Superannuation – A brief history, generosity of tax concessions, most recent legislation and Budget Night rumors and what changes could occur
Following on from our previous Super Smart (issue 44) where we covered the Government’s long term vision for employees to self-fund their retirement, we want to look at Superannuation in a little bit more detail, a brief history, generosity of tax concessions, a target of Governments to collect additional taxes and some recent Budget rumors leading up to Budget Night on 14th May 2013.
A brief history of superannuation in Australia
Prior to 1st July 1983 (coming up for 30 years ago), superannuation was effectively completely tax free.
Some people think that our current superannuation system is amazingly generous, but consider this:
All contributions to superannuation were tax free
There was no tax on investment earnings
There were no preservation restrictions. When you left your job (at any age), you could cash in your super
And upon cashing in your super, only 5% of the lump sum that you received was subject to tax at your marginal tax rate, and for someone on the highest marginal tax rate, the effective tax on superannuation benefits was only 2.4%.
So if you received a superannuation payout at perhaps age 45 of say $100,000, you’d only pay $2,400 in tax, and you walked away with $97,600. Most people paid off their house.
Paul Keating, Federal Treasurer at the time, realised the absurdity of the system, effectively no tax and no preservation restrictions, and although superannuation was intended to fund retirement benefits, and create less strain on Federal Government age pension benefits, it just wasn’t working under the above rules.
From 1st July 1983, Keating introduced a 30% lump sum tax on all lump sum superannuation benefits drawn by a person under age 55 (and 15% tax for a person over age 55), and that alone created a new word in the Australian language:- “rollover”.
If you were getting a lump sum of say $100,000, if you took the lump sum, you paid $30,000 in tax, but if you rolled over the lump sum, you completed avoided this tax.
From 1st July 1988, Keating introduced 15% contributions tax on employer superannuation contributions, and reduced the lump sum tax to 15%.
Basically the same numbers, but the Federal Government didn’t have to wait until someone collected their super, they were getting 15% as the contributions went in.
The current superannuation system of tax free benefits for all persons over age 60 was initiated from July 2007 by the previous Federal Treasurer (Peter Costello), and naturally proved to be hugely popular. As a result, superannuation contributions have been ramped up significantly over the last five or six years.
But when the Rudd Government came to power in November 2007, there were fears that the tax free status of superannuation pensions for older Australians wouldn’t last, but the Rudd Government was on the front foot, confirming in February 2008 that it wouldn’t be reintroducing tax on superannuation payments for persons past age 60.
This promise was repeated by Julia Gillard in 2010, where she:
“vowed that the tax free benefits would never be removed for the over 60s”.
And again on 2nd February this year, Julia Gillard said:
“The Government will never remove tax free super payments for the over 60s”.
Generosity of the Australian superannuation system – tax concessions
As mentioned above, some journalists and some politicians think that the current superannuation system in Australia is over generous – but nothing could be further from the truth.
The global actuarial firm, Mercer, recently compared our superannuation tax concessions with the 34 members of the OECD, and concluded that eight other major Western nations, including United States, United Kingdom, Canada and even Singapore, have superannuation and pension systems more generous than ours.
Most of the major offshore superannuation systems have no tax on contributions, no tax on fund earnings, but withdrawal benefits at retirement are subject to personal tax rates, but in most cases, with significant taxation concessions.
There has been a lot of talk in the press recently that the Federal Government (who are already in serious debt) can’t continue to support the generous taxation concessions granted to the superannuation sector in Australia.
The figure bandied about is that superannuation concessions are currently costing the tax office $32 billion a year, not much below the cost of age pensions which are currently running at $36 billion a year.
The Federal Treasury has estimated that the tax concessions are worth $32 billion, and they have come up with that figure assuming the following:
If the money wasn’t in super, people would be paying their full marginal tax rate on the additional income and the investment earnings, somewhere between 35.5% and 46.5%
And they further assume that the money not going into super wouldn’t find its way into other concessionally taxed investments, such as negative gearing or your principle place of residence (which is exempt from tax)
The $32 billion figure has been widely debunked as being something of a mythical figure, and if there wasn’t a superannuation system with taxation concessions, we as a country wouldn’t have $1.5 Trillion in superannuation assets, and that significant investment money helped Australia from being dragged into a recession during the GFC.
