Superannuation Discussion + market volatility

[lakeman]

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

In the draft proposal there were several examples for vanilla cases with standard super but I couldn’t see any for DB cases.
Perhaps there are too many permutations to do this but on fishing around google I found many further examples for “normal” funds but also couldn’t find any for DB cases.
I didn’t realise how much tax DB pensioners had to pay,certainly takes the shine off the headline amounts.
If the DB calculations under div296 follow the standard cases ,they would not be liable for 15% tax on their whole account but only on a proportion of the calculated number greater than $3000000 ,as andye has suggested

 

[andye]

I found this online.

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://archive.budget.gov.au/2016-17/factsheets/super/05-SFS-Defined_benefit_funds-161109.pdf&ved=2ahUKEwizsoDKzLmFAxWMQPUHHbwyDjoQFnoECA8QBg&usg=AOvVaw2oenfcIk9jD7nwOKFFpsVE

So I think I understand the DB taxation situation better.
Quick look doesn't seem to suggest that DB holders are getting a particularly raw deal under the new legislation of additional 15% tax on growth but I'll try to get my head round numbers to assess it properly (I'm intrigued now)

 

[lakeman]

I found this online.

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://archive.budget.gov.au/2016-17/factsheets/super/05-SFS-Defined_benefit_funds-161109.pdf&ved=2ahUKEwizsoDKzLmFAxWMQPUHHbwyDjoQFnoECA8QBg&usg=AOvVaw2oenfcIk9jD7nwOKFFpsVE

So I think I understand the DB taxation situation better.
Quick look doesn't seem to suggest that DB holders are getting a particularly raw deal under the new legislation of additional 15% tax on growth but I'll try to get my head round numbers to assess it properly (I'm intrigued now)

So the 62% tax rate is a phurphy?
Even the top tax rate is 37% rather than 47% and there are reductions for taxed components.

 

[CaptJCool]

So the 62% tax rate is a phurphy?
Even the top tax rate is 37% rather than 47% and there are reductions for taxed components.

No

The amount over $100,000 ( (2016 TBC figure) this year it’s $118,600) of an untaxed DB pension which is the case for former Fed Govt employees is taxed at marginal tax rate AND the 10% tax offset is removed. (The 10% is not a tax rate reduction)

So if you’re untaxed part is $200,000 you’re in the 47% tax bracket and no tax offset

For ease of calculation
While former PS receive different pensions it would appear around by age 60 around 30-40% of it is tax-free (your capital and tax paid employer contributions) this part is NOT INDEXED

THE remaining 60-70% is fully taxed at marginal rate but because it’s over $118,600 there is zero tax offset) if this amounts to $240,000 then you would also be receiving $$140,000 tax-free so atotal annual salary of $380,000 and a tax bill of $78,667.


So 20% of the total is tax. As compared to the 0% tax on private sector superannuation


TBC
IN THE private sector the TBC IS plus the 15% tax on annual earnings on amounts higher than $1,600,000 - since the equivalent is likely to be a notional total of $6 million. So $4.4 million earning 7% = $308,000 x 15% = $46,200
THATS $30,000 less

TSB
The extra tax to be paid by anyone would be $6m-$3m = $3m x 7% =. $210.000 x .15 = $31,500

This puts the former public servant paying 28.9% of their total package as tax ($110,000)
If they earnt this $380,000 as wages the tax is $149,200 39.2% of the total salary

Of the untaxed payment of $240,000 the total tax would be 45.83% (47% highest income tax rate plus the TSB tax)
Without the TSB the total tax would be 32.7% of the untaxed amount
This is important because this is the equivalent earnings as the tax-free payment is your own savings capital which we would NEVER tax

 

[lakeman]

No

The amount over $100,000 ( (2016 TBC figure) this year it’s $118,600) of an untaxed DB pension which is the case for former Fed Govt employees is taxed at marginal tax rate AND the 10% tax offset is removed. (The 10% is not a tax rate reduction)

So if you’re untaxed part is $200,000 you’re in the 47% tax bracket and no tax offset

For ease of calculation
While former PS receive different pensions it would appear around by age 60 around 30-40% of it is tax-free (your capital and tax paid employer contributions) this part is NOT INDEXED

THE remaining 60-70% is fully taxed at marginal rate but because it’s over $118,600 there is zero tax offset) if this amounts to $240,000 then you would also be receiving $$140,000 tax-free so atotal annual salary of $380,000 and a tax bill of $78,667.


