Major tax changes could save $1bn in operational costs per year

Calls for a major overhaul of the current superannuation system to make it fairer for all working Australians.

Employees could pay less tax on their superannuation during the accumulation period but face bigger taxes in retirement under a radical new proposal.

A new report by the Actuaries Institute says Australia’s superannuation system works but is one the most complex in the world and simpler taxation rules are needed.

In a new paper released on Monday, Actuaries Richard Dunn, Michael Rice, Jennifer Shaw and Alun Stevens discuss three major changes to the current system, aiming for meaningful tax reform of the $4.1 trillion system.

The report authors argues the plan would save about $1bn in fund operational costs per year while improving equity between young and older taxpayers.

Aussies would be taxed less during the accumulation phase but more in retirement under a radical new tax proposal. NewsWire / David Mariuz

The report says all taxes on super should be 10 per cent.

This means workers would pay less tax (they currently pay 15 per cent), but would pay more in retirement, as superannuation tax payments increase from zero to 10 per cent.

“This would enable a simpler system where people could have just one super account, build stronger balances from when they begin working and save money on fees,” Actuaries Institute chief executive Elayne Grace said.

Secondly, the report says change how taxing occurs for retirees who withdraw higher amounts, to close a loophole that lets people withdraw large amounts of super before taking on an aged pension.

“The thresholds could be set at high levels, such as $250,000 and $150,000 per annum, respectively, with compensation for any retirees adversely impacted provided through adjustments to the age pension, for example,” the report says.

“These changes would encourage retirees to use their superannuation in retirement.”

But in return, tax on bequests would also be made fairer, with the 17 per cent rate applied at 67 instead of the current age of 60, and the tax-free threshold reflecting whether the payment is to a dependent or a non-dependent beneficiary.

The proposal is aimed at making the superannuation tax system fairer for everyone. NewsWire / Gaye Gerard

Report author Jennifer Shaw said the changes, particularly the tax on large benefits, 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,” Ms Shaw said.

Finally, the authors propose removing the distinction between the tax treatments for 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,” report author Richard 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.”