Actuaries propose higher tax on super lump sums

Hitting large lump sum superannuation fund withdrawals with a higher rate of tax has emerged as one of the key recommendations of a new Actuaries Institute research paper.

The research paper, released today, also suggesting that the existing system of 15% tax paid on superannuation earnings in the accumulation phase with zero tax paid by retirees could also be replaced by a uniform tax of about 10%.

The authors of the paper, Richard Dunn, Jennifer Shaw, Alun Stevens and Michael Rice, said a uniform tax would enable a simpler system where people could have just one super account, build stronger balances form when they begin working and save money on fees.

It said the higher taxation of large lump sums and pension benefits would encourage retirees to use their superannuation in retirement.

It suggested the threshold at which the higher tax would be activated could be set at high levels such as $250,000 for lump sums and $150,000 for pensions a year, with compensation for any retirees adversely impacted provided through adjustments to their Age Pension.

The research paper also suggested the current system of tax on bequests would also be made fairer, with the 17% tax applied at age 67 instead of the current age 60 and tax-free thresholds reflecting whether the payment is to a dependent or non-dependent beneficiary.

The report authors propose further simplifying the super system by removing the distinction between the tax treatments currently applied to concessional (tax deductible) contributions and non-concessional contributions once they are invested in a super fund.

“We have a superannuation system that’s working, but it’s one of the most complex in the world,” Dunn said.

“Our proposals make super simpler for consumers and funds, while improving equity across the system. Further, the reforms encourage people to spend their super by removing the attraction of using super to accumulate tax-free bequests.”

“We believe the changes, particularly the tax on large benefits, are aligned with the proposed objective of super, which is to preserve savings to deliver income for a dignified retirement. They would leave the system largely unchanged for most retirees and still allow people to make large withdrawals for their immediate needs, for example paying off a mortgage or healthcare.”