Six ways the Budget Office is probing super taxes

It’s true that some individuals benefit from tax concessions from super contributions, but the bulk of tax concessions flow from super earnings over many years. Therefore the bulk of tax concessions flow to super funds, not individuals. On top of that my super fund doesn’t know how much I earn nor how much tax I pay.
So how can the PBO claim that two thirds of super’s tax concessions flow to the top decile of income earners?

The comment in Point 3, whilst true, is easily solvable. when the previous Government introduced the pension balance limit of $1.6m individual super funds did not know which members had more than that amount in pension phase as some members would have had pensions in more than one fund or a defined benefit pension. As the limit was introduced at a point in time it was up to the individual (especially where there was a defined benefit pension) to obtain the relevant data and transfer the excess back to accumulation phase. There is no reason this same system cannot be used to identify individuals with more than $3m in super, but it needs to be done at a point in time.

So, for example, if that point in time was 30 June 2024, then anyone with more than $3m in super (pension and accumulation) would have to transfer the excess into a new "Excess Accumulation Account", the earnings on which would then be taxed at 30%. The main issue here would be what to count as the pension amount eg do you count the actual balance or the persons used transfer balance cap (or the lower of the two?). Yes, super funds would have to replicate the existing accumulation fund software architecture to accommodate the different tax rate (which surely can't be too hard). This gets around all the problems with unrealised gains, planned lack of indexing which surely must change as the pension limit will be over $3m in the next 5-10 years and who pays the tax. Yes, a few extra SMSF's might have to get an actuary's report (as those who currently have both pension and accumulation accounts do) to split the income between different accounts but this is not a major cost.

Hi Graham,

A really outstanding commentary and one that needs to be widely distributed.

Many of the comments are thoughtful as well and shows that retirees ( in particular) can debate issues in a much more thoughtful way than our politicians.

Just reflecting on the “Former Treasury policy maker” the original wages accord included the original 3% super contribution. Subsequent increases have not ( in the main) been similarly
negotiated.

In any case the wages accord does show that there is a policy response to dampen down inflation that the Treasurer and Treasury will ignore on Tuesday night . A tax reduction for low income earners for an agreement to limit wage increases. A tax reduction which should be aggressive - for example $52,000 tax free threshold for wage earners ( note - not from any source eg investment income) should be granted to lift after tax income for low income earners.

In this way - as happened in the 1980s, rampant wage claims can be negotiated away by a sensible taxation adjustment. Services inflation ( ie wages) would be addressed early in this cycle and the RBA could support by not raising interest rates with the plan of creating unemployment, creating economic stress and blowing out the deficit.

Great article thanks - i agree - Well said, Former Treasury policy maker.
Maybe they never got to play with plasticine when very young ?
Objects (models) made from it distort , often in an undesired way, when one part of it is squeezed

Classic Camel’s Nose Under The Tent..

Govt claims it’s intended to target tax rich. Then with time policy is slowly watered down so the average punter is caught in the net...

Or inflation will do the work for them, because by the time Gen-X and especially Y/Z retire, $3m in the bank will be nothing special

It has been clear for many years the design of Australian compulsory super was flawed from the outset. Money in to super and earnings on same should not be taxed with limits in place as to how much can be put in each year, maybe with catch up provisions if you don’t contribute your maximum each year. Withdrawals to be taxed at marginal rates and subject to similar minimum drawdowns as at present. Compulsory drawdowns from age pension age. No borrowing within super.

That Treasury and the politicians would have to wait a generation to see any meaningful tax inflows is why we were never going to have such a simple, rational system.

Thanks Graham for this useful summary.

What stands out for me in the PBO document is it’s failure to discuss the enormous difference between a dollar that can be spent today (ordinary income) and a dollar that cannot be spent for 10, 20, 30 years or more (super in accumulation phase).

There really is no rationale for directly comparing taxes on super with taxes on ordinary income.

It will be interesting to see how the follow-up document treats the interaction between super and the age pension.

Graham, thanks for this summary of the PBO's document and in particular for your final statement: "Anyone advocating more taxes on withdrawals should therefore consider whether this means contributions and earnings should be taxed less, as it’s the complete picture through a lifetime of super saving that matters."

I wrote a couple of articles for FirstLinks back in the discussion about Shorten's proposal to stop franking credits that are relevant to the discussion as well, I think. In particular this one (https://www.firstlinks.com.au/zero-tax-rate-pensions-right-fair) touches on the need for no tax on withdrawals. Especially some of the discussion in the comments section is relevant - and I still see comments from some people who don't appreciate that when someone in retirement withdraws from super TAX HAS ALREADY BEEN PAID. The withdrawal has to be seen like a withdrawal from your bank account - you pay tax on the interest, but the money that went in had been taxed and so the capital that comes out shouldn't be taxed again. The only issue ever is whether 'enough' tax has already been paid and my article argued that it has because of taxes on contributions and the limit on how much can be kept in tax free income in pension phase.

