Assessingthetaxationofsuperannuationintermsofhorizontalandverticalequity.

____________________________________ JohnHarrison (apaperpreparedfortheAustralasianTaxTeachersAssociationConference2018–‘SharingtheBurden–TaxReform’sShiftingWinnersandLosers’)

AbstractThispaperdiscusseswhetherthetaxationofthecurrentsuperannuationsystemisequitable,byreferencetotheprinciplesofhorizontalandverticalequity,andhighlightsthathighincomeearnersareclearlyadvantaged.Theresearchwhichhasbeencarriedouttoanswerthisquestioncoversthetaxationtreatmentofmorethanthirtyofthemaincomponentsregardingsuperannuationcontributions,fundincomeandbenefits.Thesuperannuationsystemiscomplexandthispaperconcludesthedesignofthetaxationofsuperannuationhassubstantialhorizontalandverticalequitygiventhatmostofthecomponentsthatareanalysedmeetthesecriteria.However,verticalinequityinthetaxationofsuperannuationremainssignificantforthreeimportantcomponentsofAustralia’ssuperannuationsystem,beingtaxationoncontributions,fundincomeandbenefits.Highincomeearnerswithhighmarginalratesoftaxbenefitmostfromtheconcessionaldesignofthetaxationofsuperannuation.TheSGratebeingaflatratefailstosupportlowincomeearnersintermsofverticalequity.Inaddition,incomefromthegrandfatheringofassetsexceedingthe$1.6mcapalsoreceivesconcessionaltaxationtreatmentthatbreacheshorizontalequity.Thesefindingssupportthewidelyheldviewthatthesuperannuationsystemisinequitablegivenhighincomeearnersreceivethegreatesttaxconcessionsincomparisontolowincomeearners,whoreceivelittleornone.Finally,agediscriminationthatisunfairintermsofhorizontalequityremainsrestrictiveinsomecomponentsandshouldbeabolished.

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1. IntroductionThesuperannuationsystemisanintegralpartofthetaxationsystem,andisavery

expensivetaxconcessionestimatedtocostthegovernmentnearly$36bnin2016–

17incomeyear,1beingthesecondlargestitemofTaxExpenditures.2

Superannuationhastobefair,butwhatisfairandequitableinthesuperannuation

system? Whenmaking laws, politiciansdon’t refer to fairness andequity using a

dictionary or defined terms but rely on their understanding of its ordinary or

conversationalmeaning.However, thishasbeenproven tocreatepoliticalperil in

relationtothe2014Budget,thatwasconsidered‘beyondtheAustralianconceptof

fair’,3beingtheworstbudgetbycomparisonto14previousbudgets.4Thisinability

to grasp what fairness meant to the community, raised widespread criticism of

policy changes to the welfare system that disadvantaged low income earners, in

particularlyfamilies.5Numerousmeasuresweresubsequentlyabandonedincluding

the increase in thepensionage to70,changingpension indexationarrangements,

unemploymentbenefitschanges, familytaxbenefitcuts,afreezetothechildcare

benefit,redundancycapping,introductionofa$7co-paymentplantovisitdoctors,

andtheproposedincreaseinthepharmacybenefitsscheme.

In contrast, it could be argued the Turnbull Government got theNovember 2016 1 Treasury(Cth),TaxExpendituresStatement2016,30January2017,TablesC1–C11,

https://treasury.gov.au/publication/2016-tax-expenditures-statement/.2 Ibid.Thecapitalgainexemptiononthefamilyhomeisthelargesttaxexpenditureestimated

tobe$61bnin2016–17.3 PeterHartcher,‘JoeHockey’sbudgetbeyondtheAustralianconceptoffair’TheAge(Online),

31May2014,http://www.theage.com.au/comment/joe-hockeys-budget-beyond-the-australian-concept-of-fair-20140530-zrt8i.html.

4 DanielPotrowski,‘AustraliansthinkFederalBudget2014istheworstinavery,very,longtime,

accordingtothisgraphic’,News.com.au(Online),19May2014,http://www.news.com.au/finance/economy/federal-budget/australians-think-federal-budget-2014-is-the-worst-in-a-very-very-long-time-according-to-this-graphic/news-story/3aede549c1cfe0db6eb3fc205feaba53.

