Actuaries report urges super tax reform

There are always going to be winners and losers when governments change taxation. The prime winner is usually the Australian Taxation Office. This is always the case when governments change superannuation tax rules. 

So, when the Actuaries Institute recently proposed a shakeup of super tax, to “simplify” what it says is an overly complex system, retirees’ radar for taking a financial hit was quite rightly triggered. 

The institute commissioned actuarial consultants, across the generations, to set out their vision for “meaningful tax reform that aims to make super simpler to invest, easier to spend, and fairer with bequests”. 

The authors argued the changes would: 

• Simplify how superannuation is invested and allow consumers to have just one account 
• Improve efficiency by more actively encouraging retirees to draw down their superannuation to fund their retirement 
• Save about $1 billion in fund operational costs per year over the long term 
• Improve equity between younger and older taxpayers.

The report lacks details, so it’s difficult to tell. If the reforms were introduced today, then most retirees would be taxed more. In the longer term, it appears the tax hit would depend on:

• How much is in the super accounts 

• The age of retirement 

• How much you withdraw either as a pension or lump sum 

• Super proceeds bequest recipient. 

1. The report supports a 10% tax on fund earnings in the accumulation and retirement phases.
   
   Currently, accumulation phase earnings are, generally taxed at 15%, and retirement phase earnings are taxed at 0%. So, a flat tax of 10% would benefit those still accumulating, but may mean super funds pay more tax for those with a pension.
   
   The report says a flat tax would enable a simpler system where people could have just one super account (doing away with accumulation and pension accounts), build stronger balances from when they begin working, and save money on fees.
   
   Superannuants with low to medium super balances could be worse off and the report suggests compensation could be provided through the Age Pension, possibly raising pension thresholds.
2. In a suggestion that may raise retirees’ blood pressure, the paper also suggests introducing a tax on “very high” withdrawals in retirement, whether as lump sums and/or pension benefits.
   
   At this stage, the proposal lacks detail, but it could mean that people who currently can withdraw without any tax will be taxed if the pension or lump sum exceeds $250,000 and $150,000 per annum, respectively, with compensation for any retirees adversely impacted provided through adjustments to the Age Pension, for example.
   
   These changes could encourage retirees to use their superannuation in retirement.
3. The tax on super death benefits would change and broaden. Currently, super proceeds to certain categories of beneficiaries (dependent/non-dependent) are tax free. Under the reforms:

• A 17% tax would apply to any part of a bequest that exceeds $500,000. 

• A higher tax-free threshold of $2 million could apply for dependent beneficiaries.  

Report author, Richard Dunn, says Australia’s superannuation system is working well, but it’s one of the most complex in the world. 

“Our proposals make super simpler for consumers and funds, while improving equity across the system. Further, the reforms encourage people to spend their super by reducing the attraction of using super to accumulate tax-free bequests.” 

Related reading: SMSFAdviser, Actuaries Association