Superannuation, the ultimate government cash cow?

McLovin · 12 February 2013

sptrawler said:
McLovin that was a good question from Julia, you didn't answer it.

I don't have any figures, unfortunately.

Probably be good to measure the total cost to the government that someone 65+ incurs, rather than just whether they draw a pension. Health care would be a huge cost, even with private health insurance most of the cost is still borne by the government.

sptrawler said:
Also, a while back, I asked what you thought was a reasonable amount in todays fiscal climate to support a sustainable pension.
I posted Asics calculator to support my theory that $2m wasn't obscene, so what do you think?

Like I said up thread, if the point of superannuation was to provide someone with a basic pension so that the government didn't have to, then anything above that level should be fair game for tax. I realise that won't be popular with many/any.

Here's the problem (that I see): Let's say there's two people, one is employed and the other runs a small business. At retirement person A has $2m in superannuation and person B sells his business for $2m at retirement. Under the current rules person B who has worked just as hard for his money will have to pay tax when he sells and then will continue paying tax on his earnings until the day he dies (or at least for 12+ years until he's moved it all into super). Person A will live tax free for life. Does that seem fair?

sptrawler said:
Not putting you under the pump, but it keeps the thread going and obviously from the visits, it's popular.
Your comments are measured and well founded, also appreciated.

It's certainly an interesting discussion.

craft · 12 February 2013

Defiantly an interesting discussion.

I can bring just one firsthand account.

I’m a bit of a sucker for a tax shelter and so super has appealed.

We now have more in our SMSF then the amounts mentioned here. The majority has accumulated via earnings on early deductible contributions; only around 2% is after tax contributions.

The situation now is that for every 100K of grossed up dividend earnings received in super we pay $31,500 less in tax then if those earnings were in our own name.

With 18 years until access and then a tax free rate after that, the projected amount of tax avoided under current regime is ridiculous even a little bit scary. Not having a reasonable benefits cap is ridiculous.

Given the prior inducements to get money in I think a fair way to handle a reasonableness cap is to release any money above the cap rather than penalty rates or locking it up and still applying marginal rates. Excess money kicked out of super is by default then treated as any other asset/income.

With a reasonableness cap in place you could soften the contribution caps to make them more suitable for people with an uneven savings capacity over their lifetimes (kids/periodic work etc)

The old RBL used to be about 12 times ordinary earnings for lump sum or 24 times for pension and that sort of number sounds about right to me – super tax advantages should only be in place to offset pension replacement not to shelter large wealth.

Julia · 12 February 2013

McLovin said:
Here's the problem (that I see): Let's say there's two people, one is employed and the other runs a small business. At retirement person A has $2m in superannuation and person B sells his business for $2m at retirement. Under the current rules person B who has worked just as hard for his money will have to pay tax when he sells and then will continue paying tax on his earnings until the day he dies (or at least for 12+ years until he's moved it all into super). Person A will live tax free for life. Does that seem fair?

Couldn't person B own his business via a SMSF, thus receiving the same tax advantages as person A?

I understand your irritation at being prepared to provide for your own eventual retirement and still pay tax at your usual rate, but that's just one of life's choices, I guess. You (rightly imo) are wary of governments having their sticky fingers all over your money so prefer to keep savings outside of Super. Result of that choice is you don't get the incentive available to those who are hoping like hell it will still be their money when they get to retirement.

sydboy007 · 12 February 2013

craft said:
The old RBL used to be about 12 times ordinary earnings for lump sum or 24 times for pension and that sort of number sounds about right to me – super tax advantages should only be in place to offset pension replacement not to shelter large wealth.

Seems like a fair compromise. Maybe need to look at the actuarial tables and determine the life expectancy of the individual and add on a few years to give a reasonable chance of the money out living you, and set the limit that way?

Super has been hijacked by the finance industry and been morphed from minimising the aged pension costs on tax payers to being a tax shelter for those able to take advantage of it - currently that is not much of the tax paying population since the tax breaks are so biased towards a small section of the community.

The other thing that is rarely discussed is that the more tax is forgone on super, the higher current general taxation needs to be. I'd argue that lower income taxes now means a larger economy in 20 years time, which makes it easier to afford any pension payments required at that time.