BTW I notice that today Mr Chalmers has affirmed that the current government is not 'after' franking credits, but only schemes that look and smell like manipulations of the intention of the imputation system, and that franking credit refunds are not going to be cut off like Shorten proposed. I hope that means that we won that debate with Shorten, Bowen and the ALP and we don't have to revisit it again.

Thanks, Warren, yes good point. Nobody should expect if you invest $100 of your capital (perhaps after paying 47% tax) into super and then withdraw $10 of the capital, that you should pay tax on it. As you say, imagine if someone put $100 in a term deposit and then withdrew $10 on rollover and reinvested $90. Does anyone argue you should pay tax on the $10?

Exactly to Warren and Graham, but that's too difficult for Govt personnel to grasp apparently. In my case all is from after-tax contribution and as someone said elsewhere here, how much tax will ever be enough?

just for the record, I don't agree with Lyn's somewhat personal comment that 'government personnel' find concepts like those I've written about 'too difficult to grasp'. I don't find comments like that at all helpful to the discussion. The intelligence and capacity of our policy makers is actually quite outstanding - I got a fantastic training in this during the early years of my career in Canberra and all those I've dealt with since have been thoughtful, intellectual and well-informed. And positively motivated.
I well remember the debate 20 years ago about whether the government bond market should be shut down because the budget was in surplus and debt could be paid off. That idea was proposed, but a public discussion followed and folk like Martin Parkinson and Blair Comley from Treasury listened to arguments like those that practitioners like Stephen Halmarick and I made at various forums, and the decision was taken not to shut the market down. It was a terrific process centred around discussing the issue not the integrity or ability of those who held various views. I wish all conversations about policy could be like that!

This is being disingenuous. The earnings on the capital in retirement phase are tax free which in itself is a pretty good tax deal. The capital can be withdrawn at any stage without tax but then, if placed in non super investments, the earnings after, around $20k, are taxed.
Where super pensions are taxable, It is only after the compulsory pension factors cause more than the income to be withdrawn that the capital itself is taxed. The previous TTT system had a 15% tax offset at the drawings stage to compensate for super tax, even though the pension phase was, and still is, tax free.
Re-introducing end benefit tax is preferred over a new tax on earnings that taxes unrealised gains. "Equity" can be achieved by the tax system whereby lower income earners are exempted.

Kym is correct. Tax base is becoming too narrow not to tax income/CG in pension phase.

As for Warren's comment on his background with policymakers listening to his input. This would appear to be the exception to the rule over the past decade with so many poorly executed policies (Stronger Super, YSFY, FOFA etc etc) and show trials (Royal Commission into misconduct.......or the 0.00001% of transactions).

There is a nostalgia for the pre-Costello taxes on withdrawals from super in retirement. But people seem to forget that the tax only applied to the concessional portion of that withdrawal. Large funds (more than $5million) only got there with large dollops of non-concessional (tax paid) contributions. So their concessional portion was very small and they paid little tax. Smaller funds have larger proportions of concessional money but the 15% tax rebate meant they also paid little tax.

Note that the tax on death benefits still only applies to the concessional portion of the super balance - so large funds don’t pay much tax here either, but the 15% rebate does not apply here.

Any change in the tax treatment of Superannuation balances should be grandfathered just as the Capital Gains Tax was when it was introduced by Mr Keating in 1985.
Policy makers in the Federal Government seem to be forgetting that Superannuants with high balances entered into a compact with Government that has gone on from the 1992 introduction of Superannuation until today (31 years so far).
That compact was that people would be encouraged by reduced, but still very significant one-off and annual income and capital gains taxes, to save into their Super over those 31 years on the basis that they had no access to those funds (access was granted only in particular specific circumstances and often came with a penalty) until they turned at least 55 years old at the earliest. In other words, in return for not consuming the funds over that period and effectively relieving Governments of age pension expenditures they paid reduced but still considerable one off and annual income and capital gains taxes to incentivise them to act as the Government wished.
Now, having abided by those rules for, in many cases those full 31 years (hence the bigger Super balance), they are being penalised retrospectively in older age.
They would have been much better off had they invested in their principal place of residence in one of the major capital cities with NO tax to be paid either over each of those 31 years or in retirement. And then pick up the age pension.
What is happening now under the current Federal Government is entirely UNFAIR and INEQUITABLE.
Those that have done the "right thing" are being penalised to the benefit of those "who haven't".

