Wednesday, February 06, 2013

More Changes to Superannuation?

The Australian Labor government is floating the idea of taxing distributions from superannuation accounts (retirement accounts) if the balance is above $800k. Currently distributions are tax free but there are taxes on contributions and earnings though these are below the usual income tax rates. The tax free distributions were introduced by the Liberal government in 2006. That was a step towards moving the Australian system towards the Roth IRA model. The US Roth IRA taxes contributions at normal rates and then has no tax on earnings or distributions. The Australian government recently made changes to increase the contributions tax for earners above $300k and reduce it for those under $30k that seemed a further step towards the Roth IRA model. But this new move would just complicate things. It is the fact that earnings in the fund are taxed and that there have been so many changes to the system that has resulted in superannuation being so complicated in Australia. The US system is much simpler. There is a variety of different account types but none of them have earnings taxed - only contributions or distributions. Therefore, no tax return or audit is needed for a retirement account. As a result it is easy to set up an IRA, the US equivalent of a self managed superannuation fund, while it is complex in Australia and only worthwhile for large amounts of money because of the costs.

If the Australian government really wants to tax distributions I recommend they just move to the US 401k model where only distributions are taxed and contributions and earnings are not. I doubt they will do that. The Labor Party and the Treasury see any "tax concession" as equivalent to a government expenditure and they want to eliminate all of them if possible.

This has implications about whether to make "nonconcessional contributions" i.e. after tax contributions in the next decade. If distributions will be taxed there is little point in making after tax contributions of course, given that I don't pay tax on the earnings of my investments outside super at the moment (due to accumulated capital losses and deductions which result in surplus franking credits). Currently, I have $215k in my super accounts. In the next 12 years until I am 60 my contributions will be $300k assuming the current limit remains what it is. A 5% rate of return keeps me under $800. Assuming that the limit would be adjusted for inflation that's a reasonable rate of return. Of course, if I keep working and contributing past 60 then I will go over the limit. Snork Maiden would hit the limit in 2028 when she would be 53 me in 2024 when I'm 60.

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