With people still wary of taking on more debt, the growth rates of the early 2000s isn't going to return, so GST and corporate taxes are going to be growing at trend, along with retail spending chugging along at around income growth rates. All this makes balancing budgets much harder as revenue is lucky to rise much more than CPI.

I do think something needs to be done to allow people to sock away more in their later years of life. I certainly wont have any interest in voluntarily contributing to super until 55+ and prob more like 60+. The RBL system allowed this in a much fairer way than the current 25K annual limit now imposed. I'd say it would be hard to go back to a version of the old system. The howls from the finance industry would make the miners seem like whisperers.

Vixs · 12 February 2013

McLovin said:
I don't have any figures, unfortunately.

Probably be good to measure the total cost to the government that someone 65+ incurs, rather than just whether they draw a pension. Health care would be a huge cost, even with private health insurance most of the cost is still borne by the government.

Like I said up thread, if the point of superannuation was to provide someone with a basic pension so that the government didn't have to, then anything above that level should be fair game for tax. I realise that won't be popular with many/any.

Here's the problem (that I see): Let's say there's two people, one is employed and the other runs a small business. At retirement person A has $2m in superannuation and person B sells his business for $2m at retirement. Under the current rules person B who has worked just as hard for his money will have to pay tax when he sells and then will continue paying tax on his earnings until the day he dies (or at least for 12+ years until he's moved it all into super). Person A will live tax free for life. Does that seem fair?

It's certainly an interesting discussion.

Your super vs business example is excluding the Small Business CGT Concession and Retirement Exemption, which is designed for just such a scenario and works quite well (besides being a bit of a mindf%#k of complexity like much of the tax legislation). It would allow a large portion of that $2m to be plonked straight into super CGT free, with further funds being able to be contributed depending on age.

There is also an argument to be made that if they can't get that all into super at retirement age, maybe they should have been paying themselves a better wage and super contribution all along.

It's not something the government has ignored, it's something that Australian's with the attitude that all advisers are bad advisers have ignored.

sydboy007 · 12 February 2013

sptrawler said:
McLovin that was a good question from Julia, you didn't answer it.

Also, a while back, I asked what you thought was a reasonable amount in todays fiscal climate to support a sustainable pension.
I posted Asics calculator to support my theory that $2m wasn't obscene, so what do you think?

Not putting you under the pump, but it keeps the thread going and obviously from the visits, it's popular.
Your comments are measured and well founded, also appreciated.

I couldn't find Julia's original quote

Here's some graphs I had used in another thread.

i think they highlight some of the issues with the current super system.

Admittedly they don't all apply now as tax rates and the lower end have changed and limits on people earning above 300K now apply, but it does show how unbalanced the tax benefits are.

It just seems ludicrous to give someone from 1/3 to 3/4 of the aged pension as an incentive to not receive the aged pension, especially when it's very likely they would have assets at a level that would stop them receiving it. Can I put my hand up for that? I'll gladly sign my rights away to any Govt assistance when I retire if they gave me 1/3 of the aged pension every year until I retire

So in the 2009-10 financial year we had

The bottom 36.9% of tax payers with just 9.8% of the super tax concession

The top 20.4% of tax payers raking in 53.7% of the super tax concessions

If we can't change the super system, then I'd argue this should mean any future income tax cuts should be targeted at those earning under 80K.

Before I hear howls of protests that 80K isn't a high income, it does beat around 80% of income earners. You might not be in 1% territory, but you are up there.

Ves · 12 February 2013

Vixs said:
Your super vs business example is excluding the Small Business CGT Concession and Retirement Exemption, which is designed for just such a scenario and works quite well (besides being a bit of a mindf%#k of complexity like much of the tax legislation). It would allow a large portion of that $2m to be plonked straight into super CGT free, with further funds being able to be contributed depending on age.

Isn't it just tax-free upon retirement (above 55) if it is an active business asset and has been used for 15 years?

http://www.ato.gov.au/businesses/content.aspx?doc=/content/00106318.htm

Small business 15-year exemption

If your business has owned an asset for 15 years and you are aged 55 years or over and are retiring, or if you are permanently incapacitated, you won't have an assessable capital gain when you sell the asset.