So 20% of the total is tax. As compared to the 0% tax on private sector superannuation


TBC
IN THE private sector the TBC IS plus the 15% tax on annual earnings on amounts higher than $1,600,000 - since the equivalent is likely to be a notional total of $6 million. So $4.4 million earning 7% = $308,000 x 15% = $46,200
THATS $30,000 less

TSB
The extra tax to be paid by anyone would be $6m-$3m = $3m x 7% =. $210.000 x .15 = $31,500

This puts the former public servant paying 28.9% of their total package as tax ($110,000)
If they earnt this $380,000 as wages the tax is $149,200 39.2% of the total salary

Of the untaxed payment of $240,000 the total tax would be 45.83% (47% highest income tax rate plus the TSB tax)
Without the TSB the total tax would be 32.7% of the untaxed amount
This is important because this is the equivalent earnings as the tax-free payment is your own savings capital which we would NEVER tax

My head hurts looking at this

 

[MARTINE]

My head hurts looking at this

Yes
I have reflected
My zen take on this is
…..better to have loved and lost than never to have loved at all… better to have this amount in my retirement and lose some than not at all.

I have - and opine - PSS DB pension is a golden goose

It had that incredible bonus where you could put 10% in , employer matched 15% - for ten years. Given salary increases over a long period - I will accept what it is now as I am still way ahead even if I lose some.

YMMV

 

[CaptJCool]

My head hurts looking at this

The highlight is most people pay zero tax in retirement phase
Public servants do
And often large amounts

For the ordinary APS employee
Until age 60 this was most likely upto but no more than $30,000 tax
From age 60 this figure drops by at least 50%. Bear in mind the average pension is about $48,000 but more recently retired it’s six figure sums


For the high earners

Former politicians and Judges and commissioners are a different kettle of fish

https://www.finance.gov.au/sites/default/files/2021-10/PCSS%20Long%20Term%20Cost%20Report%202020_0.pdf

 

[Pushka]

The highlight is most people pay zero tax in retirement phase
Public servants do
And often large amounts

For the ordinary APS employee
Until age 60 this was most likely upto but no more than $30,000 tax
From age 60 this figure drops by at least 50%. Bear in mind the average pension is about $48,000 but more recently retired it’s six figure sums


For the high earners

Former politicians and Judges and commissioners are a different kettle of fish

https://www.finance.gov.au/sites/default/files/2021-10/PCSS%20Long%20Term%20Cost%20Report%202020_0.pdf

Most people pay tax on super during accumulation phase. Contributions Tax, Earnings Tax, CGT (the latter is withheld from the transactions history, but it's there). Do public servants though?

 

[CaptJCool]

Most people pay tax on super during accumulation phase. Contributions Tax, Earnings Tax, CGT (the latter is withheld from the transactions history, but it's there). Do public servants though?

Fed govt pay tax in both accumulation and retirement phase

State govt employees pay zero tax during accumulation phase (constitutional funds) and pay marginal rates in retirement phase on the full indexed value - no tax-free at all

 

[SYD]

I would have thought most DB schemes have either gone the way of the dodo or at least closed to new entrants? Most if not all replaced by “Super” as most people know it?

 

[CaptJCool]

I would have thought most DB schemes have either gone the way of the dodo or at least closed to new entrants? Most if not all replaced by “Super” as most people know it?

Yes they have
None as far as I know on offer
CSS closed 1990. Under 2,000 active members
PSS closed 2005
Military closed in the past few years but few stayed beyond the first couple of tours of duty
State schemes closed many years ago
Big corporate schemes too

 

[Pushka]

Fed govt pay tax in both accumulation and retirement phase

State govt employees pay zero tax during accumulation phase (constitutional funds) and pay marginal rates in retirement phase on the full indexed value - no tax-free at all

Ok. So the coughulative impact of having tax deducted during the accumulation phase for non Govt employees is quite significant then.

 

[MARTINE]

I would have thought most DB schemes have either gone the way of the dodo or at least closed to new entrants? Most if not all replaced by “Super” as most people know it?

Last Commonwealth super DB closed in 2004
All accumulation now

 

[andye]

It is interesting that the information online about how the CSS accumulated is quite opaque.
I accept that it is a complicated system but from what I can glean it seemed to be very generous and in excess of what people in non-DB systems were getting (and highly likely in excess of what people can expect now even with the increase in mandatory contributions).
It does seem that there is a small element of double taxation in retirement for DB-holders due to the increase in taxation on growth for funds with actual (or calculated) value >$3m. DB holders are likely not to be able to move their funds out to a lower tax environment on the growth on the portion above $3m
I'd tend to concur with @MARTINE. Small losses on the roundabouts seem to be more than offset by some big gains on the swings

 

[CaptJCool]

Ok. So the coughulative impact of having tax deducted during the accumulation phase for non Govt employees is quite significant then.

Yes

When compulsory employer super was introduced in 1992, Keating was not willing to backend all the taxes. By front-ending tax, the govt took an immediate cut of the action. Recently it’s been about $7-8 billion per annum.

