Superannuation – a new, simple 15/15/0 regime
written by Robert Deutsch CTA *
At its most fundamental, superannuation is all about money being set aside throughout one’s working life so as to provide an adequate level of funding for one’s retirement. For many Australians, the superannuation nest egg is usually the second largest asset they will ever hold — the largest being the family home.
One would have thought that the idea that a fund could be set aside for each and every Australian to provide for their retirement funding would not be a complicated process and would not lead to convoluted legislation. How wrong one can be!
A key objective of a tax system is simplicity and yet, in the context of superannuation, we are as far away from that objective as ever.
In my opinion, our political masters, both past and present, should hang their collective heads in shame at the appalling state in which we now find superannuation. For the average person, the concepts that underpin superannuation are complex, abstract and basically beyond understanding.
It is no answer to say that you shouldn’t worry about all that because, for most of you, none of it matters. The noise that emanates from the media regarding concepts such as the $1.6m cap (times two), concessional and non-concessional contributions, limited recourse borrowing arrangements, commutable and non-commutable pensions and the like generally scares the average punter into thinking that superannuation is not for them.
However, nothing could be further from the truth and the reality is that it is quite absurd how little attention is paid by the average Australian to their superannuation. Every Australian needs to make the time and the effort to look after what could and should be their second largest asset.
How could this be fixed?
We need to focus our attention on what is important in the context of superannuation and this calls for a system with some basic simple underpinnings, as follows:
- All superannuation is about accumulating funds for retirement — all funds would be accumulation funds. Defined benefit funds would cease to exist.
- Mandatory deductible contributions must be made for each employee at 15% of salary per person per year capped at $25,000 per year per person. Non-employees must contribute at the same rate based on “occupational income”.
- A further contribution should be allowed for each and every individual of $50,000 per person on a non-deductible basis.
- The deductible contributions would be taxed on receipt by the fund at a 15% flat rate. Non-deductible contributions would not be taxed in the fund.
- All earnings within the fund (e.g. interest, rent, dividends) would be taxed at a 15% flat rate.
- From the age of 65, funds can be withdrawn tax-free each year from superannuation by way of a pension up to 10% of the balance held at the beginning of the year. That pension payment would be tax-free to the recipient.
- On reaching the age of 80, the balance that is then in the fund can be freely dealt with.
- Contributions, both deductible and non-deductible, can be made within the limits specified above up to the age of 75, irrespective of whether the person is working or sitting idly all day sipping coffee.
- Subject to the next point, any withdrawal from superannuation prior to the age of 65 would be taxed at the top marginal rate. Between the age of 65 and 80, any withdrawal in excess of the pension amount specified above would be taxed at the top marginal rate.
- Special circumstances of hardship would be considered so as to allow for withdrawals either before the age of 65, or withdrawals above the allowed pension amount where aged between 65 and 80.
- Limited recourse borrowing arrangements would be expressly prohibited. There would be no arrangements for first home buyers to access superannuation, and no arrangements to allow additional contributions for aged “downsizers”. I am very firmly of the view that superannuation is for the purposes of superannuation — that is, providing retirement incomes for Australians. This should not be tinkered with, in any way. If there is concern about access to the housing market, this should be addressed by methods that do not tinker with what is otherwise available within the constructs of superannuation.
If we stick to these principles, we get a simple outcome for all: 15% on the way in, 15% on the way around, and 0% on the way out. And it could all be done within the parameters of a legislative framework that is simple, concise and readily understandable.
* Robert Deutsch is The Tax Institute’s Senior Tax Counsel. This article was first published in the February 2018 issue of the Institute’s member-only journal, Taxation in Australia.