Changes to super tax concessions could well prove too hard

The difficulties involved in attempting to change the age pension assets test also complicate the task of altering taxation assistance to superannuation. For example, a recent proposal to replace the current tax concessions by a universal non-income tested national superannuation scheme (as in New Zealand) could well create as many or even more problems than it solves. 

The underlying situation is that the steady ageing of our population has increased the upheavals involved with reducing or removing the superannuation tax concessions. Doing just this was seriously investigated 40 years ago when, with a relatively young population, the government would have been able to make the changeover with minimum disruptions to personal retirement plans. At that time, the government was not prepared to contemplate the changes required to make the scheme financially viable because they would have increased tax (or insurance) payments by the working-age population. 

Today there's a much larger aged population living longer and a smaller percentage of working-age population, meaning a universal insurance or age pension would involve even higher taxes. Even if the administrative difficulties of a changeover could be managed, by past experience the political complications of making retrospective changes adversely affecting many millions of taxpayers could prove insurmountable. 

In the past, all changes have applied only to the future accrual of benefits. Successive governments have continued to pursue a combination of income and asset-testing access to the age pension and to encourage self-provision via taxation assistance to superannuation savings. In this process, access to the age pension and superannuation benefits has been tightened. 

Up until 1983, superannuation benefits were available as a lump sum at any age when changing employment, with only 5 per cent of the lump sum received subject to tax. Today, younger people can generally only gain access to their super after age 60, upon death or with a permanent disability. The tax payable was also substantially increased but only in respect of benefits accruing after July 1, 1983. 

Further changes followed until a major alteration in 1999 denied access to all future benefit accruals until changing jobs after 60 or retiring after 55. The 2007 introduction of tax-free withdrawals after age 60 removed the complexity of pre- and post-1983 benefit components but greatly increased the reward for building up savings that were inaccessible until at least that age. 

If the rules were changed to again tax some or all of pension and lump-sum withdrawals after age 60, this would retrospectively impact on all superannuation fund members' retirement plans. To raise substantial additional revenue, retrospective changes would be required. As in the past, any such proposal could well end up in the too-hard basket.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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