Except Superannuation had reasonable benefit rules applied to it. Those RBL's were removed by Howard and Costello. Did you complain about those rule changes?

Hey Mark, Angus is right, I feel the same way, this argument is not about political persuasions, it’s about all governments of all alliances who retrospectively change the rules and now penalize those groups who have done the right thing in the past (benefiting the economy then and into the future) to line their coffers.
Dan

@Daniel. There have been many changes to Superannuation rules over the years yet most people didn't bat an eyelid at them because they weren't affected.

There were changed made that affected me that were not Grand Fathered.

Two notable ones that come to mind, no longer being able to leave the country and take your Superannuation with you. It has to stay until your preservation age. I could be retired living in Thailand on a retirement Visa now if not for that change.

Changing the age of TTR to 60 from 55, I could be semi retired now if not for that change.

Even though I am affected by this new change, I'm in agreeance with it. Superannuation was designed to help us fund or part fund our retirement, not to become a wealth creation tool due to its low tax benefits.

Grandfathered or not, some rules should never have come about in regards to Superannuation.

Removing RBL's and letting the wealth deposit millions into their Superannuation accounts 2 prime examples.

This last sentence is the very essence of the welfare system as we know it. Take from those who made the right economic decisions in life and give to those who didn't. I can't see this changing anytime soon. Democracy will ensure that, because the majority, unfortunately, are in the latter category, not necessarily through any fault of their own.

David, that's quite the wrong attitude and could actually be interpreted as a disgusting view of your neighbours. Sure, there are some who received government financial assistance who have made the wrong choices, but the majority are not in that boat.

One group that definitely doesn't deserve such opprobrium are those who've worked hard in manual, low to modest income paying jobs all their lives - to keep your house free from garbage for instance, or to cut the timber that is holding your house up or any number of other important jobs that are beneath folk like you, I guess - but not been able to save a great deal in super and often haven't been able to afford to buy a house. They retire in a situation that is often poverty or close to it. To argue that they shouldn't receive any support from old age pension or other 'welfare' because they weren't smart enough to choose the same job as you did is despicable.

This comment is addressed to the reply by SMSF Trustee about my earlier comment referencing the final sentence by Angus and was meant to be short pithy remark on the way things are. I could have phrased it better, as I completely respect workers who do those jobs we all rely on and take home a modest wage because of it. I used the word "right" in the sense of "generating more wealth", not suggesting that those who spend their life with other priorities are "wrong". Those who dedicate their lives in charities and in the service of others are needed and valued, but not economically. Theirs is a different happiness and satisfaction. The sick, the disabled, the victims of domestic violence need looking after. Where is the money to come from? From those fewer who took risks, worked when others relaxed, studied hard to get good careers, saved, made good investments. Fact of life. No blame attached. No rancor. I once thought libertarianism could work. I no longer do. I look at the brave Ukraine soldiers defending their homeland. They volunteer to do this because they all get a fair deal out of Ukraine. The same would happen in Australia. We can never have a system where people get such a raw deal that they would not fight for their country. There is no alternative to the old age pension for many and I never said, nor implied they should not have it.

Relieved to read your clarification David.

"The PBO gives an example of an individual who makes a $10,000 post-tax contribution".

Like that's a common scenario. Today, most 22 year olds are either still studying or have only recently taken up paid work. In either scenario, there is no way they would have a lazy $10k (post tax) to contribute to super. And nor should they do so. Every time government gives examples of superannuation concessions it always chooses the most extreme outliers it can create, because in the absence of such fictional examples, their case for change has no basis. Tell the PBO to get real.

Fully agree
Graeme ret CPa , GIA etc
Concess is taxed in ,along the way , annually & finally when paid out to non tax dependants....leave it as is is !
Isnt a blessing for those that have saved prudently ARE NOT on Centrelink & adding to the massive cost of the bureaucracy.
Narrow minded Treasury & Labor!
Why not look at transfer pricing with Multi national coys & massive lost revenue & I dont think ATO has the skills to sort it in this area.
Its simple have a flat tax of say 10% on gross revenue if otherwise tax paid on Aust derived income would be less

In addition to imputed rent tax free, market indexed, and capital gains tax free, the home owning full Age Pensioner couple receives free $42,000 income, capital free, tax free and indexed courtesy of the tax payers.

After tax returns on original investment =$42,000 / $0.00 = infinite.

Value of home limited to: local government taxes <= $42,000 - household expenses - contingency for local government tax increases.

