Tax and Super SA Pensions
Warning and disclaimer! on this page, and others to which is linked, information and opinions are provided in good faith to assist interested people assess prospects for various changes that could affect future retirement incomes in Australia. It is for every reader to make up his/her own mind about their validity, likelihood or accuracy.
Future possibilities for taxation of retirement incomes
Just before the 2019 Federal Budget night of April 2nd, 2019 the Grattan Institute’s Danielle Wood published a document entitled:
Expect a budget that breaks the intergenerational bargain, like the one before it, and before that
This document can be read in full by clicking here
In a nutshell Ms Wood makes the claim that the current set of retired Australians are paying too little tax and generating expenses for younger Australians who are paying much more tax than they do. After discussing a number of issues related to this claim she asked:
“So what would a budget that seriously tackles these issues look like?” And then answered, saying:
“First, it would wind back some of the tax concessions for older Australians who can afford to make a contribution. It is simply no longer sustainable for comfortably off older Australians to opt out of taxes for two or three decades they are in retirement. The obvious place to start would be a tax on superannuation earnings, and winding back the seniors and pensioners tax offset.
The politics isn’t easy. The reaction to Labor’s franking credit policy gives a sense of what governments face when trying to wind back these transfers. The public hearings for the inquiry into the franking credits policy sometimes looked more like the frontline in a generational war than a staid government inquiry.”
No political party is going to come out in clear support of Ms Wood’s claim that an increasing proportion of Australia’s voters (over 60s) are getting it too easy and something needs to be done to restore intergenerational fairness. But there are some objective facts to indicate that both the Coalition and Labor do indeed agree with her.
Trends in taxation and means testing of retirement incomes
The last 20 years have seen:
- In 1999 the introduction of self-managed superannuation funds
- In 2001 refunding of unused franking credits
- In 2007 non-taxable superannuation pensions for most, with a 10% tax offset for untaxed-source pensions. Those with non-taxable superannuation income could also use a tax-free threshold of $18,200 for other, taxable income. The non-taxable superannuation income does not get counted for the medicare levy.
- In 2007 the replacement of lifetime reasonable limits with annual contributions limits.
All the above changes were made by Coalition governments
- In 2000 the taper rate for the age pension income test reduced by a Coalition government from 50% to 40%
- In 2007 the taper rate for the age pension assets test reduced by the Coalition from $3 to $1.50 per fortnight
- In 2007 the Coalition, as well as introducing non-taxable superannuation pensions, allowed some defined benefit pensions to have a large additional component that was not assessed as income under the age pension income test.
- In 2009 the income test taper rate was moved back to 50% by Labor
- In 2009 Labor introduced a staged increase in the age pension qualifying age from 65 to 67 years.
- In 2012 Labor restricted the dependant spouse tax offset to spouses born before 1952.
- In 2015 the Coalition abolished the dependant spouse tax offset completely
- In 2015 the Coalition applied a 10% cap to the amount of a defined benefit pension that was not counted in the age pension income test
- In 2017 the asset test taper rate was moved back to $3 per fortnight by the Coalition.
- In 2017 the Coalition acted to limit to $1.6 million the account balance for a superannuation pension that did not attract tax on its earnings. Amounts over $1.6 million became subject to tax on earnings. As part of this change defined benefit pensions had an asset value assigned to them to determine how much a person receiving one of these pensions could have deployed to fund an additional source of income in the form of an account-based pension.
All this suggests that recent Labor and Coalition governments both see the changes made in the years leading up to 2007 as unsustainable with both now trying to wind back those changes. The latest proposal of this type is Labor’s intention to severely restrict refund of unused franking credits.
The difficulty all Governments since 2007 have faced, and will continue to face, is that a very large fraction of Australia’s retirees (including people in receipt of Super SA and CSS pensions) gained from the changes made to taxation and means testing leading up to 2007.
