Albanese government has mission cut out in applying super tax to defined benefit pensions

The government will have to go back to the drawing board to figure out how to apply the 30 per cent super tax on retired public servants, politicians and ABC executives.. Picture: NCA NewsWire/Jeremy Piper

The super system’s lucky cohort of defined benefit pension holders – politicians, police chiefs, ABC executives – who get paid a substantial salary in retirement will be hit by the doubling of tax for large amounts in super.

Yet how it will work in practice is puzzling even the top experts in tax for the simple reason the existing system is already terribly complicated.

Retired public servants on defined benefits entered the tax system in 2017 when the Coalition introduced a cap on tax-free super. (It started at $1.6m, moving to $1.7m more recently.)

The way it works for the majority – the unlucky cohort who must keep risking savings on the market to achieve a retirement income – is earnings are tax-free up to $1.7m, then are taxed at 15 per cent.

Under the rules proposed this week by the Albanese government, a new tax layer kicks in at $3m where earnings on amounts above that figure are to be taxed at 30 per cent.

If you have followed this explanation so far, hang on now, because complexities are about to move to another level.

As Tony Negline, chief executive of Accountants Australia and New Zealand says: “It’s already hellishly complicated and the defined benefit area is the most complex of all.”

Put simply, the defined benefit group – who get a set amount every year – don’t have millions of their own underpinning their retirement earnings so the government actuary had to come up with a system to bring them into the tax loop. In practice, under existing legislation many of the defined benefit cohort get hit with tax issues if the income they receive crosses $106,000 a year – that calculation is thought to be equivalent to $1.7m in underlying assets.

To capture the defined benefit group in the new 30 per cent “double tax” layer, the government will have to come up with new assumptions and calculations. Or as Anthony Albanese said: “Treasury will have a look at that.”

For the record, it’s worth noting if the government wants to further “tidy up” super, then the defined benefit actuarial assumptions were based on a pooled figure – that is, men and women were combined and numbers were based on a mix of lifetime expectations for male and female. Under that arrangement, men won out because on average women generally die three years later.

Whether Jim Chalmers and his number-crunchers want to add that to the task is unclear.