Business Daily Media

Men's Weekly

.

Here's a radical reform that could keep super and pay every retiree the full pension

  • Written by Kevin Davis, Professor of Finance, University of Melbourne
image

The government’s retirement income review[1] is being told our current tax and benefit treatment of retirement incomes is a mess[2].

Much of financial planning industry is devoted to structuring affairs to maximise access to the age pension.

The means test and other requirements that control access to it are a bureaucratic nightmare and expensive to administer. There are ongoing fights about the taper rate[3] at which access shrinks with income. Debates rage about whether taxpayer support goes where it should.

Then-treasurer Peter Costello’s 2006 removal of tax on super fund earnings[4] in the retirement phase has proved to be misguided.

Read more: Why pensioners are cruising their way around budget changes[5]

The scale of the benefits to wealthy households has become so inequitable it has necessitated a range of complicated administrative measures to impose limits[6].

Under our dividend imputation system, government corporate tax revenue is cannibalised as super funds in the tax-free retirement phase get “refunds[7]” of the tax they haven’t paid on the dividends delivered to them.

A budget neutral proposal…

I am proposing a radical reform involving

  • introduction of a universal (non-means-tested) full age pension

  • restoring tax on the income of super funds in the retirement (pension) phase

  • other tax changes, including removing the seniors and pensioners tax offset, and a different tax scale for those in receipt of the pension.

The changes I propose could mean the only likely losers will be those with retirement super balances currently generating tax-free income in the region of A$100,000 per year or more.

Squeals would be heard, but there would be relatively few squealers and they might be unlikely to gain much sympathy.

The change could be budget-neutral.

Read more: 5 questions about superannuation the government's new inquiry will need to ask[8]

Under the proposal retirement would trigger:

  • the automatic award of the full age pension

  • the conversion of the retiree’s super fund(s) into retirement mode where earnings within the fund(s) would be counted as personal income for tax purposes.

The tax scale for age pension recipients would also need to be adjusted, and the seniors and pensioners tax offset[9] removed, in order to avoid windfall gains or losses and make the change budget neutral.

…that could make retirement simpler

At one stroke, all of the complexities involved in applying for and checking eligibility for the age pension would vanish.

Incentives to maintain large balances in super after retirement for tax-preferred estate planning would no longer be as attractive.

Introducing a universal non-means-tested full pension would increase budget outlays by about $30 billion, but this would be offset by increased tax revenues under the changes proposed which would leave most retirees no worse off in after-tax terms.

This is calculated using ball-park figures of around 4 million people of pension eligibility age with 1.8 million currently getting the full pension, 1.4 million a part pension, and 0.8 million on no pension.

Most retirees would be no worse off

Existing full pensioners would be unaffected.

The average part-pensioner could be left in the same after-tax income position by the tax scale changes which see the government recouping in extra tax revenue what it lost in extra pension outlays.

Self-funded retirees would receive a windfall gain of the full pension amount, but part of that would be offset by taxation of super income.

With proper adjustment of the tax rates the changes could mean that only those with very high income from super ($100,000 or more) would be adversely affected.

Unforseen consequences

In reality, nothing is that simple. Incentives for choice of retirement age would need consideration, as would the implications of tax scales for households as well as individuals.

Tax arbitrage involving imputation credits could destroy some of the expected budget revenues – suggesting a need to at least consider removing the rebates for unused tax credits[10].

Read more: It's hard to find out who Labor's dividend imputation policy will hit, but it is possible, and it isn't the poor[11]

That shouldn’t be a deal-breaker for most retirees because they would be no worse off, but it could meet opposition from investors with other ways of lowering their tax rate, as we saw in the last election[12].

But my proposal, albeit radical, appears to be feasible and has the potential to abolish much of the bureaucracy and costs associated with administering the age pension and much of the tax complexity and regulations governing superannuation.

Rather than fiddling at the edges, we ought to be considering wholesale reform.

Professor Davis was a member of the government’s 2014 Financial System Inquiry[13].

Authors: Kevin Davis, Professor of Finance, University of Melbourne

Read more https://theconversation.com/heres-a-radical-reform-that-could-keep-super-and-pay-every-retiree-the-full-pension-131289

Minns Labor Government shutting down the Business Connect program

The NSW Opposition is concerned that the Labor government will shut down a support program that has assisted New South Wales businesses. In a media ...

Samsara Eco appoints Dr. Lars Kissau as General Manager for Asia

Australian biotech innovator Samsara Eco has announced the appointment of Dr Lars Kissau as its first General Manager of Asia. Based in Singapore...

From the first bounce to the final siren - small business lessons from the AFL Grand Final

The AFL Grand Final is one of the most anticipated days on the sporting calendar. This Saturday, the Geelong Cats and Brisbane Lions will battle i...

Australia’s top finance leaders recognised as CFO role expands

Amid surging regulatory demands and rapidly evolving industry, Australia’s most influential Chief Financial Officers will be honoured at the inaug...

Why outdated security leaves small businesses exposed to crime

Small and medium businesses in Australia are under increasing pressure to address security gaps that criminals readily exploit. An unlocked door, an...

Why it’s time telcos rethink location and put customer experience first

Maurice Zicman, Vice President - CX Strategy at TP in Australia unpacks why the telco industry must rethink old assumptions and focus on digital-f...

Sell by LayBy