...". That's rubbish, which, unfortunately, lots of people will believe. G Doogue should have been smart enough and picked him up on that! If he meant to say something different, then correct it!

"...I could be earning, let's just say, several hundred thousand dollars a year upon which I would pay absolutely no tax..."

Entirely possible to not only "pay absolutely no tax" but also to be paid 'several hundred thousand dollars' of overpaid tax.

Company profit: $1,000,000
Company tax rate: 30%
Company tax: 30% * $1,000,000 = $300,000
Company franking credit: = Company tax = $300,000

Super dividends: $700,000
Super franking credit assigned by company: $300,000
Super gross dividends: $700,000 + $300,000 = $1,000,000
Super tax rate: 0%
Super tax: = 0% * $1,000,000 = $0
Super tax refund: $300,000 - $0 = $300,000

Super paid no tax because it had [franking] tax credits [$300,000] exceeding its tax liability [$0].

Like an employer paying tax on wages and assigning the tax credit to the employee who 'pays no tax' but receives a refund of any excess tax.

And what's the balance of this retirement stage super fund that's generating $700,000 in dividends?

"And what's the balance of this retirement stage super fund that's generating $700,000 in dividends?":

$1 - special dividend. Or $70,000,000 - lots of special dividends.

Or $7,000,000 accumulation account taxed 15%: refund $150,000.

The problem is compounded by the promotion of incorrect scenarios. First, the Kelly O’Dwyer changes to lower the limit of concessional contributions, the imposition of 30% division 293 contributions tax, and the $1.7m cap on tax free pension accounts means the few mega funds are going the way of the dodo.
And as for franking credits; every investor is entitled to have company tax paid rebated. Either through reduction in income tax paid to the extent of the 30% tax paid, or as a refund if that tax is greater than the personal tax assessed.
The one practise that should be reviewed is for foreign entities not entitled to any rebate being able to lend their shares to Australian entities, mainly industry super funds, for them to collect the franking credits.

$200,000 from $1.7mil TBC needs a return of nearly 12% year in year out, no bad years to continue to earn several hundred thousand dollars a year

"$200,000 from $1.7mil TBC":

Transfer Balance Cap is the limit of cumulative transfers from accumulation to retired accounts where the balance might grow to any amount.

"It's about basically equity and fairness. So, just consider somebody – let's just assume that I'm nearing retirement. I could go into retirement soon, and I could be earning, let's just say, several hundred thousand dollars a year upon which I would pay absolutely no tax and even better than that for me personally, but not so much for society, I would actually probably receive franking credit rebates as well, possibly in the tens of thousands of dollars."
and
" I'd be interested in who could explain to me why that's an equitable setting. It's embarrassing"

1. Well, government can't have it both ways, otherwise why put money into superannuation? Keating decided to tax the input and the earnings. Overseas, usually input and earnings are untaxed (maximum compounding ability) and drawdown is taxed. This is arguably as it should be. To tax a superannuation pension now breaks the governments compact with the people that incentivises locking away your money in superannuation.

2. 4% of $1.7 M is $68 k p.a. pension;
5% of $1.7 is $85 k p.a. pension; and even
6% is only $102 k p.a.
so how is he about to retire and draw down several hundred thousand a year, unless consuming capital upon which tax on input and earnings has already been paid or even consuming non-concessional contributions!

3. A very biased article to say the least.

4. Nothing to be embarrassed about. If you've got a lot in superannuation it's either because you've worked a high paying job (paid a lot of tax) or voluntarily added to you superannuation (sacrificing present consumption), invested well or a bit of all of the aforementioned. It's more embarrassing to have squandered the lot on wine, women and fast cars etc and then seek to take from others with more temperance and foresight!

James, well said. The Government made the decision to Tax the inputs and reap immediate benefits rather than Tax in the drawdown phase.They should be prepared to live with that decision. Why should people work hard all their lives putting funds into Super based on certain rules and now have it changed again?Jeremy at least acknowledges that Super is a very long term bargain and any changes need to have a long, long discussion.

Thanks James, an excellent response.

James

6% of $1.7m might “only” be $102000 pa tax free, but it is much more than the average pre-tax wage of workers, so it is very difficult to justify why such a large amount should be concessionally taxed. If you want more in retirement, fine, but don’t expect it to be tax free or concessionally taxed.