5 GabrielleChan,‘HowJoeHockey’sdisastrousfirstbudgetfellapart,brickbybrick.’The

Guardian(Online),8May2015,https://www.theguardian.com/australia-news/2015/may/08/how-joe-hockeys-disastrous-first-budget-fell-apart-brick-by-brick.

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Superannuation Reforms ‘right’, especially so after the Treasurer, Scott Morrison

announcedchanges6advisingthe$500,000lifetimecapproposalwouldbedropped.

This retrospective measure backdated to 2007 did not proceed pursuant to

communityobjection.7RevenuefiguresconfirmtheTurnbullGovernmentimproved

fairness by targeting or redistributing resources from high income earners to low

incomeearners.8

Theabovepoliticsprovesitisvitaltobeclearaboutwhatisthemeaningofequity

wheninstitutingtaxreforms,andwhatthatmeansintermsofthesuperannuation

systemisnoexception.

What is fair oftendepends onwhat politicians consider is expedient andpossible

under the current economic and political climate.9 Regrettably, the history of

superannuation reform has shown a changing barometer of equity, as different

governmentshavecomeandgone.10

Given superannuation is a significant part of theCommonwealth taxation system,

perhapsamorereliablebenchmarkofwhatisfairandequitableshouldbesourced

fromthetaxationsystem.Inthiscontext,equityinthesuperannuationsystemcan 6 ScottMorrison(Treasurer)andKellyO’Dwyer(MinisterforRevenueandFinancialServices),

‘Evenfairer,moreflexiblesustainablesuperannuation’,(JointMediaRelease,15September2016),1,http://sjm.ministers.treasury.gov.au/media-release/096-2016/.

7 DavidCrowe,‘FederalElection2016:PMstaresdownrevoltonsuperreforms’,TheAustralian,

13July2016.8 ExplanatoryMemorandum,TreasuryLawsAmendment(FairandSustainableSuperannuation)

Bill2016,9.9 AgoodexampleintermsofsuperannuationwasthatdespitethePrimeMinister’s‘ironclad

commitment’therewouldbenochangestothegovernment’ssuperannuationpolicy,theTreasurer,ScottMorrisonannouncedchangestothesuperannuationsystemon15September2016advisingamongotherthingsthatthe$500,000lifetimecapwouldnotproceedgivencommunityconsultation.ReferalsoScottMorrison(Treasurer)andKellyO’Dwyer(MinisterforRevenueandFinancialServices),‘Evenfairer,moreflexiblesustainablesuperannuation’,aboven6.

10 JohnHarrison,‘Superannuationandequity-stillsomuchmorereformtocome!’,(2017)4(7)

AustralianTaxLawBulletin,100, https://www.lexisnexis.com.au/aus/services/tools/pdf_toc/atlb.pdf.

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perhaps be further guided by traditional taxation concepts such as vertical and

horizontalequity.

This paper seeks to answer the question, ‘Is the taxation of superannuation

equitablebyreferencetotaxationdesignprinciplesofhorizontalequityandvertical

equity?’Afterconsiderationoftheseprinciplestomorethan30componentsinthe

superannuation system, this paper identifies there remain important areas of

reformthatParliamentmustaddress.

2. Taxationtheoriesrehorizontalandverticalequity

2.1 Horizontalandverticalequity

The1975AspreyTaxationReviewCommittee identified threeprinciplesof awell-

designed tax system that guide revenue raising objectives; equity, efficiency and

simplicity.11TheAspreyTaxationReviewCommitteesawthatequitymeantfairness

in the distribution of the tax burden.12 Although one of its chapters focused on

superannuation,thatchapterdidnotdiscussequityasanissueatall.

Similarly, the more recent and very comprehensive review of the taxation and

superannuationsystems(theAustralia’sFutureTaxSystem,informallyreferredtoas

the Henry Review),13also did not address horizontal and vertical equity in the

11 JusticeK.W.Asprey,(Chairman),SirPeterLloyd,RossParsonsandK.Wood,FullCommittee

Report31January1975,(AspreyTaxationReviewCommittee)(1975)paras3.7-3.26,Treasury,AustralianGovernment.http://adc.library.usyd.edu.au/view?docId=law/xml-main-texts/p00087.xml;collection=;database=;query=;brand=anderson.

