• Service: Tax, Superannuation & Pension Funds
  • Industry: Financial Services, Superannuation
  • Type: Business and industry issue, Regulatory update
  • Date: 6/08/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Damian Ryan

Damian Ryan
Partner, Tax

+61 2 9335 7998

Superannuation – the importance of tax concessions 

by Damian Ryan, Financial Services Specialist
Two very important policy settings that underpin the success of Australia’s superannuation system are 'compulsion' and 'tax concessions'. With the Government under considerable budgetary pressure, the 'cost' of the tax concessions in superannuation policy, which continue to grow each year, is once again under the microscope.

Tax concessions exist at each stage of the superannuation system:

  • contributions (where concessional contributions are taxed at 15 percent)
  • income and (long) capital gains during accumulation phase (which are taxed at 15 percent and 10 percent respectively)
  • income and capital gains during pension phase (which are currently exempt from tax)
  • benefits (lump sums and pensions for members over 60 are exempt from tax)


Whilst the availability of tax concessions is acknowledged as a key policy setting that has contributed to the success of the system, the size of these concessions (particularly if measured against what would be that member’s marginal tax rate) has some commentators and welfare groups posing the question as to whether they are ultimately sustainable; or indeed a good investment in providing adequate retirement incomes for all Australians.


Take for example, the current tax concession to treat income and capital gains during pension phase as exempt from tax.


Interestingly, one of the recommendations of the Henry tax review was that a 7.5 percent tax rate should apply to income and capital gains during pension phase; rather than the current 0 percent.  (The review did recommend that the 15 percent rate during accumulation phase should also be reduced to 7.5 percent).


Another alternative was that of the previous Federal Government that proposed to tax earnings above $100,000 a year in pension phase. Whilst strong from a tax 'equity' point of view, the policy was (at best) difficult to administer and implement given the way a super fund calculates its taxable income.


Another response to this measure may well see all income and capital gains during pension phase subject to tax. Whilst addressing the concerns of the growth of the tax concessions to those better off, any flat rate response, would be regressive to low income earners and those members in pension phase with already inadequate superannuation balances, particularly women and those workers who have been under-employed for significant periods during their working lives.


Intriguingly, recently the Association of Superannuation Funds of Australia (ASFA), in their report, The Equity and Sustainability of Government Assistance of Retirement Incomes, has suggested another alternative – a lifetime contribution cap. The argument for a lifetime contribution cap being that it would still allow members to build an adequate balance to provide for their retirement, whilst not providing tax concessions on earnings on very large balances, such that superannuation would no longer be a vehicle for wealth accumulation.


One thing is certain, the debate around the appropriateness of the policy settings and the size and sustainability of the tax concessions will continue.


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