The only difference in the two scenarios, as McLovin rightly alludes to, is the fact that the $2 million will then need to be invested somewhere, and the earnings will be subjected to normal earnings rates outside of super.

I believe you could only get $500,000 of this money into super with the exemptions, and additionally you could contribute more as non-concessional contributions, and be maxed out at $450,000 over the first 3 years. Once you're over 65, you're dead stuck if you are retired and cannot contribute.

prawn_86 · 12 February 2013

sydboy007 said:
Before I hear howls of protests that 80K isn't a high income, it does beat around 80% of income earners. You might not be in 1% territory, but you are up there.

Is that table saying you are in the top 3% of wage earners if you earn over 180k??

sydboy007 · 12 February 2013

prawn_86 said:
Is that table saying you are in the top 3% of wage earners if you earn over 180k??

Pretty much.

I wish the media and Govt would talk about median rather than average wages. When I was studying high school economics the avg wage put you in the top 30% of income earners. I dare say that ratio hasn't changed for the better over the last couple of decades.

Vixs · 12 February 2013

Ves said:
Isn't it just tax-free upon retirement (above 55) if it is an active business asset and has been used for 15 years?

http://www.ato.gov.au/businesses/content.aspx?doc=/content/00106318.htm

The only difference in the two scenarios, as McLovin rightly alludes to, is the fact that the $2 million will then need to be invested somewhere, and the earnings will be subjected to normal earnings rates outside of super.

I believe you could only get $500,000 of this money into super with the exemptions, and additionally you could contribute more as non-concessional contributions, and be maxed out at $450,000 over the first 3 years. Once you're over 65, you're dead stuck if you are retired and cannot contribute.

It doesn't need to be 15 years, the 15 year rule is one way of qualifying, but there are others. The $500,000 is the capital gain amount, and can be discounted using various discounts.

As I said, it's complex and the best option is to seek competent professional advice, but the option is there.

Retiring small business owners are not left high and dry.

drsmith · 12 February 2013

sydboy007 said:
The bottom 36.9% of tax payers with just 9.8% of the super tax concession

The top 20.4% of tax payers raking in 53.7% of the super tax concessions

If we can't change the super system, then I'd argue this should mean any future income tax cuts should be targeted at those earning under 80K.

To some extent, I don't disagree with the problem, but I do with that solution.

Biasing tax cuts to the lower end increases marginal rates for middle income earners. The Carbon tax compensation is a perfect example of this.

craft · 12 February 2013

sydboy007 said:
So in the 2009-10 financial year we had

The bottom 36.9% of tax payers with just 9.8% of the super tax concession

The top 20.4% of tax payers raking in 53.7% of the super tax concessions

In addition to your very good points

Even with very moderate returns more concession will come from the flat earnings rate tax of 15% over the entire accumulation phase than from total contribution concessions – the advantage to high balances is also totally skewed.

Ves · 12 February 2013

Vixs said:
It doesn't need to be 15 years, the 15 year rule is one way of qualifying, but there are others. The $500,000 is the capital gain amount, and can be discounted using various discounts.

As I said, it's complex and the best option is to seek competent professional advice, but the option is there.

Retiring small business owners are not left high and dry.

Of course - sorry I should have qualified it by saying "the best case scenario is..."

I'm glad I don't do business tax any more. The CGT concessions are, as you said, complex. A nightmare, really.

McLovin · 12 February 2013

Julia said:
Couldn't person B own his business via a SMSF, thus receiving the same tax advantages as person A?

Not if my understanding of SMSF's is correct.

Unless an exception applies, trustees generally can't:

...

lend to, invest in or lease to a related party of the fund (including related trusts) more than 5% of the fund's total assets (these are called 'in-house assets').

http://www.ato.gov.au/superfunds/content.aspx?menuid=0&doc=/content/00251857.htm&page=23&H23

I assume that would cover owning a small business through an SMSF.

Julia said:
I understand your irritation at being prepared to provide for your own eventual retirement and still pay tax at your usual rate, but that's just one of life's choices, I guess. You (rightly imo) are wary of governments having their sticky fingers all over your money so prefer to keep savings outside of Super. Result of that choice is you don't get the incentive available to those who are hoping like hell it will still be their money when they get to retirement.

