NEWS ALERT! On 6 November 2013, the federal treasurer, Joe Hockey, confirmed that the proposed tax on pension earnings above $100,000 a year will NOT become law. Many thanks to our readers for providing comments and questions, and for contacting members of parliament regarding this tax measure.
We have received a lot of emails from readers who have expressed their frustration at the unfairness of the proposed pension tax on earnings above $100,000 a year, although a small minority have supported the tax.
The common theme for the majority is that many Australians sacrificed and worked hard to ensure they would have sufficient savings in retirement, only to be hit with un unexpected additional tax after they retire. One of our SuperGuide readers, John Critchley has expressed his views on this issue, and we have published his comments below. John is a self-funded retiree, an ex-senior banker and a budding novelist.
Continue reading to find out what he has to say. In a separate article, we have published additional reader comments (you can find the link for this second article at the end of the page). For background information on the proposed tax on pension earnings, see links at the end of this article.
New pension tax is unfair to those who made prudent choices
My issue is equity, and I will illustrate: Assume Bill and Wayne both start work on 1 July 2013 on $60,000 a year. For 40 years they earn exactly the same wage. Let’s assume that CPI is 3%, super is 12% and fund investment performance is 5% a year. When they retire they each will have paid contribution taxes of $81,400 and each have a super fund balance of $1.167 million.
Wayne chooses to smoke 20 cigarettes a day but Bill, being marginally smarter, although shorter, invests exactly the same money in his super as a non-concessional contribution. At retirement Bill will have $122,600 more than Wayne in super.
How the hell can Wayne believe it is fair and rational to tax Bill’s additional super because, not only did Wayne smoke, he also never paid for health insurance and now needs intense public purse medical support?
Everyone makes “consume now or save for future” decisions and it is inequitable, dishonest and grossly unfair to take Bill’s life savings to pay for Wayne’s lifetime of poor judgement. This is not redistribution of wealth it is theft from the now “fabulously wealthy” Bill.
I have simple objectives in presenting this case study:
- Illustrate that over the next 40 years, using conservative growth metrics, very normal Australian taxpayers may well be paying Tax on what will be (multi) million dollar super funds.
- We are being told that “fabulously wealthy” Australians are rorting the super system because they have saved “too much”.
- I have tried to illustrate how a simple “consume now” decision (e.g. to smoke/drink/gamble/use drugs/take holidays/to have or not have children…) will have significant impact on eventual superannuation wealth ( or its lack ).
- It seems (to me) morally bankrupt for any government to arbitrarily categorise (vilify) and penalise (tax) Bill, who has nurtured and invested in his super.
Bill, by simply saving more than Wayne, is now required to make additional tax contributions ( i.e. because he didn’t smoke ), which in effect is to pay for Wayne’s 40 years of cigarettes and public health care.
I personally fail to understand how it is possible to value a person’s life choices based on the balance in their super fund, after 40 years of work… some will sacrifice, others will abuse…. some will take risk, others be averse, some may even invest in an industry fund. ( remember that ad?)
Policy should set a base line, have a safety net, but never put a ceiling on any individual’s aspiration or dreams…isn’t that Un Australian?…. and certainly never second guess or make distinctions between citizens on any criteria.
Different tax treatment for politicians
I am confused about defined benefits super for politicians. If I calculate the minimum 8 years parliamentary service for the Prime Minister (based on 11.5% tax-payer funded contributions, prescribed way back in 2004) I find that the PM’s “employer contributions” would total about $456,000. Not a bad little earner in 8 short years!
The prescribed pension is 50% of parliamentary salary (up to 75% for longer service), this means our PM from September will draw a minimum lifetime pension of approx. $250,000 pa. Indexed for life! If we assume say 33 years of payments that’s worth over $8 million.
Now, the rub for we mere mortals is that the entire “notional” employer contributions will be gone in less than 2 years…. but the PM will continue to draw a risk free, indexed superannuation benefit courtesy of unaware taxpayers.
For anyone else to have a guaranteed income for life at a 5% return, to match what our PM has been granted by taxpayers, one would require an imaginary fund balance of $5 million.
I also do not profess to understand statements that politicians will be subject to tax….It seems to me there would never be any capital gains tax payable… as there are no assets to sell.
I am sure any Australian would be pretty happy to pay 15% tax on “deemed earnings” over the $100,000 (i.e. $22,500)….. given that the person had in effect only made a personal notional investment of $456,000.
Lastly, how do you actually pay tax on money that has been paid by taxpayers based on a formula… surely all politicians have done is agree to a nominal reduction in their future generous pension payments and based on money they had never ever actually saved or nurtured in the first place.
Of course the same applies to every politician… Perhaps if Australians really understood how we are being hoodwinked by these double standards it may be a revolution, not an election, coming in September.
Want more information on the proposed pension tax?
Check out the following SuperGuide articles:
- For a sample of comments from other SuperGuide readers, about the proposed tax on pension earnings, see New tax on superannuation pension earnings: Reader comments
- For background information on this proposed tax see New tax on pension earnings over $100,000
- For 30 Q&As on the proposed tax on pension earnings see New tax on pension earnings (30 Q&As)