12 Ibid–referpp12-15.13 TheHenryReviewproducedvariouspublishedreports,includingapreliminarypaperonthe

architectureofAustralia’sfuturetaxsystem(August2008),aconsultationpaperonthetaxationsystem(December2008),consultationpaperontheretirementincomesystem(December2008),astrategicissuespaperontheretirementincomesystem(May2009)andafinalreportinMay2010.Referhttps://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm

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superannuation system. The Henry Review’s objectives for the taxation system

included horizontal and vertical equity as taxation design features, but when

discussingthesuperannuationsystem,itoutlined5objectives:broadandadequate,

acceptable, robust, simple and approachable, and sustainable.14The objective of

acceptablewasonafoundationofequity,butthiswasonthebasisofexaminingthe

superannuation system with respect to the broader retirement income system,

taking into account the tax-transfer system and assessing impacts in terms of

intergenerational equity. Therefore, both the Asprey and Henry reviews did not

taketheopportunitytoreviewthesuperannuationsystembyspecificallyaddressing

horizontalandverticalequity.

Horizontalequityinvolvestaxpayersinlikeeconomiccircumstancesbeingtaxedthe

sameorasElkinsputs it, ‘similarly situated individuals face similar taxburdens’.15

Ontheotherhand,verticalequityiswherehigherincomeearnerspaymoretaxin

comparison to low income earners because higher income earners have greater

capacity to paymore to support the government.16Elkins expresses that, ‘vertical

equityisconcernedwiththedistributionofthetaxburdenalongsociety’seconomic

spectrum’.17 Accordingly, vertical equity is broadly inherent in the design of the

progressiveincometaxationsystemwhichprovidesfor increasingratesoftaxation

asincomelevelsrise,and‘hasbeenalong-standingdesignfeatureoftheAustralian

taxsystem’.18

14 Henryetal,Australia’sfuturetaxsystem.Theretirementincomesystem;Reportonstrategic

issues,(May2009)23-34,Treasury,AustralianGovernment,https://taxreview.treasury.gov.au/content/downloads/retirement_income_report_stategic_issues/retirement_income_report_20090515.pdf.

15 DavidElkins,‘Horizontalequityasaprincipleoftaxtheory’,(2006)24(3)YaleLaw&Policy

Review,43,http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1515&context=ylpr.

16 KenHenryetal,Australia’sfuturetaxsystem:Part2DetailedAnalysis,(December2009)11,

Treasury,AustralianGovernment,https://taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf.

17 DavidElkins,‘Horizontalequityasaprincipleoftaxtheory’,aboven15,51.18 MirandaStewartetal,‘Astocktakeofthetaxsystemanddirectionsforreform,Fiveyears

aftertheHenryReview’,(PolicyResearchPaper,TaxandTransferPolicyInstitute,February

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Horizontalandverticalequityare thereforedistinguished in their conceptsas ‘the

notionsthat it is fairthatpersons inthesamesituationshouldbeequallytreated,

and those in different situations being differently treated, with those more

favourablyplacedbeingrequiredtopaymore.’19Giventheinherentfairnessofthe

progressivetaxationsystem,it ispossibletooverlooktheimportanceofhorizontal

equity. However, Elkins stronglyputs it that ‘Violationof horizontal equity,while

notnecessary fatal, is nevertheless considereda serious flaw in anyproposed tax

arrangement.’20Hepointsout that theoristshavetaken forgrantedthenotionof

horizontalequity (that thetaxsystemshouldtaxsimilarlysituatedtaxpayers),and

have focused their attention on how to measure well-being or examine where

horizontalequityhasbeenviolated.Elkins21advisesthereisavastlevelofliterature

regarding vertical equity and economic efficiency in comparison to the literature

regardinghorizontalequity.Musgrave22viewsthathorizontalequityisnotasubset

ofverticalequityandthatbothhavestandingasprimarynorms.Kaplow23disagrees

and doesn’t see that horizontal equity has any significant independence. After

considering the Musgrave/Kaplow debate it is interesting that McDaniel and

Repetti, refute the value of horizontal equity and vertical equity in evaluating

changes in tax policy objectives.24 However, this paper finds that relying on the

2015),7,https://taxpolicy.crawford.anu.edu.au/files/uploads/taxstudies_crawford_anu_edu_au/2015-03/stocktake_report_27_feb_2015_final_web_version.pdf.

