Superannuation Discussion + market volatility

[burmans]

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?

Pretty obvious isn’t it, if the environment for those with greater than $3m in super is no longer advantageous move your money out. The fact that people haven’t done so to date suggests the alternatives aren’t quite so advantageous hence the revenue gain.

 

[CaptJCool]

Pretty obvious isn’t it, if the environment for those with greater than $3m in super is no longer advantageous move your money out. The fact that people haven’t done so to date suggests the alternatives aren’t quite so advantageous hence the revenue gain.

The folk who are in this over $3 million situation are already affected by the TBC 15% tax on earnings forever and a day as they can’t place greater than $x into pension phase

And you’re right tax at 15%
Versus income tax of 0% with SAPTO UNTIL around $50,000

Versus above $180,000 at 47% plus loss of private health rebates
Versus the new TSB Tax rate of 30%

Tax arbitrage at work

 

[Freq Flier 2013]

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.

People shouldn’t look at the number in absolutes. People who have more then 3 million in super might also have expensive lifestyles. So one person might think that 3 million will last 50 years but to someone it might only last 5 years.

No judgement but everyone should understand that everyone’s lifestyle is different - there is not right or wrong.

 

[Pushka]

People shouldn’t look at the number in absolutes. People who have more then 3 million in super might also have expensive lifestyles. So one person might think that 3 million will last 50 years but to someone it might only last 5 years.

No judgement but everyone should understand that everyone’s lifestyle is different - there is not right or wrong.

So surely then It isn't up to a generous tax payer system to fund that lifestyle post retirement? Enjoy that lifestyle by all means, but not at an overly generous tax payer assisted system.

 

[lakeman]

More to it than that, tax on income will be up to 62%; tax on CGT 25%

I am trying to get around your calculations and I can’t.
If you have a DB pension you add half the income over 118000 to get your marginal tax rate which if you have 3000000/16 (for arguments sake) means you would have a DB of 188000 and pay tax on 70000/2 =35000.
I gather you have other assets in accumulation currently paying 15% tax on earnings.
Any unrealised Capital gain will be assessed together with income for the new tax.
I have seen some calculations for smaller excess amounts that make the authors suggest the burden is not too large to force Changing or cashing the excess super.
Obviously the governments aim is to force people to trim excess amounts over the $3000000 limit.
I have been on the wrong side of many financial rule changes in the past ,but not this one and have just worn it or changed my strategy to fit the new rules.
It’s not going to help you by saying it’s unfair, it’s “just business”

I can see unfairness for widows encountering these issues but they generally get a bit more time to sort things out and they would be still reasonably wealthy by most standards.
Interested to see where you will Be taxed 62%

 

[CaptJCool]

I can see unfairness for widows encountering these issues but they generally get a bit more time to sort things out and they would be still reasonably wealthy by most standards.
Interested to see where you will Be taxed 62%

its because of the unique oddity of DB schemes in that Govts refused to fund them over the working lifetime, and so when the time came to pay them they had to - out of consolidated revenue (and federally buffeted by the Future Fund) aside QLD who fully funded their state public servants.

this was known as untaxed taxable component https://csc.sitecorecontenthub.cloud/api/public/content/b2e3e1fe84b2405a9b6d5a7c30fdcabc?v=d20e90bd

to cut a long story short - you would be received a rather bumper annual pension of at least $230,000 (where $50,000 is tax-free and the rest taxed at marginal rates) - the magical $180,000 for you opens the door to the 47% tax rate. While this is in lieu of paying the 15% tax on earnings on the balance above Transfer Balance Cap of say $1.6 million, its still considerable tax paid.

Edit - i did the calculation at age 60 and on the figure of $230,000 that would get you over $3 million - but by age 70, even with indexed pensions you would probably go below the TSB figure of $3million
$250,000 per annum (would get you at age 60 over the TSB of $3,000,000) which opens the door to a further 15% tax on notional fund earnings and there appears no way out of it = 47% plus 15% = roughly equated to 62% (plus the withdrawal of the 10% tax offset would be happening too (rough estimate that you would lose $8,000 of tax offset), and you're not eligible for the Private Health rebates either nor the Comm Senior Healthcare Card)

now we know from the stats that many former Parliamentarians having been Ministers are on very healthy pensions way in excess of $400,000 pa so yes, they will cop it in the neck

 

[lakeman]

Thanks for the link, very interesting !

 

[Freq Flier 2013]

So surely then It isn't up to a generous tax payer system to fund that lifestyle post retirement? Enjoy that lifestyle by all means, but not at an overly generous tax payer assisted system.

