superannuation, taxing super, Grattan Institute, equity, retirement income

How super is taxed?

Is this about to change?

Respected think tank, The Grattan Institute, has released a report suggesting that all super be taxed in order to create a fairer and more sustainable retirement income system. The report released earlier this month, Super savings: Practical policies for fairer superannuation and a stronger budget, justifies its far-ranging cuts to concessions by highlighting the $45 billion that super tax cuts cost Australia annually. It also noted that they will soon cost more than the Age Pension. The Grattan Institute believes that such generous concessions are excessive and need to be reduced in order to balance the budget. In fact it maintains that ALL super income in retirement ought to be taxed.

Before we look at the detail of the Grattan Institute proposals, here’s a reminder of how super is currently taxed, before retirement and after.

Super in accumulation 

This is the savings phase of super – when you are still working and contributing. Generally speaking, your contributions before Preservation Age will be taxed at 15%. There are a range of rules attached to the many ways Australians can contribute – here’s a handy overview.

Super in decumulation

Those who have reached Preservation Age (and satisfy the necessary conditions) are able to access their super. This is often in the form of an Account-Based Pension income stream or it could be in one or more lump sums. If you have switched to a retirement income stream then your withdrawals are not taxed, nor are your earnings. 

Changes ahead

The current tax situation is due to change on 1 July 2023 when a cap of $3 million will be applied to a persons total superannuation holding.  It is not per account.  It is also per person so a couple could have up to $6m before they were affected by this additional tax if the money was split evenly between their accounts. The additional 15% tax on earnings will apply to the amount held in super above the $3m threshold and will incur a total tax of 30%.   The cap of $3 million is not indexed.


The concessional treatment of savings in superannuation has been legislated by governments of all political hues over the past 20 or so years since superannuation was first introduced. In general, these concessions have been used by governments as a strong encouragement for Australians to save hard for their own retirements. People that have done so have often deferred expenditure or saved in super rather than reduce their mortgage. However, with all things, there is a tipping point. And some would argue that the point has been reached when concessions are set to cost more than the retirement safety net for lower income earners, the Age Pension. But as we have seen, it takes a brave government or opposition to remove a benefit that has already been granted. 

What is Grattan suggesting?

How does the Grattan Institute suggest these tax rules be changed? They have put forward a raft of changes they claim would save the budget $11.5 billion. You can read all the detail for yourself in the previous link. The two main changes which affect the most retirees are the following:

Taxing all superannuation earnings in retirement at 15 per cent – the same rate that applies to super earnings before retirement. This would save more than $5.3 billion a year.

Taxing earnings on super accounts larger than $2 million (rather than $3 million as proposed by the Albanese Government) at 30 per cent. This would save about $3 billion a year, compared to about $2 billion a year under the government’s plan.

Can these changes be justified?

The Grattan Institute describes Australia’s current super system as both unfair and unsustainable, stating that

“Two-thirds of the value of super tax breaks benefit the top 20 per cent of income earners, who are already saving enough for retirement and whose savings choices aren’t much affected by tax rates.”

Much of the boost to super balances from tax breaks is never spent. Grattan cites that, by 2060, one-third of all withdrawals from super will be in the form of a bequest – up from one-fifth today. 

In conclusion, one of the report’s authors, Brendan Coates, notes:

“Tax-free retirement earnings mean an increasing number of retirees are ‘checking out’ of the tax system, while the budget faces spending pressures associated with an ageing population.”

Is there another side to this argument?

Well yes there is. People that save in super are often making a decision to defer spending today to put something away for the future.  That money is often locked up and can’t be touched for years and years.  It can’t be used for spending, to reduce the mortgage, or other forms of investment that can be accessed quickly.  Without these tax concessions many people would be far less likely to save via super and might often end up relying on the Age Pension. So the Government ends up paying anyway.  

What do you think?

Are the Grattan Institute changes likely to make our super system fairer for most retirees, as the authors of the report claim? Or are the tax concessions necessary to encourage people to save more for their retirement?     

Keeping up with super tax laws can be exhausting as well as confusing. Understanding when to move from accumulation to decumulation is also a challenge. What’s right for one retiree may be less financially rewarding for another. The tax-free status of income streams is appealing, but if you wish to touch base with an experienced adviser who can check your maths, a tailored superannuation advice appointment makes a lot of sense. 

And if you’d like to better understand how super combines with the Age Pension, here’s a recent article on how this works.