Taxation of Superannuation

Hazel BatemanCentre for Pensions and Superannuation

UNSW

February 2009

1. Alternative tax regimes for retirement savings

Tax points – contributions (T), fund earnings (T), benefits (T)

Alternative tax regimes

Comprehensive income tax – TTE, ETT

Expenditure tax – EET, TEE

Hybrid – TTT

Personal income tax OR specific super taxes

3

2. How we tax super?Different tax treatment by: • Employee• Employer/salary sacrifice• Self employed• Govt co-contribution• Spouse, childContribution caps

• Deductible contributions (15%)• Interest (15%)• Dividends (15%), imputation credits• Overseas income (15%), FTCS• Capital gains (10%)In retirement - earnings on underlying assets, taxexempt for – broadly defined - income streams satisfying min standards

Taxation depends on:• Tax status of super fund • Age – benefits tax free if 60+

4

3. How did we get here?Pre 1983 EEt: some contributions deductible, no tax on fund income,

very concessional taxation of lump sums (not income streams)

1983-1988 EET: some contributions deductible, no tax on fund income, lump sum taxes (15/30), some tax concessions for annuities

1988 TTT: 15% tax on deductible contributions, 15% fund income, lower lump sum taxes, 15% annuity rebate, RBLs

1988-2007 TTT: Increased complexity - age based contribution limits, superannuation surcharge, life and life expectancy income streams, TAPs encouraged under tax/transfer system

From 2007 TTE: Simpler Super - Benefit taxes removed if aged 60+, RBLs abolished, common tax/transfer arrangements applied to broadly defined complying income streams, contribution caps

5

4. What does the rest of the world do?

Country Contributions Fund Income Benefits Australia (TTE) yes yes no Canada (EET) no no yes Denmark (ETT) no yes yes Chile (EET) no no yes France (EET) no no yes Germany (EET) no no yes Hungary (EET) no no yes Japan (ETT) no yes (low rate) yes New Zealand (TTE) yes yes no Singapore (EEE) no no no Sweden (ETT) no yes (low rate) yes UK (EET) no no yes US (EET) no no yes

5. Issues arising from current super tax arrangements Flat rate super tax on contributions and fund earnings (15%), separate from income tax

Regressive (increasingly so over time)Tax concessions skewed to high income earners Complexity in seeking equity (contributions taxes, caps, rebates, co-contributions etc…)

Tax free benefits from 60+ huge concessions to high income retirees, difficult to design drawdown incentives (but has reduced EMTRs in retirement) Tax on savings in super (fund earnings) differs from other savings, and by age (< or> age 60) Future tax revenue?

6. Complications

Cannot consider super taxes in isolation

Super is one part of total retirement income

Mandatory and voluntary super

Tax concessions and adequacy

Integration with age pension – adequacy, means tests, EMTRs

Alignment with taxes on labour and other h/hold savings

Health and aged care expenses

7. Where to?Abolish super tax regime, align with personal income tax – TEE/EETFor example, EET

Reintroduces progressivity => equitySimpleImprove efficiencyFlexibility to provide incentives for super income streamsEquiv for taxed and non taxed fundsEnables risk sharingEncourages voluntary contributionsFuture tax revenue