For someone to put their hard earned money into super - first off most would be after tax (to get a high balance) - tax would have been paid.
Secondly a lot of tax would have been paid to generate 3 million in the first place.
So I’m sure that person would have contributed enough tax to the government over the years. The alternative is to rely of the pension and burden everyone.

 

[Flashback]

For someone to put their hard earned money into super - first off most would be after tax (to get a high balance) - tax would have been paid.
Secondly a lot of tax would have been paid to generate 3 million in the first place.
So I’m sure that person would have contributed enough tax to the government over the years. The alternative is to rely of the pension and burden everyone.

If it's anything like the UK, not necessariily...... I know of people who have a really good pension pot and they only pay £3k tax/year.

 

[Pushka]

For someone to put their hard earned money into super - first off most would be after tax (to get a high balance) - tax would have been paid.
Secondly a lot of tax would have been paid to generate 3 million in the first place.
So I’m sure that person would have contributed enough tax to the government over the years. The alternative is to rely of the pension and burden everyone.

But that is no different to anyone else.

And up to a certain limit, for everyone, overly generous taxation advantages apply.

Maybe go spend the excess and that way you will be treated exactly the same as someone with a much smaller super amount.

Rely on the pension? I did the calculations last night out of interest. And even someone on a very meagre super fund, waaay less than mine which is extremely well under this $3 million cap, wouldn't get it so that's a bit of a furphy.

 

[Brissy1]

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?

a) not comparing apples with apples; $210k tax free income or $210k taxable income. Yep, I'd take a tax free income!
b) absolutely, presuming contribution were the same. Perhaps it's not realised that members made after-tax contributions, and will again be paying tax even on the capital component of their pension.

Imagine withdrawing savings from a bank account, and then hey a new rule... add that to your taxable income.

 

[33kft]

Imagine withdrawing savings from a bank account, and then hey a new rule... add that to your taxable income.

How is that an accurate analogy though? Firstly, plenty of people are taxed on income that they withdraw (or don't) from their bank account if it wasn't taxed via PAYG prior to deposit. Think investment earnings, rental earnings or business earnings. For business earnings in particular, that business income gets assessed for income tax when it leaves the business account and lands in an individual's account as income (obviously with several steps inbetween). Secondly, proportions of that income are often subject to higher taxation over a certain threshold which is effectively what's happening here, it's exactly how our income tax system works. Tax thresholds change all the time - plenty of Victorians suddenly getting land tax bills due to a change in the minimum threshold for example. I don't see how this is that fundamentally different.

 

[burmans]

People shouldn’t look at the number in absolutes. People who have more then 3 million in super might also have expensive lifestyles. So one person might think that 3 million will last 50 years but to someone it might only last 5 years.

No judgement but everyone should understand that everyone’s lifestyle is different - there is not right or wrong.

Of course people have different lifestyles but you aren’t going to win many arguments suggesting we should subsidise the lifestyles of the rich (well except from the rich themselves but I suspect that won’t convince anyone not in that bracket). We are all aware of the revenue crunch coming and the need to support adequate healthcare, education etc, I know which I prefer and I suspect I’m far from the only person with this view on priorities.

 

[Brissy1]

How is that an accurate analogy though? Firstly, plenty of people are taxed on income that they withdraw (or don't) from their bank account if it wasn't taxed via PAYG prior to deposit. Think investment earnings, rental earnings or business earnings. For business earnings in particular, that business income gets assessed for income tax when it leaves the business account and lands in an individual's account as income (obviously with several steps inbetween). Secondly, proportions of that income are often subject to higher taxation over a certain threshold which is effectively what's happening here, it's exactly how our income tax system works. Tax thresholds change all the time - plenty of Victorians suddenly getting land tax bills due to a change in the minimum threshold for example. I don't see how this is that fundamentally different.

I stated "withdrawing savings...", or to be clearer, compare withdrawing money you've already paid tax on.
The legislation as proposed, in some cases, taxes withdrawals (a component of a DB pension) of the after tax contributions.

Personally I support taxing income from excessive super balance at a non-concessional rate... the company tax rate seems fair. But for some it goes far beyond that.

 

[stm1sydney]

revenue crunch coming

The government does not have a revenue problem (look at a graph of its revenue over the last 15 years), it has a spending problem.

 

[Gremlin]

For someone to put their hard earned money into super - first off most would be after tax (to get a high balance) - tax would have been paid.
Secondly a lot of tax would have been paid to generate 3 million in the first place.
So I’m sure that person would have contributed enough tax to the government over the years. The alternative is to rely of the pension and burden everyone.

