In late 2012, the federal government dropped a potential T-bomb (that is, a tax bomb) and fuelled the rumours that tax-free super benefits were to be removed for over-60s. The rumours fizzled out when the government realised it would be political suicide to remove the tax-free status of retirement benefits, and for not much financial reward. The reason the former Liberal federal government introduced tax-free super is that they realised very few retirees pay income tax, and the cost to the federal budget was not as big as the political goodwill benefits of delivering tax-free super to over-60s.
Incredibly, the current batch of kamikaze politicians wanted to have another go at testing the resistence of the electorate by leaking the possibility of removing tax-free super for over-60s with superannuation account balances of more than $1 million. I am not sure whether this idea came from the superannuation industry, or from Treasury or from the brain of Mr Wayne Swan (or even Mr Bill Shorten) but the obvious lack of understanding of how the super rules work, in particular the superannuation tax rules, highlights we are dealing with politicians (on all sides of politics) more interested in political ideology then the long-term financial interests of the electorate.
The $1 million cap for tax-free super triggered a frenzy of newspaper articles and conspiracy theories. In nearly all cases, the government (obviously) and the commentators failed to understand that it is not the account balances that will matter if tax-free super for over-60s was ever removed, but the components of the super benefits. If an individual has a super benefit that is 100% tax-free component (typically made up of non-concessional contributions), then no tax is payable on super benefits paid from that super account, even if that account balance is more than $1 million.
Another oversight by the financially challenged members of the government, is that in many cases, one super account is supporting two people (husband and wife), but some financially illiterate political adviser (or heaven forbid, a member of the superannuation industry) has advised the leaders of our country that $1 million means that you’re a rich, while someone with $900,000 is not rich. I could go on with analysis about assets and earnings, and the capital component of any super pension income, but I will save that for a future article.
In any case, the Prime Minister, Ms Julia Gillard has publicly stated that the super benefits for over-60s will not be taxed. Tax-free super for over-60s remains in place – thank goodness! I explain how tax-free super benefits for over-60s operate later in this article.
Superannuation industry lobby for removal of tax-free super
So, we have the federal government stating in parliament that tax-free super for over-60s won’t be touched. Now, you would think the superannuation industry would be quietly celebrating and not drawing attention to any further opportunity to attack the benefits of retirees. Not so!
The Association of Superannuation Funds of Australia (ASFA), the peak superannuation industry body, represents the superannuation industry and indirectly all Australians with superannuation accounts, have made a submission to government as follows:
“If there were to be a cap on superannuation individual entitlements attracting tax concessions, then ASFA considers the figure should be in the order of $2.5 million and be indexed to average weekly ordinary time earnings (AWOTE) to reflect future increases in community and retirement living standards” (page 7 of ASFA’s Pre-Budget Submission for the 2013/2014 year).
I realise that ASFA are trying to mitigate the rumoured $1 million cap, but in both cases – $1 million or $2.5 million – there appears to be no understanding by the super experts: the people looking after our super benefits, that they know how super works in the real world. Where do they come up with these figures, does it exclude the tax-free component and what if the pension account balance is intended to look after a couple (or even a family, with children staying at home longer)? And why is ASFA creating anxiety and uncertainty for the fund members it is supposed to be looking out for?
The Prime Minister has promised not to tax the superannuation benefits for over-60s, so why is ASFA presenting this suggestion to government?
Rumours are causing a lot of unnecessary confusion for prospective and current retirees. The superannuation and tax rules for over-60s remain in place, and are explained below.
How does tax-free super for over-60s work?
If you’re aged 60 and retired, you can receive your superannuation benefits tax-free — as a lump sum, or as a superannuation pension. A pension is also known as an income stream (regular payments over a period of time). You can enjoy a tax-free income in retirement assuming you have sufficient super savings to deliver you that regular income in retirement.
Note: Tax-free super has always been a feature of Australia’s retirement system but, before July 2007, you usually had to hire advisers and get involved in creative gymnastics to make it happen — not unlike what you still have to do to secure tax-free income when you retire before the age of 60. And before July 2007, how much super you could receive at concessional rates was limited.
What is particularly attractive for retirees is that since 2007, you can earn non-super income in addition to your superannuation income and still pay little or no tax because your superannuation benefit isn’t counted as income for tax purposes. What this means is that the benefit payments from your superannuation fund are not included in your tax return. For example, you can, say, receive $100,000 income from your super fund, and $18,200 (for the 2012/2013 year) from part-time work and pay no tax. If you’re aged 65 or over, you can earn even more non-super income and pay no tax (due to the application of the Senior Australians Tax Offset).
Public servants aged 60 or over may still pay tax on super
If you’re aged 60 or over and retired, your superannuation benefits from a taxed source are tax-free — most Australians are members of a taxed super fund. If your super benefits are paid from an untaxed source (some public sector funds) then your benefits may still subject to income tax after you turn 60, but less tax than if you were under the age of 60.
Turning 60, and turning 65 are significant
In the past, the retirement age of 65 used to be the main focus in retirement planning because that was the official age of retirement for many companies, and it was only a few years ago that you weren’t permitted to work beyond the age of 65 if you were an employee. Now, the focus (at least for tax purposes) is the age of 60.
Note: More importantly, the age of 65 is the Age Pension age for Australian men close to retirement, although Age Pension age increases to 67 from 2023. The Age Pension age for women is currently 64.5 years (since January 2012) and increasing to 65 years (from January 2014), and increases to 67 by 2023. The Age Pension is still a very important part of retirement planning for most Australians because around 80 per cent of retired Australians of Age Pension age currently receive a full or part-Age Pension.
Consider taking an income stream (superannuation pension)
Besides enjoying tax-free income in retirement, a compelling argument for starting a superannuation pension is that the earnings on assets financing your pension are exempt from tax. You receive tax-free income, and your tax-free income is sourced from assets that are invested in a tax-free environment.
In comparison, if you invest your savings outside the super environment, the earnings on your savings are subject to income tax.
Note: If you choose, you can leave your super account in accumulation phase indefinitely. You’re not forced to take a lump sum or start a pension. Accumulation phase means that you haven’t started a pension with your superannuation account. By choosing such a strategy, however, your super account’s fund earnings on assets in accumulation phase continue to be subject to up to 15 per cent earnings tax.