The introduction of a uniform tax on superannuation earnings in the accumulation and retirement phases would remove some of the complexity from the system, a paper from the Actuaries Institute has claimed.
The “Super Tax Reform – Sensible Changes for a Fairer System” paper put forward a three-pronged tax reform package, with its first recommendation being that a uniform tax of 10 per cent is applied to superannuation earnings in the accumulation and retirement phases.
“A single rate of tax on earnings (including realised capital gains) would greatly improve equity across the system. Retirees would pay higher taxes, but those not yet retired would enter retirement with higher balances from which to fund this extra tax,” the paper stated.
“Implementing a uniform tax rate across accumulation and retirement would also mean that all members could have a single account. Retirees would not need to juggle two accounts with different rules and the significant complexities (and costs) of transfer balance caps would be removed.”
The second recommendation proposed taxing retirees who withdrew high amounts from their superannuation funds, whether as lump sums and/or pension benefits after they had reached specific thresholds under which any withdrawal would still be tax-free.
“The thresholds could be set at high levels, such as $250,000 and $150,000 per annum, [for lump sum and retirement income benefits] respectively, with compensation for any retirees adversely impacted provided through adjustments to the age pension, for example, which would encourage retirees to use their superannuation in retirement,” the report stated.
The final plank of reforms floated the idea of same tax treatment of concessional and non-concessional contributions once they have entered into a superannuation fund.
“Both types [of contributions] are subject to annual limits and are treated differently once made to a fund. This separation of contributions adds unnecessary complexity to the system and encourages perverse strategies that do not improve system outcomes,” the report said.
Report co-authors Mercer principal Richard Dunn and Actuaries Institute strategy, risk and transactions director Jennifer Shaw said the changes would improve the system while causing minimal disruption to superannuants.
“Our proposals make super simpler for consumers and funds, while improving equity across the system. Further, the reforms encourage people to spend their super by removing the attraction of using super to accumulate tax-free bequests,” Dunn said.
Shaw added: “We believe the changes, particularly the tax on large benefits, are aligned with the proposed objective of super, which is to preserve savings to deliver income for a dignified retirement.
“They would leave the system largely unchanged for most retirees and still allow people to make large withdrawals for their immediate needs, for example, paying off a mortgage or healthcare.”