Strawman. There's plenty of alternatives for those of us with this much net worth that don't involve relying on the pension. But...

Just to note that once your super balance exceeds roughly $3.1m to $3.3m (the number varies slightly given different tax treatments of assets within super), that the tax concession you receive from having those investments in super is greater than the cost of the full aged pension.

 

[andye]

I stated "withdrawing savings...", or to be clearer, compare withdrawing money you've already paid tax on.
The legislation as proposed, in some cases, taxes withdrawals (a component of a DB pension) of the after tax contributions.

Personally I support taxing income from excessive super balance at a non-concessional rate... the company tax rate seems fair. But for some it goes far beyond that.

I'm probably not across all the aspects of the DB pension schemes but I had understood that the new legislation applied to the growth within the fund rather than the capital. I had assumed the calculated capital and growth equivalent of a DB would be treated similarly. Could you explain (apologies if I've missed the explanation already) how it's different?

Noting:
Most people with large standard funds will have some taxed non-concessional component to their capital also
Also not sure how the tax treatment of DB withdrawals is related to the new legislation rather than due to more long-standing differences
By my maths, a $3m standard fund providing a tax-free withdrawal at 5% is $150k p.a compared to a 14x calculated $3m DB fund providing a fully taxed pension only provides $214k gross/$142k net p.a (though at 13x it gives $151k net and gets better as the multiplier drops with age).
DB doesn't have the benefit of retaining any capital value after death of spouse but does offer guaranteed income in event of poor market returns

 

[CaptJCool]

That had been the problem for DBs. No capital value on which to hang your tax hook because it’s not like you can pocket the capital and walk. Away. Intricacies.

So they made the best of it and in effect when the Transfer Balance Cap came along because DB pensions already paid tax they weren’t required to pay anything more

But the TSB is different. Aside the constitutional funds, everyone needs pay and to calculate the actual or notional value to see if the total balance is over $3 million and if it is these new funky technocrat rules apply so for the private sector superannuated this adds an extra tax burden on earnings raising the rate from 15% to 30%

For the public sector already paying marginal rates of tax including a select few at 47%, but excluded from the TBC 15% and catered for with the 10% tax offset to equalise out (as best as can be done)
their funds aren’t excluded from this 15% extra rate on top of the tax (yes some do pay 47% highest rate) they pay every fortnight

 

[SYD]

I'm probably not across all the aspects of the DB pension schemes but I had understood that the new legislation applied to the growth within the fund rather than the capital. I had assumed the calculated capital and growth equivalent of a DB would be treated similarly. Could you explain (apologies if I've missed the explanation already) how it's different?

Noting:
Most people with large standard funds will have some taxed non-concessional component to their capital also
Also not sure how the tax treatment of DB withdrawals is related to the new legislation rather than due to more long-standing differences
By my maths, a $3m standard fund providing a tax-free withdrawal at 5% is $150k p.a compared to a 14x calculated $3m DB fund providing a fully taxed pension only provides $214k gross/$142k net p.a (though at 13x it gives $151k net and gets better as the multiplier drops with age).

DB scheme pensions work a bit differently to regular super and can be quite complicated for anyone who has one plus regular super.

You might get one or more options 1) convert to a full pensions 2) partial pension 3) lump sum 4) rollover to another super scheme etc

In my case, a modest CoA super balance was converted into a full pension before preservation age and a one off TBC activity recorded. There is zero “capital” in that fund and the “pension” balance doesn’t change. Despite getting a twice a year CPI indexation. My residual TBC is indexed prorata as the TBC increases. It will affect how much I can convert to a pension later from my regular super.

I discovered recently, that when I reach preservation age, that CoA pension doesn’t get bestowed the same tax free benefit as regular super, just a discounted tax rate.

Someone who spent a long time in the system will, as mentioned before potentially take a big hit on the proposed tax changes and there’s nothing they can do if they’ve already taken the full pension.” and their TBC is > $3m.

DB doesn't have the benefit of retaining any capital value after death of spouse but does offer guaranteed income in event of poor market returns

Actually, several DB schemes allow the spouse/significant other to inherit the pension - albeit at a reduced amount.

 

[CaptJCool]

Actually, several DB schemes allow the spouse/significant other to inherit the pension - albeit at a reduced amount.

Yes they do for surviving spouses if you meet the 3 year spouse rule etc (the idea is to avoid a single 90yo marrying a 20 something yo to “pass on the income stream for say another 70 years longer”)

However, if you stay partnered nothing allows the capital value to be withdrawn in full later down the track.