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.
Background
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.
Another over generous tax concession is that retirees don’t pay Medicare as it is based on income received on the tax form . However income from the allocated pension does not count. So even though the elderly are large users of the medical system we don’t contribute.
Maybe it should be means tested so that those retirees that are well off still pay.
So I’ve paid Medicare and the levy for as long as I remember. God knows how much… now Medicare pays something to my doctor and you say I don’t deserve it! Bugger off!
I agree with John T, I have paid the Medicare levy since it was first introduced and an additional levy for the past 20 years and apart from the birth of 3 children I have never used the medical system in that time – I have 1 visit to doctor every 2 years for general check up, and have never had any hospital or other emergency attendance. I have paid for any blood test etc and all dental out of my own pocket, and just paid $50,000 in extra with an additional medicate levy added on to my on my redundancy offer. So if I chose to work very hard and save for my retirement, whilst contributing a very large share of my income to the government, why should I pay for Medicare and extra taxes now I don’t have any income except what can maybe earn in interest?
Thats a noble gesture BUT what about those of us who pay for private health cover. We should be rewarded not punished.
Sorry Les, I have news for you some retirees do pay the Medicare Levy.
I’m a self funded retiree. I’ve paid Taxes all my Life including PAYG Taxes, because I did without then so I’d have a comfortable retirement.
I pay $90 every time I go to the Drs nowadays, whether its a consultation , get results or to get a script rewritten., (no bulk billing for the results or script nowadays). No Heathcare benefits here, except the Medicare rebate which everyone is entitled to.
Although (I know people of similar circumstances who manage to get health cards etc.)
I’m wondering if you have a Family?
Whom I was supporting with childcare rebate benefits whilst I was working hard. Did I complain No, that’s just the way the system works.
So like it or not, Retirees are Not a Greedy bunch as you appear to think of us. We’ve worked hard, saved to built a prosperous country. It’s just that nowadays everyone wants everything for nothing.
So people like you should stop begrudging retirees like me, because if you live long enough you’ll be one of us. ps I’m not mega rich, & don’t fall into the $2000000+ category
Yes I agree wholeheartedly with the Grattan Institute’s recommendations. The system is way out of balance. My thought is also that superannuants should pay a contribution to Medicare given we’re the heaviest users of it.
I’ve paid the Medicare levy since it was introduced. I have no children and according to the comments here, now I am retired I am the biggest user of it. So for years while I was working and not using Medicare you took your children to the doctors and got your Medicare rebate that I helped pay for. Well you know what you can bill me. Deduct it from all my Medicare levy payments and tax paid over many, many years of work.
Just because we are retired doesn’t make us the burden on society you think we are. We paid all the levies, taxes and interest rate at 17 and 21%. We didn’t race out and buy the latest iPhone, big screen TV’s, jet around the globe, have child care payments and still cry poor. We made do. Think about it, you too will be here one day. The snow on the roof catches us all in time…
As for the tax issue, tax all the beneficiaries they didn’t work for it.
Well said and an accurate assessment of the situation.
I totally agree Sue. We have a similar background however I’m still working. Single people and people that have not had children seem to be the forgotten ones in the system.
The family home should definitely be counted in Assets to try for a Pension. I have saved & spent money wisely to allow ok retirement, with NO PENSION for self & partner, who has zero money but have had to forego a high end unit/home to be able to do so & live off my investments. Most people choose to have expensive home & cars & GET PENSION, as family home NOT counted in Assets. THIS STINKS & SO UNFAIR. Government would save BILLIONS on Pensions if family home taxed. Then, level playing field for all.
Fully agree Barbara White. I have been saying this for years. Why should people sitting on a 3 million dollar house be exempt in the asset. There is such a thing as reversed mortgage.
You might consider all the years we paid contribution’s and were not heavy users of the system. Using your analogy then those receiving a pension should also pay. Furthermore you might take into consideration those superannuants who pay private health care.
I might suggest most superannuants have been diligent savers to accumulate sufficient to sustain themselves in retirement not to lead a lavish life style.
I’m 68 years old and on an allocated pension – not rich by any means and I use Medicare twice a year – so no!
easy fix….input super …tax deductible.
no limit….when accessing super….Anything income earnt over $100000 to be taxed at current tax rate…..
Surplus super …after death to be taxed at 33:3 % .
I agree with the reduction of the maximum amount to $2,000,000 per person.
I strongly disagree with the taxing of all earnings from super at %15. I think earnings above some threshold like $100,000 would be acceptable.
The article starts with ‘… Respected think tank, The Grattan Institute, …’. This begs the question, respected by whom? The Grattan Institute is a left-wing think tank and its views on the taxation treatment of superannuation are well known. Its latest suggestions are nothing more than a wish list of electorally unacceptable ideas.