Preservation age is fast approaching for me and I like the tax free status on withdrawals.

That being said if I was younger, I'd prefer no tax on deposits or earnings and the paying tax on withdrawals at the pension phase

Dollar value would be higher then.

Government wins with the status quo.

Yep, much more sensible…but Keating needed to still collect some tax so we have a poorer systems in my opinion. However, like you i am close to preservation and so dreading that they would have the nerve to convert the system now.

I think the best way to guess what they will do is to ask, what would hurt SMSF but not disadvantage our mates in industry funds? Seriously, most people would be better off over their lifetime with their own SMSF invested in an index fund…compare the pair makes that clear

All the more reason to let those with more than $3M in Superannuation access the amounts over if they wish too regardless of age.

Sorry, I'm not sure if this comment relates 100% to this article, but reading it has prompted me to recall an aspect of our super system that was important at the time it was kicked off, but doesn't get any coverage these days.

Compulsory super was part of the policy approach to tackling our high inflation of the 1980s. (And by high inflation I mean consistently above 8%.) It was negotiated in the context of the Prices and Incomes Accord, as a replacement for what would have been inflationary wage increases.

So how about Budget Office and Treasury and Grattan and others go back and model what would have happened if we'd just had a continued wage-price spiral, with the resulting higher interest rates, deeper recessions and entrenched structural problems in the Australian economy. How much do they think that not having our system in which superannuation is taxed concessionally would have cost us in terms of higher inflation, higher interest rates, lower tax revenues, and much higher cost of the aged pension, etc?

Spare me days, this narrow focused partial analysis of 'tax concessions' as if they operate in a vacuum from both other policies and as if they don't contribute to overall economic outcomes is driving me nuts.

Historical context for policy formation is always important. The younger the average parliamentarian gets, the worse off we are.

By the way, the other important policy factor that gets (conveniently?) forgotten is that the 50% CGT discount was introduced as a simplification measure for investors who had to do indexation calculations across many tranches (ie. many different dates) of an investment's cost base. This was underpinned by the policy intent that investors should not be taxed on the inflation-part of their investment gain. The 50% was appropriate for the CPI rates around at the time it was introduced, but perhaps became a "windfall" for investors in a low inflation environment over the last 15 years (until mean reversion started taking place over the last 12 months).

Neil, I agree that the 50% CGT discount is a fair attempt to avoid a capital gain being taxed as though the whole gain accumulated in the last year of owning the asset. Under the old system, an indexing process was employed to recognize that the gain had occurred over several years, but the process was complicated and hence replaced by the current system of the 50% discount. Any attempt to remove the 50% discount needs to recognize why it was introduced and why it is not some kind of concession or rort.

And as I recall there was an option of taking the Indexed Cost Base or the 50% discount. Perhaps we should go back to indexing the cost base as the fairest way of doing it - especially as now we have computers to do it for us. Some commentators, who should know better, seem to have forgotten the principle of not taxing the inflation portion of the capital gain.

At 7% inflation, it would only take 6 years for the 50% discount to start to cause taxation of capital gains.

Well said, Former Treasury policy maker.
It's too easy for money hungry Governments to look at the "costs" of concessional superannuation taxation and forget why it was introduced in the first place.
It's also too easy for commentators who don't have a long enough memory, and who are looking jealously at the large super balances enjoyed by very few people to try to come up with some magic "equalising" formula.
Same as the ones who look at the elderly members of our population who still live in their family homes in (often) inner suburban locations and want to move them in retirement homes while at the same time forgetting that those inner suburban locations were on the urban fringes and comparatively expensive at the time they were purchased.
Policies based on greed and envy are never good policies.

So, to tackle high inflation, just make it so that they stick MORE into super and you forego the payrise, just like what happened when superannuation was introduced. Same same.

What that will do is mean more people get to the $3m limit faster and then you can tax them even more for it when they get there. Oh, that's genius...the Government are lucky people like myself exist who have worked out a solution for their current inflation problem, but I prefer the term "seen their sleight of hand move for what it will be". Gen X, Y and Z, watch this space and don't say you weren't warned...

"...is narrow focused partial analysis of 'tax concessions' as if they operate in a vacuum" very succinctly put.

This is not a honey pot Jimmy. Why not tax the pension side if you want to broaden the tax base? Complete short termism targeting the ultra-wealthy as they'll never end up paying anyway. Add nothing long term.

The equity is the current system is self evident via who pays extra tax and those with readily access to the Age Pension (best $1.2M lifetime guarantee available) so it just needs a laser focus on sustainability........

TAX the PENSION side as it can be shown to be progressive for 90% of those earning under the Age Pension entitlement.