In a research paper released today, the institute has outlined a three-pronged approach that lead authors Richard Dunn, Michael Rice, Jennifer Shaw, and Alun Stevens said would generate debate about meaningful tax reform in Australia.
The paper also suggested introducing a tax on very high withdrawals in retirement and simplifying current tax rules for bequests, as well as applying the same tax treatment to concessional and non-concessional contributions once invested in a fund.
The authors argued the changes would not just simplify how superannuation is invested and allow consumers to have just one account, but would also improve efficiency by more actively encouraging retirees to draw down their superannuation to fund their retirement.
They suggested it could save about $1 billion in fund operational costs per year over the long term and improve equity between younger and older taxpayers.
Actuaries Institute chief executive Elayne Grace said the authors have proposed well-considered and holistic reforms and while views on superannuation tax reform vary widely, the paper will hopefully generate constructive debate about ways to improve equity within the system and deliver better value.
Additionally, the paper suggested that the existing system of a 15 per cent tax paid on superannuation earnings in the accumulation phase, with zero tax paid by retirees, could be replaced by a uniform tax of about 10 per cent.
This would enable a simpler system wherein people could have just one super account, build stronger balances from when they begin working, and save money on fees.
The second reform would involve taxing retirees who withdrew high amounts from their superannuation funds, whether as lump sums and/or pension benefits.
The thresholds could be set at high levels, such as $250,000 and $150,000 per annum, respectively, with compensation for any retirees adversely impacted provided through adjustments to the age pension.
The authors suggested these changes would encourage retirees to use their superannuation in retirement.
They also outlined how the current system of tax on bequests would be made fairer, with the 17 per cent tax applied at age 67 instead of the current age 60 and tax-free thresholds reflecting whether the payment is to a dependent or non-dependent beneficiary.
Finally, the authors proposed further simplifying the super system by removing the distinction between the tax treatments currently applied to concessional (tax-deductible) contributions and non-concessional contributions once invested in a super fund.
“We have a superannuation system that’s working, but it’s one of the most complex in the world,” Dunn said.
Shaw added that the proposals would simplify super for consumers and funds while improving equity across the system. Further, the reforms encourage people to spend their super by removing the attraction of using super to accumulate tax-free bequests.
“We believe the changes, particularly the tax on large benefits, are aligned with the proposed objective of super, which is to preserve savings to deliver income for a dignified retirement,” she said.
“They would leave the system largely unchanged for most retirees and still allow people to make large withdrawals for their immediate needs, for example paying off a mortgage or healthcare.”
Simplification never means that. Less is better. Stop the politicians meddling in areas most of them have limited knowledge of.
If the government want to find money, transition defined benefits to accumulation schemes. Take the tax and use it wisely to invest in public housing.
Great thought leadership! If this was to be seriously considered (ie; a fin services minister that understands their portfolio), then I would add another potential alternative. Make super fund earnings tax free and tax withdrawals at marginal tax rates. It would mean everyone would continue to lodge personal tax returns but with the advances being made by the ATO tech systems, pre-fill would make this very straight-forward for most. The system is mature enough that the number of de-accumulators would make up for the lack of tax revenue from the accumulators. Just a thought!
The approach you suggest was in fact how the system worked in Australia until Keating brought in contributions and earnings tax on accumulations and Costello removed tax on benefits to the retired. It is in fact a significantly more efficient and equitable system than the one we have now. The only issue with the approach is for governments who get no tax for a long time. Which is why Keating changed it.
Costello changed it in order to cement the Liberal Party’s standing with Baby Boomers and, as a result, created a significant inequity. The very people now putting a burden on the Health Care and Aged Care systems pay no tax on their primary source of income leaving it to the dwindling base of workers to cough up.
A change back was considered, but the complications of implementation are such that there is no practicable way to do it equitably while maintaining fiscal aggregates. Going back to the nice smooth egg would be wonderful, but it unfortunately got scrambled by two Treasurers.