The statement is made ‘… Tax-free retirement earnings mean an increasing number of retirees are ‘checking out’ of the tax system‘. This is nonsense. Everyone, including every retiree pays GST. And then there is Peter Costello’s sting in the tail at the end. The taxable component of any money remaining in a superannuation account when a person dies is taxed at 15% plus the 2% Medicare levy when that money is distributed to a non-dependent beneficiary (i.e., your adult children).
I have made contributions to my super from my savings after tax, will I be taxed again when withdrawing these contributions from my super when I need it?
Hi John thank you for your question! As with most things related to super there is no definite yes/no, instead there are ifs, buts and maybes. To clarify exactly what your personal options are and the pros/cons of each for yourself it is best to book an “Understanding More About Super” consultation.
It is important to remember that the ‘untaxed’ component of super is taxed at 17% upon passing if not received by an eligible beneficiary. Taxed at 15% in the SG phase and up to 17% seems more than enough tax! If compared to ‘lost wages’ for the SG, an already overtaxed scenario?
It is unfair that so much money in high super accounts is from tax concessions
Also a nurse working to earn $60000 pays plenty tax but a retiree on the same pays none!! Cruel middle class welfare
Not true. As a retiree on roughly that amount p.a. I still pay several thousands of dollars a year tax.
Both the wife and i have been retired for 3+ years and now its time to sell an investment property we both have room for “x” amount before we reach our super limits what is the max sum we can contribute to both supers after the property is sold .
Hi Russ, thank you for seeking our guidance! There are a few factors that need to be taken into account so it would be best to book one of our “Understanding More About Super” consultations to understand your options and each of the pros/cons.
its very good to know about age pension and super
We must remember that in account based pension mode we are saving the government
paying the age pension ( personally 8 years at $25k a year ) and Grattan are now suggesting we pay15% on our earnings. Grattan needs to realise that super earnings at 4-5% does not make for a luxurious living in retirement with a super balance between the cut off pension amount and 1 million.
As the government already means tests the state pension, they should keep their hands off people’s hard earned retirement savings. They shouldn’t have it both ways.
I’m not in the 3-6 million super bracket, I didn’t earn anywhere near that in my working life. If I was in that 3-6 million bracket I doubt a higher tax rate would make me concerned about the quality of my retirement income. After all if your driving a luxury half million and above auto you don’t worry about $2.50 price for a litre of petrol.
As for those of us no where near this higher earning bracket who are concerned about just making ends met I ask the following…
How many times must we pay tax?
We pay tax on earnings, stamp duty, GST on purchases.
If the government wants more revenue, surely they can wait until we are dead to claim their final pound of flesh. Let them tax what’s left to be bequeathed at a higher tax rate.
You try and save as much as you can through your working life to be able to afford what you hope, is a comfortable retirement. When you finally retire most of us have the uncertainty of no income, raising inflation, global instabilities all this is stressful enough. Worrying about incoming bills, cost of living, energy prices going up on a regular basis, daily market falls. Worrying everyday if your super will out last you. Let’s face it most retirees struggle on a daily basis of being able to afford the basics like, food, heating, petrol and medical. For those who need to find rent money on top of everything else it’s even worse! It’s not all beer and skittles for most retirees. So let us live out our final years with as much dignity as we can afford with out penalising us for managing to save a few pennies for retirement. They say there are only two certainties in life death and taxes. So wait till we’re dead and tax what if anything is left!
Two people earning the same income – one spends all his income, not adding to super, retires on the basic super plus full pension costing the tax payer.
Other person goes without during his working life, adding to his super and working past the retirement age, maybe to 70, then onto an income stream from his retirement savings at no cost to the taxpayer.
He should not be penalised for being diligent during his or her working life.
Where is the fairness in that?
It’s Interesting that the Grattan Institute state “They have put forward a raft of changes they claim would save the budget $11.5 billion”. The current super schemes doesn’t cost the government any money and what is proposed is a blatant tax grab which will add $11.5B to the budget. There is a subtle difference and this notion of “saving the budget” will be promoted and no doubt supported by those who don’t have any super and politicians who can’t stop salivating at the thought of grabbing some of the accumulated super funds money! The original intent of superannuation was to reduce the pension cost but changing the tax concessions will discourage younger people from adding to their super. The current systems were set up by various acts of parliament so any changes now should be for future accounts and existing accounts should be covered by a grand fathering requirement.