19 AspreyTaxationReviewCommittee,para3.7,aboven11.20 Ibid.21 DavidElkins,‘Horizontalequityasaprincipleoftaxtheory’,aboven15,44.22 RichardMusgrave,‘Horizontalequity,oncemore.’(1990),43(2),NationalTaxJournal,113,

https://www.ntanet.org/NTJ/43/2/ntj-v43n02p113-22-horizontal-equity-once-more.pdf.23 LouisKaplow,‘Horizontalequity;Measuresinsearchofaprinciple’,42(2),NationalTax

Journal,139,http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.318.610&rep=rep1&type=pdf

24 PaulMcDanielandJamesRepetti,‘Horizontalandverticalequity;TheMusgrave/Kaplow

exchange’,(1989)42(2),FloridaTaxJournal,154,http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.318.610&rep=rep1&type=pdf

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notion of vertical equity alone in considering fairness is flawed because different

findings resulted when applying horizontal equity (refer discussion following).

Accordingly,theimpactsofbothhorizontalandverticalequityareaddressed.

Also, in assessing theequityof the superannuation system, this is betterdoneby

comparing those within the system, not by comparing superannuation members

against taxpayers generally. For example, when a 61 year old retiree receives a

pensionfromataxedfund,suchearningsaretaxfree.Incomparison,a61yearold

whoworksandreceivesthesamelevelofearningspaystaxonthatincome.These

two taxpayers are in similar or equivalent situations, not identical situations.

Although gross income (essentially the economic circumstances or economic

wellbeing) is the same, their circumstances are very different given the retiree’s

earnings flow fromthesuperannuationsystem,and theworker’searningsdonot.

However, horizontal equity requires that equal tax burdens apply, despite these

different circumstances, and regardless of whether they choose to consume or

save.25

Theaboveexamplethatrelieduponincomeasthebasisof‘economicwellbeing’in

applicationtotaxation, isconsidereddefensibleandhasbeenadoptedthroughout

theanalysis in thispaper,because inapractical sense, it is theonly feasiblebasis

that horizontal and vertical equity can be applied. The Asprey Taxation Review

Committee commented that the best measure of a person’s economic wellbeing

was inregardtotheir income,26sowhencomparingbothtaxpayerswiththesame

income,theywouldpaythesametaxes.27

However, there are various other points of debatewhen applying horizontal and

verticalequity. Forexample, inAustralia, the taxationsystemtaxes the individual

whilethewelfaresystemassessesthefamilyunit.Thisstrikestheessentialchordof 25 DavidElkins,‘Horizontalequityasaprincipleoftaxtheory’,aboven15,45.26 AspreyTaxationReviewCommittee,para3.9,aboven11.27 Ibid.

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what is fair in terms of the taxing unit. For example, if a single middle income

earner receives$60,000, should the individualbe taxed the sameasa familyof2

adults and 2 children that has greater consumption needs but the same level of

income? Further, what about the legal but arguably unfair practice of income

splittingthroughpartnerships(andtrustarrangements).Aplumberandhisspouse

inafamilypaylesstaxbecauseofincomesplittingincomparisontoasingleearner

familyof the same income level. Wouldn’t it be fairer if all familieswereable to

income split? Piggott and Whaley28argue the household unit should be the

appropriatetaxableunitcontrarytothewiderheldbeliefthattheindividual isthe

appropriatetaxingunit(largelyonthebasisofefficiency).

