Taxation of Superannuation Hazel Bateman Centre 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? Contributions (T) Fund income (T) Benefits (E) Different tax treatment by: Employee Employer/salary sacrifice Self employed Govt co-contribution Spouse, child Contribution caps Deductible contributions (15%) Interest (15%) Dividends (15%), imputation credits Overseas income (15%), FTCS Capital gains (10%) In retirement - earnings on underlying assets, tax exempt 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 1983EEt: some contributions deductible, no tax on fund income, very concessional taxation of lump sums (not income streams) EET: some contributions deductible, no tax on fund income, lump sum taxes (15/30), some tax concessions for annuities 1988TTT: 15% tax on deductible contributions, 15% fund income, lower lump sum taxes, 15% annuity rebate, RBLs TTT: Increased complexity - age based contribution limits, superannuation surcharge, life and life expectancy income streams, TAPs encouraged under tax/transfer system From 2007TTE: 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?

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 ( 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/EET  For example, EET Reintroduces progressivity => equity Simple Improve efficiency Flexibility to provide incentives for super income streams Equiv for taxed and non taxed funds Enables risk sharing Encourages voluntary contributions Future tax revenue