Federal Treasury goes on to say that the superannuation concessions will rise to $45 billion in the 2015/16 financial year, and at that stage, the cost to Treasury will exceed the cost of providing age pension benefits.
Possibly a good argument, except for one very BIG DIFFERENCE:
The Federal Government actually pays out cash to people receiving age pension benefits in Australia (we are talking physical cash), and the government doesn’t have anything “in the pot” in order to fund these pension payments. Pension payments come out of general revenue. Or put another way, the taxpayers are paying age pension benefits.
Superannuation concessions are not a cash payment. It is, and always has been, the intention of the Federal Government to provide concessions in order to encourage people to self-fund for their own retirement.
Bigger tax concessions are usually given on the ownership of your principle place of residence. Your own home is exempt from Capital Gains Tax. If you bought a house 20 years ago for say $150,000, and you sold it now for $600,000, that’s a $450,000 capital gain, and Capital Gains Tax on that would be just on $80,000. But because it’s your principle place of residence, you are except from Capital Gains Tax, so you are getting an $80,000 concession.
It’s one of the reasons why we have one of the highest levels of home ownership in the world. And the Government wants you to own your own place of residence, further removing the need for the Government to fund your accommodation needs in your later years.
Successive Australian Governments have been very smart. They give generous taxation concessions, because when you get old and grey, they want you to own your own home and they want you to self-fund your own retirement. A very good idea.
What are the most recent legislated changes to superannuation?
The first tax increase, already legislated, commenced from 1st July 2012 for individuals that have an adjusted taxable income over $300,000. It simply means that their concessional contributions, limited this year to only $25,000 per person, incurs not only the standard 15% contributions tax, but an additional 15% “high earner” tax.
Keep in mind, this only applies to people with a taxable income in this current financial year above $300,000, and the maximum additional tax take would be $3,750.
You’ve got to ask yourself, why did they even bother? The Federal Government has legislated this very complex tax collection system that will apply to a very small portion of the population, and come at significant administrative costs, and surely it would’ve been easier just to add an extra 1% “surcharge tax” on taxable incomes over $300,000.
Other points of interest are:
The age pension benefit has already been pushed out to age 67, commencing from 2024
We also suspect that the superannuation preservation age will also get pushed out to age 67
Back in 2007, the concessional contribution limit was $100,000, in 2009 it dropped down to $50,000, and from July 2012, it dropped down to $25,000. The tax concessions are diminishing.
The mining tax introduced last year was proposed to help the Federal Government fund the increase in superannuation contributions up to 12% of ordinary time earnings.
- What an absolute load of rot.
- If the Federal Government was a private business, it would’ve been charged with false advertising.
We hope by now that you know your superannuation rules fairly well, and a brief summary of the major concessions are:
Employer contributions going into super incur a 15% contributions tax, rather than the average personal marginal tax rate of 35.5%
The same applies for “salary sacrifice” superannuation contributions, only 15% contributions tax rather than the average 35.5% personal marginal tax
Superannuation fund earnings are taxed in the hands of the superannuation fund at 15%, whereas again, the average income earner pays 35.5% tax on their personal investment earnings
From age 55, a superannuation member can convert their superannuation balance into a “Transition to Retirement” pension, and instantly reduce the tax on investment earnings from 15% to 0%. We have many clients in this situation with varying superannuation balances, and they pay no tax on their investment earnings. Zero.
From age 60, lump sum withdrawals or pension income received from a superannuation fund is COMPLETELY TAX FREE.
So a person over age 60, in the pension phase, pays no tax on the superannuation fund earnings, and receives all benefits from the fund completely tax free. (You can’t get anything lower than a 0% tax rate.)