Implications for people with Super SA and CSS pensions
Super SA and CSS pensions are taxed, and means tested, differently from most other retirement income streams. Anyone receiving a Super SA or CSS pension will be paying both tax and the medicare levy once the pension value exceeds $35,000. It is going to be important for the organisations representing them to keep reminding governments of this fact. Otherwise people receiving these modest pensions might be adversely affected by measures aimed at reducing superannuation tax concessions flowing to much higher income retirees who pay little or no tax or medicare levy.
Australia’s dual system for taxation of superannuation
1. The two different superannuation taxation regimes existing in Australia are:
a) untaxed-source schemes. The state pension scheme (and most other South Australian public sector schemes) is in this category. These schemes pay no contributions or earnings tax. But when the scheme pays benefits the individual receiving the benefit pays more tax than otherwise would be the case. Pension benefits are taxed, and assessed for the medicare levy as normal income with a 10% tax offset on the pension able to be claimed after age 60. Any additional taxable income, including age pension, is added to the superannuation pension and taxed at the marginal rate for the combined income which is commonly 32.5%. Commonwealth Superannuation Scheme (CSS) pensions are also paid from an untaxed source. Only public sector superannuation schemes can operate as untaxed-source schemes.
b) taxed-source schemes. These schemes have been the norm in Australia since 1988. All private sector schemes are taxed-source schemes and so are most public sector schemes. Prior to 1988 all superannuation schemes paid no tax on contributions received or tax on the earnings of assets they held. From 1988 the schemes have paid 15% tax on contributions and up to 15% on earnings as a benefit accumulates. This application of taxation to superannuation contributions and earnings in 1988 brought the current dual system into existence. The taxation payable by taxed-source schemes reduces the gross value of the benefit that can be paid at retirement. But then pension benefits are completely tax free after age 60 and the medicare levy does not apply to the pension income.
Any additional taxable income, including age pension, is taxed, and assessed for the medicare levy, as if it is the only income. A person with a taxed-source superannuation pension can have $18,200 of additional, and taxable, income (including age pension) without paying any tax or medicare levy on that income. A person with an untaxed-source superannuation pension, and another $18,200 of taxable income, will commonly pay more than $6000 tax and medicare levy on that additional income.
The South Australian state pension scheme is unusual in that all its assets backing pensions are managed in the untaxed-source superannuation environment. This includes assets purchased with member contributions paid from after-tax income and the earnings of those contributions. By holding state pension scheme assets in the untaxed-source superannuation environment South Australian governments have avoided paying tax on the scheme’s earnings before pensions commence and we acknowledge that doing this allows higher pensions to be paid in retirement. But the retirement pensions, and any additional income, including age pension income, are subject to higher tax rates. So, the question is- which is better, a larger gross income on which more tax is paid or a smaller gross income on which less tax is paid?
If a person with a Super SA or CSS pension is currently paying no tax or medicare levy they cannot gain from a reduction in their pension unless tax offsets they are currently making use of are abolished. This is a possibility and winding back of the Senior Australian and Pensioner Tax Offset is suggested in the Grattan Institute document summarized at the start of this discussion.
If a person is paying a significant amount of tax and medicare levy then they can gain from a reduction in their pension if the reduction has been used to fund conversion of some of the pension to taxed-source income. This will depend on how big a reduction in the pension is required to do this. SA Superannuants is currently exploring this possibility with the South Australian State Treasurer. The Treasurer knows that we would only cooperate with changes that are voluntary for every member. He also knows we accept that any change must be cost neutral for the State Government and must be capable of providing significant increases in net incomes for a significant number of pension scheme members. If any one of these conditions cannot be met then the Association would agree that the scheme should be left to run out as it is now.
Click here to read a discussion of :
- the effect that reducing Super SA pensions, to increase the proportion that is non-taxable, would have on net income for a range of pension values;
- what might happen to Super SA and CSS pensions in the near future if governments continue acting to rein in the cost of superannuation tax concessions.