Peter Costello’s tax free withdrawal reform I entirely responsible for the mess we find ourselves in regarding super. If the 15% rebate still applied it would solve the problem entirely and higher pension incomes would effectively be subject to marginal tax rates (less the 15%).

Because, Jenni, that person forfeits the old age pension. That are "taxed" in that sense. To deny them the pension and then tax them as well would be unfair.

Jenni,

As per my original point 1 above, Keating should have allowed tax free input and earnings. Most countries do this. It is telling that he did not. He had a revenue problem due to profligate spending and debt. Sound familiar? Give people a fighting chance of building a sufficient sum in superannuation to provide a decent retirement income (high fees already do enough damage) and get as many people off reliance on the tax payer funded pension as possible. Win, win, surely?

Suppose I am a high income earner and I input the maximum $27,500 into super each year. Due to my high income I pay 30% tax, not 15% on this input, so $8,250 tax and $19,250 input to my fund. That $19,250 earns say 8% p.a. so $1,540 less 15% tax is another $231 tax. Tax so far $8,481. I start a super pension the following year, at 4% of my balance but I now pay tax on that draw down at 15% (as is being suggested by some), so my original concessionally taxed $19,250 input pays another $2,887.50 in tax (if I withdraw that original $19,250). Total tax in a nominal year on that original concessional input of $27,500 now = $8,250+$231+$2,887.50 = $11,368.50. So 41.34% tax on that original $27,500 input! Using a tax calculator for this FY, tax & medicare levy on $102,000 (earnt outside of super) is $24,967 i.e. ~24.5%.

A somewhat simplistic example with some obvious contentious points I know. But my point: how much tax is enough? When will greedy governments and envious non savers be satisfied? People earn different amounts, doing different things in a lifetime. Those that earn a lot more paid a lot more tax! To a large extent we make our own luck and even those on modest incomes can save if they have the discipline to do so and let compounding weave it's magic ("The Millionaire Next Door" book proves this is possible)

Take away the incentive to save in superannuation and people will choose to live it up and spend almost all of it. Hit 67 and draw a full single or couple's pension indexed for life, and aim to have only the maximum allowable in assessable assets (home owner singles $280,000, couples $419,000) to supplement the pension. Which is preferable, richer retirees spending more in the economy (paying more GST, stamp duties, fuel excise etc) or poorer retirees who are welfare dependent who will consume and spend less?

jenni

see James's note 4 above.

But Jenni 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 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.
Bottom line: large funds paid very little tax because their taxable portion was so small.
In fact these taxes collected very little revenue overall. That’s why it was fiscally easy to do and no government since has wanted to reverse the Costello changes.

"... drawdown is taxed. This is arguably as it should be.":

That taxes inflationary gains. Arguably how it should not be.

Hi Dudley, when should anything related to superannuation be taxed then? Does the rest of the world have it wrong too? Genuine question!

"should anything related to superannuation be taxed":

No need for super so no need for super tax.

Age pension for all age eligible satisfies any supposed state obligation to the welfare of its subjects.

Progressive taxation is how the state affords such welfare.

"No need for super so no need for super tax."

Dudley. Ok, I get your idealistic position/objection on the need for superannuation.

That aside, the present and likely future reality is super is here to stay; given it essentially has bipartisan in principle support. Given that, how then should super be taxed if not on drawdown (essentially treated as post retirement income by governments) as most overseas countries do?

The present existential danger to "fairness" in superannuation is that social division and intergeneration enmity is being stoked by the disingenuous optic and discourse that most "boomers" and their ilk are filthy rich and aren't paying their way. To tax super input and earnings and then now look at taxing potential capital gains and drawdown in pension mode is heinous and renders superannuation into an inefficient, present-consumption-denying, legislated injustice!

What then do you suggest, given that total abolishment of superannuation and granting of a taxpayer funded Universal Pension is unlikely?

Perhaps somewhat cynically, I suspect that too many vested interests will ensure your preference never becomes reality!

"treated as post retirement income by governments) as most overseas countries do":

That's where they collectively go wrong. Madness of herds.

Drawdowns are capital, not income. Super income capitalised over years.

If hell-bent, tax withdrawals like any other capital: on gains discounted for inflation and possibly for risk if risk taking is deemed worthy. Resulting in tax rate of 0%.

"Drawdowns are capital, not income. Super income capitalised over years."