So now the government is considering taxing superannuation yet again. My superannuation is my only form of income. It is not a huge amount, but enough to mean that I do not qualify for any of the supposed “perks” except reduced car registration. I pay for top private medical cover which still leaves me out of pocket for any specialist treatment. Yes, I have cheaper PBS prescriptions and until the latest changes was only charged the scheduled fee for GP appointments but that is about the only extras I receive. Like so many retirees and budget to ensure that my superannuation will last for my lifetime and allow me to access the care etc. I may require. I paid my taxes for my entire working life and listened to government advice about saving to fund retirement. So, yes, maybe tax high multi million dollar balances, but those thousands who have less than a million receive little from the government and should not be seen as a cash cow.
Guys this is just trying it on to judge public reaction to a future action by the government. The thing is this- most of us are PAYG people and we have paid our fair share of tax. If the government needs more money they should ask the Grattan Institute to look at ways that the businesses sector is reducing their tax and plug some holes. Also it was recently on the news that some mining companies have done Deals not to pay any income tax.
Stand firm guys and don’t fall for this nonsense that we are being spun.
I know I’m lucky as a single woman to have the amount of super I have. It is no where near $2m. I figure if I’m careful it will see me through till I’m 80(ish). After that I hope I go quickly. I don’t understand how friends retire and start accessing the pension and go on their annual six weeks overseas holidays. If a single person has $2m in their super, and have retired at 66 or 67, then they would be having a good life. I believe anything over that should be taxed. I continue to pay a hefty amount for private health insurance so why should I have to continue to pay for Medicare? I know I’m lucky and remain healthy but that doesn’t come without cost. I’d like to be able to leave my children the benefit of my modest asset without them being heavily taxed. If the very wealthy were suitably taxed in the first place then those people who need more assistance could be helped.
Why not make the system dead easy, everyone qualifies for a pension and any income above the pension amount is taxed at 15%. So you can work a bit, pull a bit of pension income etc and you pay 15% one age 67 and retired.
I am about to head into retirement in about 4 years time and am concerned the government is proposing to tax my super in retirement.
As the demographic of retirees continues to grow l think we need to stick together and begin to organise and punish those who push through tax changes on super at the polling booth
l look to the people of France who are fighting tooth and nail with their government to keep their retirement conditions
if retirees in Australia pushed back half as much as the French people have recently no government would touch super
The bottom line is government’s today and in the future will continue see super as an easy target to raise tax revenue
Who gives a stuff what the “Grating Destitute” says !
who are they ?
Just another propaganda wing of Government !
The cost of tax concessions to super is designed to exceed the cost of the shed pension. As more people have been accumulating super capital, the cosy of the concessions increase. But also as those who have retired before a full life long period of making super contributions receive full and part pensions and pass away the cost of the pension decreases. This is both in real dollar terms and relative dollar terms per head. So the comparison is simply not a valid one Trying to work out what the cost of pensions would have b en without super being universally introduces regardless of choice would be proper comparison but almost impossible to calculate even by an actuary
Both me and my wife have worked fulltime beyond our preservation age.I worked till I was 74 yrs and my wife till 71 yrs.During this period neither of us were on Age Pension,Health Care or any other benefits.
Now that we are applying for Age pension they are penalising us for extra years when we wanted to simply improve our savings for later years.
In my opinion any savings that one does after preservation age should be TAX FREE and exempt from assets test.Having a cut-off $419,000 for full age pension is not enough in these days of high inflation.Wait till July and all tiers of government will increase tax without any consideration for retirerees.
While all this is happening the TOP end keep on increasing their nestegg.
Government should stop tax the easy target like Super but start to create more jobs by opening more factories and start to make our own clothing in Australia and other goods this will cut down unemployment. More people in the work force government will collect more tax and pay less jobseeker benefits.Also if there is a shortage of labour in this country why not introduce like in Europe that people in jobseeker allowance need to do between 30 and 40 days of work per year in order to get jobseeker payments. There are jobs out there like picking fruit, manual labour, hospitality etc, while they’re looking for their dream job
With government dishing out all sorts of benefits why going to work!!
The people that have cared and worked hard for this country and saved not to burden the government at retirement now they get penalised with all sorts of taxes .
I see nothing in comments to remind people that politicians, judges, heads of government departments, and who knows how many other manipulators who make more than $180,000 per year cunningly exempted themselves from paying the higher levy taxation for Medicare that the Gillard Government slipped into the taxation/superannuation act during her reign. We need to remind ourselves that many of these government employees also receive a larger percentage contribution from the public purse than the general public do from their private industry employers. Also, let’s not forget that these high earning public servants also play by different rules when it comes to being able to re-employ themselves after receiving their retirement package. The public via any means possible should start a movement to pressure the politicians and their like associates to totally eliminate all ‘poly perks’ that are discriminatory and do not align to the benefits received by the average Australian worker.