Bear in mind public servants were compelled to make a contribution into the fund from their own post tax dollars. There was no salary sacrifice nor tax deductions directly available to do this

While the private sector paid tax of 15% going in there were the 3 options to alleviate it
1. Salary sacrifice
2. approved personal Tax deductions
3. Don’t make any of your own contribution and pay off the home loan instead

The first two reduced your personal tax by 30, 37 or 47% which provides an enormous tax benefit
Cost 15%
Savings Benefit 30, 37, 47%

The trouble with doing it that way is eventually the back end is reached and there’s no taxes whatsoever turning up.

I’m no fan of the all or nothing deal

 

[CaptJCool]

It is interesting that the information online about how the CSS accumulated is quite opaque.
I accept that it is a complicated system but from what I can glean it seemed to be very generous and in excess of what people in non-DB systems were getting

Yes it became that because of the 54/11 loophole created by the 1986 *(edited) changes to removing tax exemption from superfunds when they invested in 4% govt bonds

This opened the door to superfunds paying tax AND being able to invest in shares
From 1985-89 the annual returns were 19-22% !!
However the risks are also yours. This fund lost 16-17% of capital balance during the GFC stalling plenty of “early departure” plans

Why this matters is because the pot of cash grew exponentially. Compound interest !

Because the formula for calculating the pension for the 54/11 deferral is based on the pot of cash the bigger the pot of cash the bigger the final pension. As well, you can convert the entire sum into a non-indexed pension which on retirement you can only convert 20% plus of course it’s 52% of final salary
There’s now probably only 1,000 contributors and less than 100,000 DB CSS pensioners. The average pension is under $50,000 but for the last lot is six figures plus because their salaries are six figures


For those who love detail, all the ins and outs are here

https://forums.whirlpool.net.au/archive/2333592

 

[MARTINE]

Yes it became that because of the 54/11 loophole created by the 1987 changes to removing tax exemption from superfunds when they invested in 4% govt bonds

This opened the door to superfunds paying tax AND being able to invest in shares
From 1989-92 the annual returns were 19-22% !!
However the risks are also yours. This fund lost 16-17% of capital balance during the GFC stalling plenty of “early departure” plans

Why this matters is because the pot of cash grew exponentially. Compound interest !

Because the formula for calculating the pension for the 54/11 deferral is based on the pot of cash the bigger the pot of cash the bigger the final pension. As well, you can convert the entire sum into a non-indexed pension which on retirement you can only convert 20% plus of course it’s 52% of final salary
There’s now probably only 1,000 contributors and less than 100,000 DB CSS pensioners. The average pension is under $50,000 but for the last lot is six figures plus because their salaries are six figures
View attachment 378733

For those who love detail, all the ins and outs are here

https://forums.whirlpool.net.au/archive/2333592

Are you able to supply the reference @CaptJCool ?
Interesting
Medians would have added some granularity

 

[CaptJCool]

Are you able to supply the reference @CaptJCool ?
Interesting
Medians would have added some granularity

The tax exempt superfunds stopped - the 1988 tax return had removed that question

1987 tax returns, schedules, instructions and guides | Australian Taxation Office

Use these tax returns, schedules, instructions and guides to help you with completing your 1987 tax obligations.

www.ato.gov.au

OCCUPATIONAL SUPERANNUATION STANDARDS ACT 1987 No. 97, 1987 - SECT 5 Satisfaction of superannuation fund conditions

classic.austlii.edu.au

 

[tgh]

All this complexity is amazing
Iirc ( it was aeons ago) all our super contributions ( to our smsf ) came from pre tax company profits and were therefore tax free. The eventual pension receipt is tax free as well as all the capital gains and earnings
It has been an amazing ride and i am fairly sanguine about the fiscal fiend getting a bit back so late in the game

Posted courtesy of airnz wifi

 

[CaptJCool]

Are you able to supply the reference @CaptJCool ?
Interesting
Medians would have added some granularity

Research

Research

www.aph.gov.au

the abolition of the ‘30/20’ rule for investments in government bonds for life companies and superannuation funds from 11 September 1984

It required Australian life insurance and superannuation funds to invest 30 per cent of their assets in state government bonds and 20 per cent in Commonwealth government bonds in order to qualify for income tax exemption.

How the financial system has changed

Australia's financial market has reinvented itself in just six months. That has implications for the government bond market, the banks and risk averse households.

www.afr.com

see 15.56 on page 38 (243) of the Campbell report https://treasury.gov.au/sites/default/files/2019-05/Chpt13-22_v2.pdf




see page 11

SUPERANNUATION LEGISLATION AMENDMENT BILL 1985 Explanatory Memorandum

classic.austlii.edu.au

Investment of Fund

21. Section 42 of the Principal Act is amended—
(b) by omitting sub-sections (2), (3) and (4) and substituting the following sub-section:

“(2) Moneys that, by virtue of sub-section (1), are required to be invested by the Trust may be invested in any manner and, without limiting the generality of the foregoing

It PASSED the Parliament in 1986
for completeness, the original section 42 is here Federal Register of Legislation - Superannuation Act 1976