If my $1.7M superfund in pension mode spits out distributions and dividends of say $102,000 (6% return) but I only withdraw the mandated 4% (aged 60-64 years old) allocated pension of $68,000, surely that is income, not capital?

"surely that is income, not capital":

No. Withdrawal on Jul 1st = capital. Withdrawn after income on Jul 2nd = income.

Or perhaps:
Capital_Withdrawn = Withdrawn * ((Open - Income) / Open)

Or perhaps withdrawals always capital.

I was going to stay out of this, but since there seems to be confusion here I thought I'd remind folk of the article I wrote a few years ago that unpacks this question of capital vs income in pension payments from super.
https://www.firstlinks.com.au/zero-tax-rate-pensions-right-fair

Let me give a short comment. If I put $10,000 in a term deposit for 3 years at 4% per annum interest, then after 3 years I leave $5,000 in the bank and withdraw the rest am I taxed on the $6,200 that I've taken out? No. I'm taxed on the $1,200 that was interest income. It's similar with super. When you withdraw money from your super account, if the amount you take is more than the income you earned then that means some of it was taking out capital. In super, as my article points out, and as others have said in comments here, you have ALREADY PAID TAX on that. You don't get taxed when you take money out of your bank account and you shouldn't be taxed when you take capital out of your super.

When you take income out of super, well if that income was earned on $1.7mn that's in a pension phase account, it's currently tax free. I argue that this is absolutely fair and reasonable - see the article for the reasons why. But what would be totally unfair would be for people to fail to distinguish between capital withdrawals and income, resulting in taxing that person twice.

And btw in response to Kate Fallick's question in her comment on this topic, back in 2019 where we were was very active in the debate with the then opposition. My contributions were both the article cited above and also this one https://www.firstlinks.com.au/basics-franking-credit-refunds-fair , which I turned into a submission to the parliamentary inquiry at the time. Go back into the FirstLinks archive and you'll see a very active debate including sharing of what folk wrote in letters to Chris Bowen. Geoff Walker, Jon Kalkman and others were very much part of that response to a very poor policy intention which, thankfully, has been shelved these days by the ALP.

"confusion here": Not just here.

"When you take income out of super, well if that income was earned on $1.7mn that's in a pension phase account, it's currently tax free."

The commonly used terminology is confusing.

Funds withdrawn from super are capital.
'Pension phase' is not entirely accurate as lump sums of some or all 'retired account' capital can be withdrawn.
Term 'Retired account' is not perfect as the beneficiary does not have to be fully retired to withdraw funds.
'Decumulation account' also not perfect.
Perhaps 'Disbursement account' but would it pass the 6 pint pub test?

Hi again Dudley,
I'll give you credit for your persistent pedantic literalism! It demands us all to be clear with our terminology.

You said:
"Funds withdrawn from super are capital.
'Pension phase' is not entirely accurate as lump sums of some or all 'retired account' capital can be withdrawn."

OK, technically yes, all funds we take out of superannuation accounts are a capital amount. The taxation of the income earned by superannuation is done within the fund, not upon withdrawal. (Unless you withdraw before your eligible to do so, which can trigger additional tax on the capital that was taxed on a concessional basis when it went in. But let's stick to the topic which is withdrawals by those of retirement age.)

However, in pointing that out you're reinforcing my point. When someone gets a cash flow out of their super, that shouldn't be taxed at that point. The withdrawal is either of some capital that was originally put into the fund and has already been taxed in one way or another, or the capital that has accumulated from earnings made on the investment of those original sums. The earnings have been taxed at 15% along the way. They shouldn't get taxed again when they are withdrawn.

I think that many people calling for more tax on the cash that people take from super in their retirement just don't understand that it's already been taxed. My article, referred to in my previous comment, explains how that's happened and why I believe that it means that a certain amount of earnings in a retired person's super should be taxed at zero. The current regime where you can put $1.7 mn into a special super account called "pension phase" and have earnings in that tax free is a fit for purpose, fair and reasonable policy.

