Superannuation – Opportunity for Further Reform

Australian workers earning $450 gross or more per month are entitled to a superannuation contribution of 9.5% of their gross salary under the Superannuation Guarantee legislation, with contributions capped at $25,000.

The single aged pension in Australia currently stands at $926.20 per fortnight / $24,080 per annum.  For couples, the aged pension is $698.10 each per fortnight or an aggregate of $1,396.20 per fortnight / $36,300 annually per couple.  There are some variations to these arrangements for couples who become separated through illness.

A proportion of retired Australians, in particular those who have self-managed superannuation funds, do not qualify for the government aged pension and therefore do not place themselves as dependents upon the government for financial their needs in retirement.

These retirees are required to pay tax on their fund earnings, including dividends, at the rate of 15%

In the past, superannuation contributions made within the framework approved by government have been taxed concessionally.  Notwithstanding, the ultimate fund available for an individual at the time of retirement is reflective of investment returns and those earlier sacrifices made with a view to securing an independent retirement.

Clearly it is in the government’s interest to provide working Australians with sufficient incentives to encourage and enable future retirees to live post-retirement without dependence upon the aged pension.

A particular strategy in this scenario would be for government to recognise the benefits to the nation by having a greater number of independent, self-funded retirees. Unfortunately, as a result of amendments to the Superannuation legislation in the 2016 budget, many current and future independent retirees are confronting unanticipated taxes and associated costs.

It is unwise for government to risk penalising independent retirees to a point where significant numbers of them find they must turn to the government for support.

A more pragmatic initiative from government would be to award independent retirees with the benefit of the deduction of a pension entitlement if they were calling upon the government for pension support.  Where the earnings on their funds are taxable, in our opinion these individuals should be able to claim a deduction equivalent to a pension entitlement.

Assuming the earnings on an individual’s accumulation fund were $50,000 on which they would nominally pay tax of $7,500 (15%), thus reducing their earnings to $42,500.  Under this scenario, our proposal would be that the independent retiree should be entitled as an individual “pensioner” to deduct approximately $24,080 from their earnings, leaving taxable income of $25,920 where their new tax obligations on the balance of their earnings would be $3,888 or a tax saving of $3,612.

This tax saving is modest in relation to the aged pension though recognises the contribution of the pensioner to savings by government by their not drawing upon a pension of nominally, say, $24,080, receiving a tax benefit of $3,612 or 15% of the pension that they might otherwise be entitled to.

While this does not remove the tax obligation of $3,888 which their fund would be required to pay, it acknowledges the independent retiree’s contribution to the government through the saving of more than $20,000 per annum in the aged pension.

If the earnings on a couple’s accumulated funds from which they drew a retirement benefit was $75,000 in a setting where they would have otherwise been entitled to a combined pension of approximately $36,300, then that amount would be deductable from their earnings leaving a taxable amount of $38,700 or a tax obligation of $5,805, not the $11,250, or indicatively an additional $105 per week to meet their living costs.

Again, this is a net cost to the government of $5,445 as compared with $36,300 which would be the couple’s entitlement under the aged pension.

While this does not eliminate the change in the taxing regime on superannuation earnings for self-funded retirees, it does acknowledge the significant saving to the government through their independence. 

It would also go towards encouraging those still engaged in the workforce to strive where possible towards self-funded retirement through more of a “carrot” than “stick” approach.

It is important for government to also be mindful of the very real sensitivities of the population to legislative changes when they are made retrospectively, particularly when such changes can have a dramatic and unanticipated impact on an individual’s livelihood and previously reasonable expectations.

These observations provide a supplement to the Coalition’s reduction in the marginal rate of tax being applied to wage earners on salaries of less than $120,000 per year and supported by the Labor opposition.  However, they propose an alternate construct for Australia’s retired and aging population who in parallel with younger members of society are likely to be incurring increased costs in relation to health, energy and general living.

In the Coalition government’s 2019/20 budget, a number of proposals were outlined.  Many of these modifications, while positive to retirees or those preparing for retirement, require Parliamentary approval.

Among the amendments were the following:

  • From 1 July 2020 Australians aged 65 and 66 will be able to make voluntary superannuation contributions, both concessional and non-concessional, without meeting the work test (a minimum of 40 hours over a 30 day period).
  • From 1 July 2023 the Aged Pension will only be available to individuals who have reached 67 years of age by that date.
  • The Government has proposed to extend access to the “bring forward” arrangements which presently allow those aged under 65 to those aged 65 and 66 to make 3 years’ worth of non-concessional contributions to their superannuation in a single year.
  • Further, the age limit for receiving spouse contributions is to go up from 69 to 74. At the time of the 2020 budget those aged 70 and over cannot receive contributions made by another person on their behalf.
  • The government also proposed a number of amendments which will streamline administrative requirements for the calculation of exempt current pension income. In this context, the government will allow a superannuation fund trustee with interests in both the accumulation of retirement phases during the income year to choose their preferred method of calculating exempt current pension income (ECPI).
  • The government also announced changes to personal income tax extending out to the 2024/25 Financial Year.

Most of the government’s recommendations have been endorsed by the Labor opposition.

We further note that the government proposed that a retiree couple aged 65 or 66 who sell their family home will be able to make contributions to their superannuation up to $1.2 million from the proceeds of the sale under new rules revealed in the budget.

While this proposal is clearly attractive, many commentators noted that the proceeds of such a sale could mean a reduction in aged pension entitlements and that retirees should also be aware that the family home is not counted in the assets test for the aged pension.

There were a number of other measures, all of which have been considered favourable or positive for those planning or in the early stages of their retirement.

One issue not acknowledged is that self-funded retirees’ pension arrangements were modified in the 2016 budget with earnings on investments outside the $1.6 million exempt portfolio to be taxed at 15% while all pension receipts will be tax free.

It is our judgement that this is an area where further initiatives which are unlikely to cost the government a substantial amount of money can be introduced in recognition of the significant savings being made to the nation through the contribution of independent retirees.