Tax Review report on the retirement income system

The Government has today released the report prepared by the Australia’s Future Tax System Review Panel into the retirement income system. The report presents the Panel’s broad strategic views on the retirement income system.

The Panel’s key finding is that the three-pillar architecture of Australia’s retirement income system — consisting of the means tested Age Pension, compulsory saving through the superannuation guarantee and voluntary saving for retirement — should be retained. The retirement income system is facing increasing challenges as the 21st century unfolds which will test the sustainability, adequacy, acceptability and coherence of the system. The three‑pillar architecture is well suited for a balanced and flexible response to these challenges.

However, there is a need for some adaptive change to calibrate the three pillars so the system serves its purposes and retains its strengths.

The Panel recommends:

* maintaining the superannuation guarantee at 9 per cent, not extending the superannuation guarantee to the self employed and retaining the $450 per month threshold;
* gradually increasing the Age Pension age to 67 years;
* gradually aligning the age at which people can access their superannuation savings (the preservation age) with the increased Age Pension age;
* improving the fairness and coherence of the pension means tests, possibly through a single test, and improve incentives to work beyond retirement age;
* reducing the complexities resulting from the interactions between the tax-transfer system and the aged care sector;
* maintaining tax assistance to superannuation but improving the fairness of concessions for contributions, including by broadening access to them, and considering whether the current cap on concessions is appropriate;
* improving the ability of people to use their superannuation to manage longevity risk; and
* improving the awareness and engagement of individuals with the retirement income system.

The report was developed with the help of many people, in particular those who provided, at short notice, valuable submissions and those who participated in direct consultation with the Panel and the Secretariat. The public consultation meetings also offered valuable information on issues of concern to the community about the retirement income system. The Panel records here its gratitude to all who have worked so diligently on this task, or taken time out to attend consultation meetings.

A range of issues that were raised in these submissions and consultations, such as the age beyond which a person cannot make contributions, the taxation of benefits received by members of untaxed funds and the taxation of superannuation death benefits, are not expressly dealt with in the report. However, they will be taken into account in the Panel’s final report due in December 2009, as they may be affected by the Panel’s recommendations on the broader tax-transfer system.

More information

Please visit http://www.taxreview.treasury.gov.au or call 1800 614 133 for copies of the papers and more information on the review.

Media contact: Tony Murray (02) 6263 3736

12 May 2009

Forget concessions, the reality may be a 93% tax
ANNETTE SAMPSON
October 31, 2009

Fancy paying up to 93 per cent tax on your superannuation contributions? And you thought super was concessionally taxed.

Thanks to cuts in the last federal budget, many investors could unknowingly be heading for a big tax shock when they look at next year's super statement.

Most investors will be aware that the Government cracked down on so-called high income earners rorting the system by more than halving the amount you can contribute to super on a concessionally taxed basis.

The limits were cut from $100,000 for those aged 50 and above to $50,000 and from $50,000 to $25,000 for the under-50s. On the face of it, that halved the amounts allowed; in reality the cut was even more savage as those original limits had been due to be indexed this financial year.

Theoretically, the under-50s should have been able to squirrel away up to $55,000 this year - so the cut was more in the order of 55 per cent.

But all that is history. The new limits came in and apply for the first time this financial year. We're stuck with them.

But super experts are warning that not everyone understands how they work and could find they have unintentionally breached the new limits come next July.

That's because the new caps apply to all concessional (or pre-tax) contributions made on your behalf. So it's not just the voluntary contributions you elect to make through a salary sacrifice arrangement or by making tax-deductible contributions yourself, if you're eligible.

It also includes any compulsory super payments your employer makes on your behalf, plus any additional employer payments such as higher contributions and - wait for it - any costs of the fund subsidised by your employer.

Some employers, for example, choose to pay some or all of the administration or insurance costs of their corporate fund.

Employees are unlikely to take account of, or even be aware of this when deciding how much extra they should contribute.

But intentional or not, the penalties for making excess contributions are hefty. Any contributions above the limit are taxed at 31.5 per cent. That's on top of the normal 15 per cent contributions tax, so you're automatically being hit with the top tax rate of 46.5 per cent - regardless of your income or marginal tax rate.

Arguably, that should be penalty enough. But the excess is also counted towards your non-concessional cap - the amount that you can contribute after-tax. [You have got to be joking - but sadly not! - Judd]

If you're nearing retirement and have taken the opportunity to make a big after-tax contribution (maybe you've sold an investment or received a divorce settlement), you could find that excess contribution has tipped you over this cap as well. In that case more penalty tax will apply - another 46.5 per cent - taking the total tax hit to an incredible 93 per cent. If you are over the limit by $10,000, that's $9300 to the government and just $700 to you. It's hard to think of a more punitive tax rate.

The stiffness of these penalties is not accidental. They were introduced to limit the extent to which investors could benefit from the abolition of all taxes on super benefits taken after age 60. Limiting contributions was intended to be simpler and less costly than the convoluted old system of reasonable benefit limits.

But the lower contribution caps have made more people vulnerable to excess benefits, and super experts are warning of the need to review your contribution levels before it is too late.

The consulting company Mercer says a red flag should automatically be raised for anyone under 50 and earning more than $277,000 (or over 50 and earning more than $553,000 - though that's less common).

On this salary, if you are receiving your full compulsory super entitlement, that alone will amount to $24,930 (or $49,770) and even a small pay rise could tip you over the limit. Fortunately, there is a provision to stop you automatically being pushed into excess contributions. Your employer is only required to pay the Super Guarantee on the first $40,170 of ordinary time earnings per quarter - which equates to annual earnings of $160,680 a year. So you can talk to your employer about trading off some of those super contributions for other benefits, though they may not attract the same tax concessions. Mercer says one option is to keep the money going into super and have it counted as a non-concessional contribution.

You'll still pay the same 46.5 per cent you would have paid if you had taken the salary, and you'll be building up your super - so long as you take care not to exceed the non-concessional limit as well.

Other options include tax-effective investments like insurance bonds, borrowing to invest, paying off debt and managed funds.

But it is not just the super high earners who need to review their contribution levels. Compulsory super on a $150,000 salary is $13,500, so a modest contribution of $250 a week would push an investor over the new cap if they're under 50.

And someone earning less than this could run into problems if they are maximising their super contributions but don't reduce them after receiving a pay rise - and the corresponding lift in compulsory super.

The new limits have increased the importance of reviewing your super strategies early in the year, rather than the usual last-minute rush in June. It can be difficult to turn off arrangements at short notice and once contributed, you can't just ask for your money back.

Higher-wage earners to pay increased tax on super
PHILLIP COOREY CHIEF POLITICAL CORRESPONDENT
November 6, 2009

WAYNE SWAN has endorsed making those on higher incomes pay a higher rate of tax on superannuation contributions as part of the Government's response to the Henry review of taxation, recommendations of which would be implemented over a decade.

The Treasurer suggested yesterday that a sliding tax scale would be applied to super contributions.

Citing fairness as a priority, Mr Swan said the current 15 per cent flat tax on superannuation contributions meant the value of the concession on contributions increased as the person earned more. .

Mr Swan said this worked against the progressive personal income tax scale, which he considered fair. For example, he considered it fair that a person who earns $150,000 has 2½ times the income of somebody on $60,000 but pays almost four times the amount of tax.

''It's important that we maintain incentives for Australians to save for their retirement through super,'' he said.

''But I know that some have asked the [Henry] review whether aspects of the current taxation of superannuation contributions work against our progressive personal tax scale.''

More.........