Superannuation - Daryl Dixon

The Public Sector Informant (Canberra Times), July 2010

I received some interesting feedback from readers about my analysis, in last month's Informant, of the taxes faced by people over 60 who receive unfunded pension income compared with those who receive funded pensions. In early 2007, bipartisan support existed to remove this inequity. At the time, the Senate's Economics Committee unanimously recommended "that the government should consider separately assessing, for taxation purposes, superannuation income streams and additional assessable income".

This recommendation, as discussed last month, would have ensured that, after the age of 60, all retirees were subjected to income tax on their non-superannuation income in a consistent manner. As tax law now operates, recipients of funded pension income (about 85 percent of retired superannuants) pay significantly less tax on their extra income from investments and work than unfunded pension recipients, including most federal employees. Apart from the resulting higher tax burdens on unfunded pension recipients with other income, these tax arrangements interfere with the decision of retired public servants to return to or continue work after the age of 60.

In the subsequent debate on this report in the House of Representatives, then opposition MP Wayne Swan noted the unanimous agreement of the Senate committee. In the Senate, Swan's Labour colleague and member of the committee, Nick Sherry, moved Labor's second reading amendment, which also referred to the Economics Legislation Committee's unanimous recommendations to address the issues raised in the report. Unfortunately for members of unfunded super schemes, neither the Coalition nor the current Government have acted on its recommendations to date.

Former public servants, many of whom are encouraged by the CSS's 54 years and 11 months resignation benefits to retire or change employment at an early age, continue to be subject to heavier tax burdens after the age of 60 than other, similarly placed taxpayers. As the tax laws now operate, federal government pension recipients are penalised after the age of 60 if they receive other personal income in their own names. There are strategies available to help reduce these tax penalties, including transferring private investment assets into funded superannuation schemes, or transferring assets into a spouse or partner's name.

In both cases, however, there can be tax impediments, including stamp duty for transfers of property and capital gains tax on assets bought after September 19, 1985. Even when assets are given to a spouse or partner, the capital gains tax legislation deems, for capital gains purposes, that the assets gifted have been sold at the prevailing market price. For single retirees with no partner, the only option available to reduce the tax bill on investment income is to transfer the assets into a funded superannuation scheme.

When the investment assets owned include properties, there is a further complication in transferring these assets into a super fund; for example, a self-managed fund. The superannuation regulations permit the transfer of listed securities owned by a fund member into such a self-managed fund. But unlisted assets, including rental residential property, cannot be transferred.

Investors wanting to transfer residential property into a super fund are thus compelled to sell the properties they already own and then rebuy similar properties in the self-managed fund. These complications highlight the need for public servants to plan ahead to ensure a tax-effective retirement. The options available include using salary-sacrifice contributions to a second fund during working life. Doing this can help reduce tax bills while earning a salary before retiring and, after leaving the public service, retaining that second superannuation fund as the main or only retirement investment vehicle.

Investment strategies such as those outlined above can help reduce the effect of the tax discrimination against unfunded pension recipients receiving other income. But, inevitably, poorly informed or ill-advised public servants who do not plan ahead for retirement will end up paying more tax than members of funded super schemes in similar financial situations. This will remain the situation until a future government acts on the 2007 recommendation of the Senate Economics Committee to level the playing field for all retirees over the age of 60 who receive non-super income.


Daryl Dixon is executive chairman of Dixon Advisory and Superannuation Services.
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