Superannuation Discussion + market volatility

[CaptJCool]

Thanks didn't see that bit, depressingly I think it's proposed that defined benefit "value" does effect ones liability for extra 15% tax , as page 6 example 1.21 refers to "Total" super balance, and total super balance includes value of defined benefit.

To take an extreme example for clarity, if a retired person's defined benefit Value was $3m, and one had just $100 earnings in another super fund, then proposed div 396 applies. So a more likely example, lesser pension and higher (other) super account will effect many. As I read it, if you have a significant defined benefit value it can push a modest (other) super account into 396

And does the Defined benefit Value change each year as one's pension increases, or decreases as one ages? I can't see the history of my defined benefit value unfortunately, but if it does then it would affect the % of your earnings that are taxed at 30%.

I hope I'm wrong.

Todays Oz has an article
On page 19

Extract

The family law calculations formula are here

FAMILY LAW (SUPERANNUATION) REGULATIONS 2001

www5.austlii.edu.au

 

[CaptJCool]

And does the Defined benefit Value change each year as one's pension increases, or decreases as one ages? I can't see the history of my defined benefit value unfortunately, but if it does then it would affect the % of your earnings that are taxed at 30%.

I hope I'm wrong.

It appears to decrease
Tables here on Schedule 4

FAMILY LAW (SUPERANNUATION) REGULATIONS 2001 - SCHEDULE 4 Method for determining gross value of superannuation interest payable as life pension

www5.austlii.edu.au

All the info here

 

[andye]

It appears to decrease
Tables here on Schedule 4

FAMILY LAW (SUPERANNUATION) REGULATIONS 2001 - SCHEDULE 4 Method for determining gross value of superannuation interest payable as life pension

www5.austlii.edu.au

All the info here

Not that it's relevant to me but am I correct that the assumed value aims to replicate a non-DB fund that could be assumed to leave nothing left at death
My mental back-of-the-envelope calculation is 16x benefit at 65 is pretty fair

 

[MARTINE]

I hope this does not apply to existing pensioners
Have been drawing PSS for almost a decade
No lump sum left in fund as the lifelong ‘pay’ far better option for me

 

[CaptJCool]

I hope this does not apply to existing pensioners
Have been drawing PSS for almost a decade
No lump sum left in fund as the lifelong ‘pay’ far better option for me

Yes it applies to both accumulation and pension phase

To be fair
There’s age based schedules that lower the TSB over time to reflect the usage of the withdrawals.

So in theory, one could end up with a “stranded” asset where it goes under $3 million but no way to utilise the (investment) losses ….

 

[Brissy1]

I hope this does not apply to existing pensioners
Have been drawing PSS for almost a decade
No lump sum left in fund as the lifelong ‘pay’ far better option for me

Yes it does, further up in that article "... Treasury's confirmation of a formula to capture DB members in the new tax"

 

[Brissy1]

To be fair

Not the phrase I would use,
considering to be entitled to this pension one had to contribute AFTER tax contributions, yet unlike other superannuates now pay PAYE tax (sure less 10% on some of it), and now it's proposed an extra to that PAYE rate (eg 30% to 45% either directly, or as I see it indirectly through inc tax on other super "earnings"). So in this eg pay 50% more than other (not retired) taxpayers on the extra income/unrealised capital gain!

Thanks CaptJ, those Family Law valuations are much less than the ATO "Value" (16X?) which also (looking at history) are fixed. Even so I think it will push many with a 2nd super fund into div396 rates...in theory, but people aren't stupid they'll rearrange their affairs.

 

[MARTINE]

Nothing like retroactive changes at the stroke of a pen. No doubt this will also apply to all those ex-politician’s with super in CSC - or not

 

[CaptJCool]

Nothing like retroactive changes at the stroke of a pen. No doubt this will also apply to all those ex-politician’s with super in CSC - or not

Yes it will
And some of them are on extremely juicy DB annual pensions

So will get hit with the “extra” tax

 

[MARTINE]

Yes it will
And some of them are on extremely juicy DB annual pensions

So will get hit with the “extra” tax

Karma

 

[CaptJCool]

Yes it does, further up in that article "... Treasury's confirmation of a formula to capture DB members in the new tax"

this is one time being M is an advantage = the calculator at each age is lower than for W as they live on average 3 years longer (and survive their spouse at least 6 years longer)