Budget Night 14 May 2013 - Superannuation and rumors and what changes could occur
At this time of the year leading up to Budget night it is very common that Governments put rumors out there to test reaction to proposals they have on the table, and in particular superannuation always seems to be targeted as it effects all employees in one way or another.
So what are the rumors out there for Budget night?
The recently leaked rumor to tax lump sum withdrawals for persons over age 60, where their superannuation balance is in excess of a nominal figure suggested at $1 million, was quickly knocked on the head when the current government realised that there was significant opposition to this proposal, and would cost it votes in the upcoming election.
There will probably be quite a few other rumors going around over the next couple of months, but any proposed tax hikes in superannuation or other areas, will be revealed in this year’s Federal Budget on Tuesday 14th May, (if it doesn’t cost it too much in votes).
There is no point in us worrying too much about what might happen in the Budget, because the Federal Government has two big problems:
Let’s look at the connection of the $1 million figure mentioned above with pension payments and income for a comfortable retirement
Age pension benefits cut out when your total assessed assets, including super, are more than $1,050,000 and strangely, the Federal Government said that they were considering taxing benefits withdrawn from a superannuation fund in excess of $1 million.
So in effect if your total assets, including super, was quite a bit below $1,050,000, you get some age pension benefits, and of course don’t pay any tax.
Certainly, that system appears quite flawed to people that are just above the $1 millon mark.
In our last issue of Super Smart (number 44) we covered off on those making every effort to self-fund their own retirement so it appears ironic that the Government would impose a tax on people that have self-funded their retirement (as encouraged by successive Federal Governments).
A joint venture between ASFA, Westpac and Melbourne Uni continue to conduct research amongst a very large number of retirees in order to determine the income that is required for what they call a “comfortable retirement”. The figure is currently $56,235 a year. It also assumes that you fully own your principle place of residence.
With that figure in mind, in order to achieve a “comfortable retirement”, you probably need about $1,100,000 in superannuation assets, and assuming those assets were throwing off an income, net of costs of say 5%pa, it produces that “comfortable retirement” income.
Is it some sort of a coincidence that all of the figures that we have been talking about are very close to $1 million?
What changes to superannuation could occur to collect additional taxes?
In simple terms, the Government makes the laws, and anything that has the word “tax” attached to it could increase.
As mentioned above, because it’s an election year, we would be very surprised if there were any draconian taxes, and the quick withdrawal of the rumor of lump sum tax for persons over age 60 makes us think that the Government will find it very tough to increase tax on superannuation benefits for ordinary Australians.
But here’s a wild guess at some of the changes to superannuation that could be considered in the future
The 15% contributions tax could increase to 20%?
The 15% earnings tax on superannuation investments could increase to 20%
The government might remove the “Transition to Retirement” pensions (possibly for persons below age 60 or 65)
Imposition of Capital Gains Tax on assets moving from the superannuation phase to the pension phase. (The previous government proposed this six or seven years ago, but it got a hostile reception)
A 7.5% tax on pension fund earnings (rather than zero), as proposed by the Henry Tax Review two or three years ago
Reducing the CGT discount on superannuation fund investments, meaning that CGT would increase from 10% up to 15%.
Our view is if they are going to target anything, the “Transition to Retirement” pensions would be at the top of the list.
Annual SMSF superannuation conference
On Friday 15th February at the annual SMSF superannuation conference that we attended, Senator Mathias Cormann, Shadow Assistant Treasurer and Shadow Minister for Superannuation said that the Liberal Party will make no negative changes to superannuation in their first term of parliament. And if the Budget allows it, they will bring back the $50,000 concessional contribution cap as soon as possible.
No doubt in the coming months leading up to the election there will be debate from both sides on the superannuation landscape and we wait with interest what proposals are put forward.
You will certainly understand our views on the superannuation system in Australia, and hopefully you will have a better understanding of the overall benefits of the system.
We would love to get your feedback on anything to do with this superannuation overview.
Certified Financial Planner
Authorised Representative No. 230877
If you have any questions or comments, my email address is
DISCLAIMER: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.