Which leads me to my response to your comment about ''pension phase'' being incorrect terminology. I sort of agree and would prefer if we just referred to cash withdrawals or some such thing. I'd go further than your point about lump sums and suggest that even those who are just taking out the 4% per annum (or the higher amount as they get older) are taking out a small lump sum, on a regular basis rather than the occasional larger amount. I'd make another point in the context of this discussion - when the regular payments that retired folk take out of super are called a ''pension'' I think that some ill-informed folk think that this makes it a payment just like the one that many people get from the government via the old age pension, or a disability pension, or the like. They see the size of the payment and compare it to the government pension and think that it's a more generous payment and isn't fair. But as you and I know, it's nothing like that payment and is merely a withdrawal from an investment account just like someone taking their money out of the bank. Interest earned on a bank account is taxed in the year it's earned and doesn't get taxed again when it's take out! Neither should the accumulated earnings from many years of investing in super.

(When I wrote the article about zero tax rate on pensions is right and fair, in the comments someone expressed incredulity that the capital-income distinction needed to be pointed out. Surely no one is arguing for taxing the capital, they said. My reply remains relevant - sadly, no, and the fact that it's come up again in this discussion proves the point that clear explanations of what is actually happening to super and tax are needed.)

" The taxation of the income earned by superannuation is done within the fund, not upon withdrawal. " Warren, the problem developing in the public eye (and actively agitated by certain interests) is the optic/perception that retirees are getting it too good and not paying their fair share. Intergenerational animosity, envy and cash strapped governments are pushing for changes. As with the franking credit debacle, it's open to manipulation and interpretation. Your explanation aside, the optic is that in pension mode, the capital does earn dividends and distributions that is no longer taxed. Interest on capital held in an external ADI would still be taxed regardless of the age of the recipient. Ergo the pension mode retiree could be living off these dividends, distributions or interest on cash within superannuation and is not paying tax, unlike assets held outside of superannuation. They may never draw down on the original capital! Which is why I suggested a better way would have been to not tax input or earnings but tax drawdown. The issue now is vested interests want to tax it a third time i.e. input, earnings and drawdown!

Your point 1 is spot on James and one of the causes of constant tinkering with Superannuation.
It annoys me that Paul Keating gets credit for the current system but no criticism for this obvious policy flaw.

Maybe it was also a mistake to get rid of reasonable benefit limits.

And if there is to be change how about curtailing some of the inequitable benefit that politicians and senior public servants enjoy.

Well said james

Only super in pension phase has zero tax on earnings. The amount each individual has in pension phase is limited by the Transfer Balance Cap (TBC) which started at $1.6M & is now $1.7M. Super in accumulation phase has 15% tax on earnings. The suggestion that several hundred thousand dollars a year can be consistently earned tax free, even before considering franking credits, is therefore very unlikely.

Spot on Graeme......Seems nealy every article on the subject misses this important point.

Ok, it may only be $200,000 tax free, is that still a fair and equitable system?
Young couple next door earning the same paying at least $50,000 in tax!

Franco, two things. First, you're missing the point of the previous comments. $1.7 mn in a pension phase account cannot generate $200k a year in income. That would be a yield of 12% and that's not going to happen in a sensible portfolio. So the cap on the size of the fund that can generate the tax free retirement income also limits the income that is generated. More like $80-100k is what you should be thinking.

The comparison then becomes with someone earning $80k on which they'd pay $16,000 in tax.

Second, you need to take into account that the reason society, through successive governments, has encouraged people to save for their own retirement is that the person with $1.7 mn in pension account does not now get the old age pension. That effectively means that they ARE being 'taxed' on their earnings, to the tune of $27k a year. That's more than the person paying $16k in income tax.

Look at the big picture and you'll see that there's a very fair base to our retirement income system. What would be unfair would be to not only deny the retired person the old age pension, but to tax the income they've earned on the funds they've put away for decades to get into that position.

SMSF Trustee

Spot on

Age pension card holders also get discounts on rates, water, rego, medical services etc etc whixh a SMSF trustee does not get.

Great discussion. But I can't help 'choking up' either at the mention of franking credits. Where was everyone when this Labor policy, described incorrectly as a 'retiree tax', was roundly slammed back in 2019?

Well for some retirees Labor's proposal on Franking Credits was indeed a form of taxation on them.

My mum is an example, under the asset and income test she is entitled to the full aged pension.

She has small holdings in some of the popular dividend paying blue chips.

Her income means she is not required to pay tax so she gets the dividend + the franking credit.

Some think that because people like my mum don't pay tax, the shouldn't get the credit.

This is not true, as a part owner of the company, the company has paid tax on her/their behalf, if the status of that person is that they are not required to pay tax, they should get that tax paid back.