I do note the non-indexed pension rate is much lower than the indexed pension rate and so it should be as its your money in the pot, which is withdrawn over the years

I hope this does not apply to existing pensioners
Have been drawing PSS for almost a decade
No lump sum left in fund as the lifelong ‘pay’ far better option for me

Because TSB is a NEW term and because DB's are not a large bucket of money actually available to you, they have needed to utilise the family law value as a proxy to work out the gross value

so at 65 non-indexed is 9.9 (never reaches 16) and indexed is 12.2 (at age 54 its 16.06 akin to the 16x currently used for transfer balance cap calculations which are currently at $1.9 million)

what makes this rather dastardly, is that non-taxed DB earnings of former Public servants are already taxed at marginal rates unlike private sector super funds, are already used to determine Comm Seniors Health care card unlike private sector super but all super is used to determine age pension eligibility (regardless of public or private sector) and with the DB income cap[ currently of $118,750 restricts the tax concessions and the amount of tax-free income you can receive from defined benefit income streams, there will already be the high earners stuck on losing the tax concession completely and paying 47% tax rate who can now look forward to paying a Div296 tax on top of that!

 

[Brissy1]

this is one time being M is an advantage = the calculator at each age is lower than for W as they live on average 3 years longer (and survive their spouse at least 6 years longer)

I do note the non-indexed pension rate is much lower than the indexed pension rate and so it should be as its your money in the pot, which is withdrawn over the years


Because TSB is a NEW term and because DB's are not a large bucket of money actually available to you, they have needed to utilise the family law value as a proxy to work out the gross value

so at 65 non-indexed is 9.9 (never reaches 16) and indexed is 12.2 (at age 54 its 16.06 akin to the 16x currently used for transfer balance cap calculations which are currently at $1.9 million)

what makes this rather dastardly, is that non-taxed DB earnings of former Public servants are already taxed at marginal rates unlike private sector super funds, are already used to determine Comm Seniors Health care card unlike private sector super but all super is used to determine age pension eligibility (regardless of public or private sector) and with the DB income cap[ currently of $118,750 restricts the tax concessions and the amount of tax-free income you can receive from defined benefit income streams, there will already be the high earners stuck on losing the tax concession completely and paying 47% tax rate who can now look forward to paying a Div296 tax on top of that!

It's so inequitable. 7 figure income earners have a lower tax rate. And plumbers on $400,000 are taxed at 25%-30% (company).

CGT outside super = 1/2 marginal tax rate.
CGT inside super Div296 = 10% + 15%; higher than any marginal rate, not to mention the opportunity cost and cash flow of paying tax on a paper gain, and Super restrictions (eg at death). No-one is going to cop that when there are alternatives.

People aren't silly, they'll transfer excess to a Trust (depending on their family), a Company (no tax on unrealised gain), buy a Noosa beach house which they'll never sell and never pay CGT on it in their lifetime, upgrade the CGT free $5m home unit to $10m (Sydney), etc. Treasury estimates will, again, be wrong.

It will be interesting what Financial Planners (best interests duty) advise. I expect a flood of funds exiting Super before this takes affect, even if crystalizing a 10% CGT.

 

[CaptJCool]

the vast majority of people are in super arrangements that are less than $3 million

for those above it
its property or especially speculative share purchases that took off reaping millions.
and was seriously fettered by concessional and non-concessional caps as well as the 30% tax rate above $250,000...

I'm not that keen on this initiative because the ALP are telling 99.5% of us we will never reach $3 million in the fund - but that's in todays money - with a non-indexed threshold, in time, plenty will arrive at $3 million

 

[andye]

It's so inequitable. 7 figure income earners have a lower tax rate. And plumbers on $400,000 are taxed at 25%-30% (company).

CGT outside super = 1/2 marginal tax rate.
CGT inside super Div296 = 10% + 15%; higher than any marginal rate, not to mention the opportunity cost and cash flow of paying tax on a paper gain, and Super restrictions (eg at death). No-one is going to cop that when there are alternatives.

People aren't silly, they'll transfer excess to a Trust (depending on their family), a Company (no tax on unrealised gain), buy a Noosa beach house which they'll never sell and never pay CGT on it in their lifetime, upgrade the CGT free $5m home unit to $10m (Sydney), etc. Treasury estimates will, again, be wrong.