My irritation isn't that I'm paying tax it's that others aren't. I have no problem with paying tax, at all. I think it's what FDR called enlightened self-interest. But I think on a point of principle the tax system should be equal. If you remember the discussion we had a few weeks ago about family tax benefits, my sentiments were very similar; two people earning the same amount from the same source should pay the same amount of tax.

I'm not trying to have a go at people, like yourself and sptrawler, who have diligently saved and contributed toward their retirement under the current system. If I was 20 years older I'd probably be in the same boat.

Ves said:
I believe you could only get $500,000 of this money into super with the exemptions, and additionally you could contribute more as non-concessional contributions, and be maxed out at $450,000 over the first 3 years. Once you're over 65, you're dead stuck if you are retired and cannot contribute.

Yeah, this is my understanding too, which is why I said over 12+ years they may be able move the cash into shares.

Sydboy, those are some very interesting graphs! It really shows who is receiving the benefits!

medicowallet · 12 February 2013

sydboy007 said:
Here's some graphs I had used in another thread.

i think they highlight some of the issues with the current super system.

Admittedly they don't all apply now as tax rates and the lower end have changed and limits on people earning above 300K now apply, but it does show how unbalanced the tax benefits are.

It just seems ludicrous to give someone from 1/3 to 3/4 of the aged pension as an incentive to not receive the aged pension, especially when it's very likely they would have assets at a level that would stop them receiving it. Can I put my hand up for that? I'll gladly sign my rights away to any Govt assistance when I retire if they gave me 1/3 of the aged pension every year until I retire

So in the 2009-10 financial year we had

The bottom 36.9% of tax payers with just 9.8% of the super tax concession

The top 20.4% of tax payers raking in 53.7% of the super tax concessions

If we can't change the super system, then I'd argue this should mean any future income tax cuts should be targeted at those earning under 80K.

Before I hear howls of protests that 80K isn't a high income, it does beat around 80% of income earners. You might not be in 1% territory, but you are up there.

These are the kinds of arguments left wingers tend to make.

How about providing the figures of how much net tax the bottom 36.9% of taxpayers paid and the what the top 20.4% paid.

It should NOT be everyone's right to freeload off high income earners all their life.

Heaven forbid a leader actually offering incentives for people to improve their income, as opposed to offering bribes to gain votes.

Your kind of logic, and unfortunately I guess this entitlement attitude is representative of the majority of low-medium income earners, is flawed and pathetic.

I wish people would make the kinds of sacrifices that high income earners make, as opposed to rewarding governments who flog the highest earners the most.

Sigh

MW

qldfrog · 12 February 2013

In France for the last 30 years, this has been the way:
"flog the bastards" (ie everyone richer than 'us') with taxes-> you see the results very quickly economically

this is easy for left politicians as you will always find a majority (>50%) to vote for you and agree to parasite a higher 40% minority, the trouble is that after a few decades of this regime, the 40% richest class is actually quite poor and so is the whole country...

sydboy007 · 12 February 2013

medicowallet said:
These are the kinds of arguments left wingers tend to make.

How about providing the figures of how much net tax the bottom 36.9% of taxpayers paid and the what the top 20.4% paid.

It should NOT be everyone's right to freeload off high income earners all their life.

Heaven forbid a leader actually offering incentives for people to improve their income, as opposed to offering bribes to gain votes.

Your kind of logic, and unfortunately I guess this entitlement attitude is representative of the majority of low-medium income earners, is flawed and pathetic.

I wish people would make the kinds of sacrifices that high income earners make, as opposed to rewarding governments who flog the highest earners the most.

Sigh

MW

Not sure if you're saying I'm a left winger - i'm very much a centrist that sees some good center right and left policies out there.

As for being a low medium incomer, if you'd read some of my other posts you'd know I'm in the roughly top 15% of income earners, so I'm not basing my opinion out of envy, rather out of a sense of efficiency.

How much income in retirement should someone be entitled to build up in a system that has minimal tax? At what point does a system like that start to cost more than the problem it's solving?

Quite often those who lean towards the right want to see the top tax rates lowered. My argument is if you add a lot of the benefits that top income earners can take part in, super being one and the halving of the CGT, then I think you'll see most are not paying anywhere near the top tax rate on their income.

