Wednesday, May 10, 2006

Australia Simplifies its Retirement Accounts System

In the Federal Budget announced last night, treasurer Peter Costello, announced among other things a simplification of the superannuation system - Australia's retirement accounts system. Unlike the US there was already only one type of account but the tax regime was a little complex. It consisted of a 15% tax on contributions, a 15% tax on earnings, and above certain limits - additional taxes on payouts. Getting a payout as a pension annuity was tax-favored over taking a lump sum. So it was some mixture of tax concession and deferred tax regime.

The new system removed the complex regime of taxes on large payouts. Now it seems there is just a 15% tax on cointributions to and earnings of the funds and no taxes on payouts after age 60. This news is important for me because 40% of my net worth is in an Australian superannuation account. I estimate that I will save at least $A90,000 in tax that would have been paid in 2024-5.

For Americans and people from the many other countries that visit this blog it might be interesting to compare these moves in Australia with the system in your country. The announced changes makes this system simpler and lower tax than any of the US accounts - especially for people in higher tax brackets - as the only tax that will ever be applied is 15%. Also the maximum contributions allowed are much higher for people over 35 than those allowed in the US - equivalent to $US 40,000 per year. The downsides of the Australian system is that it is harder to withdraw your money before age 60 though it seems that now money can be left indefinitely in the Super system at the 15% earnings tax rate. In the US earnings on the Roth remain tax free and IRA/401(k)/403(b)'s etc. remain tax deferred until the money begins to be withdrawn (with compulsory withdrawals at age 70).

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