It will be interesting what Financial Planners (best interests duty) advise. I expect a flood of funds exiting Super before this takes affect, even if crystalizing a 10% CGT.

So let me get this straight
You already have $3m worth of assets in the generous environment of super.
You were hoping to have a CGT event taxed at 15%
Instead you'll have to move the asset out of super and it be taxed at a discounted rate of 22.5%
Both of these are well below the tax rate of the plumber (who has somehow managed to circumvent the sole trader rules) or many other people working for a living
And you say that's inequitable

 

[tgh]

Super has become a major tax shelter and it had to end.
We have done very well out of a generous system and I accept the need for change.
The new rules however , smack of overreach and is suspect/hope that sanity prevails.

 

[Brissy1]

So let me get this straight
You already have $3m worth of assets in the generous environment of super.
You were hoping to have a CGT event taxed at 15%
Instead you'll have to move the asset out of super and it be taxed at a discounted rate of 22.5%
Both of these are well below the tax rate of the plumber (who has somehow managed to circumvent the sole trader rules) or many other people working for a living
And you say that's inequitable

More to it than that, tax on income will be up to 62%; tax on CGT 25% (higher than even someone on top personal income rate) and on a paper profit you may never get (values go down too and there will be no refund); it won't just affect funds with actually >$3m but those with DB value (hence 63% rate because they also pay PAYE).

The inequity is, it is proposed to tax some super at MORE than even the top tax bracket. Except of course most won't leave assets in a high tax vessel and if "forced" to put it elsewhere of course they'll select the best strategy. So where's the revenue gain?

 

[33kft]

Except of course most won't leave assets in a high tax vessel and if "forced" to put it elsewhere of course they'll select the best strategy. So where's the revenue gain?

Is this not the point of the exercise? Taxpayers subsidise the tax treatment of superannuation investment returns in the form of reduced taxation revenue. I don't think discouraging contributions over a certain amount can be considered a fault of the legislation but rather the point of it?

 

[CaptJCool]

With the caps on contributions this problem is going to naturally go away EXCEPT for massive gains on speculative property or shares that occasionally occur. The big size SMSF superfunds of which there a just a smallish number were as much a result of uncapped contributions as speculative high risk high reward investment that worked out

The DB question is also naturally going to go away but this is a much longer timeframe but with around 100,000 long term CSS account holders (including a few QF employees like Vanessa) scheme closed in 1990 and 500,000 or so PSS account holders scheme closed in 2005 (both with reversionary to spouse pension rights) a very small but lucrative parliament scheme closed in 2004 a judges scheme again small numbers plus a military scheme that closed recently (but generally much lower years of service as people left after a decade not four or were able to leave at 42, 50 or compulsorily 60) whatever state govt schemes most closed long ago and some Uniting church and big Corp private sector schemes long gone.

In theory a 55 yo today just taking their CSS PENSION could live 30 years more and say at 80 “Marry an 18 yo” in 2055 who lives til 100 keeping the scheme open until 2137!!!
This can’t happen you say. Go look up the date of the last Civil War pension …

The other Govt DB Issue is the 62%. Yes, these DB pensions are taxed and some face the 47% tax rate so this new tax on TSB will be on top of that !

 

[burmans]

Super is intended to fund retirement, I have about $2.2m and it’s more than enough. Those who have more than $3m have had it good for a very long time so don’t have a lot of sympathy but do agree the $3m should be indexed.

 

[andye]

More to it than that, tax on income will be up to 62%; tax on CGT 25% (higher than even someone on top personal income rate) and on a paper profit you may never get (values go down too and there will be no refund); it won't just affect funds with actually >$3m but those with DB value (hence 63% rate because they also pay PAYE).

The inequity is, it is proposed to tax some super at MORE than even the top tax bracket. Except of course most won't leave assets in a high tax vessel and if "forced" to put it elsewhere of course they'll select the best strategy. So where's the revenue gain?

I agree that the numbers put about in media that "Subsidies within super to rich people costs the Australian tax-payer $xB" are never going to realise $xB as people will structure their investments differently.
But as @33kft says the point is to discourage people sheltering more money into super above $3M rather than realising that money

With the DB benefit, let's say the valuation is 14x:
(a) Would you be comfortable drawing down an equivalent non-DB fund at 7% p.a and it lasting until your 80s?
(b) if you had a time-machine and could have opted for a non-DB fund knowing the tax-treatment would be as it is now, would you have made the switch?