As for an entitlement attitude, not sure how you came to that conclusion. I grew up poor, scrounged my way through uni, and worked quite hard to get to where I am. So how about you post some factual information rather than biased claims that really add little to the discussion?

ps. I seem to remember it was the Honorable Howard who perfected the entitlement mentality of the middle classes.

Miss Hale · 12 February 2013

qldfrog said:
In France for the last 30 years, this has been the way:
"flog the bastards" (ie everyone richer than 'us') with taxes-> you see the results very quickly economically

this is easy for left politicians as you will always find a majority (>50%) to vote for you and agree to parasite a higher 40% minority, the trouble is that after a few decades of this regime, the 40% richest class is actually quite poor and so is the whole country...

As Maggie Thatcher said, ""The problem with socialism is that eventually you run out of other people's money".

medicowallet · 12 February 2013

sydboy007 said:
Not sure if you're saying I'm a left winger - i'm very much a centrist that sees some good center right and left policies out there.

As for being a low medium incomer, if you'd read some of my other posts you'd know I'm in the roughly top 15% of income earners, so I'm not basing my opinion out of envy, rather out of a sense of efficiency.

How much income in retirement should someone be entitled to build up in a system that has minimal tax? At what point does a system like that start to cost more than the problem it's solving?

Quite often those who lean towards the right want to see the top tax rates lowered. My argument is if you add a lot of the benefits that top income earners can take part in, super being one and the halving of the CGT, then I think you'll see most are not paying anywhere near the top tax rate on their income.

As for an entitlement attitude, not sure how you came to that conclusion. I grew up poor, scrounged my way through uni, and worked quite hard to get to where I am. So how about you post some factual information rather than biased claims that really add little to the discussion?

ps. I seem to remember it was the Honorable Howard who perfected the entitlement mentality of the middle classes.

1. Yes Howard and Costello gave too large tax breaks, which has contributed to the housing bubble etc.

2. I NEVER said that you possess an entitlement attitude, however I did infer it is what I suspect the majority of lower to medium income earners possess.

3. Get on the bandwagon, that way your low income could become higher.

4. Isn't it easy to come up with policies that don't really affect you, but affect higher income earners.
How about we get rid of the tax free threshold and fund extra super contributions for all?

5. My argument and the reality is that these high income earners, even with their taxation strategies still pay truckloads more than the other taxpayers, so why flog them more?

MW

sptrawler · 12 February 2013

McLovin said:
Here's the problem (that I see): Let's say there's two people, one is employed and the other runs a small business. At retirement person A has $2m in superannuation and person B sells his business for $2m at retirement. Under the current rules person B who has worked just as hard for his money will have to pay tax when he sells and then will continue paying tax on his earnings until the day he dies (or at least for 12+ years until he's moved it all into super). Person A will live tax free for life. Does that seem fair?

It's certainly an interesting discussion.

Small business has a special provission whereby they can reduce cgt and put $1m into super.

These concessions are complex but the recent changes have made them somewhat simpler and accessible to a wider range of business owners.

It's possible to sell your business and pay no tax under the new rules around super and business capital gains tax concessions.

For example if you sold your business for $2 million, you could avoid any tax by putting $500,000 into super.

Under the new super rules, most people are limited to annual non-concessional (after-tax) contributions of $150,000 a year, or $450,000 over three years if you're under 65. But there are small business concessions that allow an extra contribution cap up to $1 million (indexed) - which means you could sell your small business and contribute up to $1.45 million in one year. To qualify for any of the small business CGT concessions, you must first satisfy several basic conditions. These conditions and further information are detailed on the ATO web site at www.ato.gov.au

Whilst the concessions can be very useful, careful consideration should to be given to how you structure your business, and the timing of its sale, to make the most of them. It's essential to obtain advice when both planning and selling your business.

It seems there are tax breaks everywhere. No wonder it is costing so much.

Getting back to tax on the pension. If it is taxed as income it basically puts a brake on withdrawls, the more you pull out the more exit tax you pay.

You've got to love this forum don't you? There is no way I can talk to the missus about this stuff, she'd just tell me to go away and let her read her book.lol

Superannuation, the ultimate government cash cow?

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