As discussed above, horizontal and vertical equity can be difficult to assesswhen

consideringgroupingindividualswiththepurposetotaxfairly.Anothersignificant

issue to consider is whether individuals should be taxed at a point in time (the

income year) or over an entire lifetime that contemplates averaging or income

smoothing.KudrnaandWoodland29explorethelife-cycleframeworkasitappliesto

thesuperannuationsystemandusemodellingtoassesstheimpactofverticalequity

on superannuation taxation concessions. This was researched pursuant to the

HenryReviewthatreportedin2008thetop5%ofincomeearnersreceived37%of

taxation concessions. Kudrna andWoodland’s findings based on hypothetical tax

reformsreveal intheshort,mediumandlongterm,thatlowerincomehouseholds

improved in terms of vertical equity because of larger welfare gains and income

improvements.Thearbitrarynotionoftheincomeyearcanbeasourceofvertical

inequityincomparisontothelife-cycleframework.

28 JohnPiggottandJohnWhalley,‘TheTaxUnitandHouseholdProduction’,(April1996):104(2),

JournalofPoliticalEconomy,398-418,http://www.journals.uchicago.edu/doi/abs/10.1086/262028.

29 GeorgeKudrnaandAlanWoodland,‘Progressivetaxchangestoprivatepensioninalife-cycleframework’(ResearchPaperNo.CE110001029,AustralianResearchCouncilCentreofExcellenceinPopulationAgeingandResearch,April2002),1-27,https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=CEF2012&paper_id=23.

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Another important issue for equity concernswhether taxation shouldbe imposed

on an income base or consumption base, both of which can be viewed as a

reflectionofan individual’swellbeing.Overa lifetime,an individual’s total income

wouldequatetotheirconsumption(andnetsavings),sothe issuebecomeswhich

would be a fairer tax base in terms of horizontal equity; equal earners or equal

consumers? BankmanandWeisbach30consider theseopposingpositions in terms

ofsearchingforanoptimaltaxtheory,thefocusofwhichisonreducinginefficiency.

They dispute the arguments that a consumption tax is regressive to low income

earnersandsparesthosewhoaresaversgiventhereisnotaxoninterest.Afterdue

considerationandbasingtheirpositionsof ideal taxregimes, theyconcludethata

properly designed consumption tax is superior to an income tax. They admit

however, the main ‘Achilles heel’ to their position lies with implementation.

Practically speaking, Australia has amixed base onwhich taxes are levied, raising

most of its taxation directly on income (64 per cent) and the remainder through

indirect taxes, including GST (36 percent).31 This ratiomix is broadly in linewith

other OECD countries, and very unlikely to change politically given complexities

associated with tax competitiveness in a global environment, and also

implementationdifficultiesincludingthosewhowouldbeadvantaged(thewinners)

anddisadvantagedbysuchachange(thelosers).

Similarly,theAspreyTaxationReviewCommitteeraisedvariousconsiderationsthat

complicatethemeaningormeasurementofhorizontalandverticalequity,butthese

cannot be easily applied. For example, the Asprey Taxation Review Committee

considered when assessing equity whether the appropriate unit should be the

familyortheindividual,thehealthandsizeofthefamily,thearbitrarynatureofthe

30 JosephBankmanandDavidWeisbach,‘Thesuperiorityofanidealconsumptiontaxoveran

idealincometax’,(2006)58,StanfordLawReview,1413,https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=3035&context=journal_articles.

31 Henryetal,‘Australia’sfuturetaxsystem;ArchitectureofAustralia’staxandtransfersystem’,

(August2008),204,Treasury,AustralianGovernment,https://taxreview.treasury.gov.au/content/downloads/report/architecture_of_australias_tax_and_transfer_system_revised.pdf.

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incomeyear,thelifetimeviewofequity,thecomparisonoftaxtoconsumption,and

theissueofinflation,allofwhichtheAspreyTaxationReviewCommitteeconcluded

wouldbetoodifficulttoadminister.32Itisassertedsimilarconsiderationswouldbe

toodifficulttoapplyforthispapertoo.

Finally,itisunnecessarytoevaluatethefairnessofthesuperannuationsystemifit

was only on the basis of a comparison of those in the superannuation system to

those outside of the superannuation system. Under this comparison, the

superannuation system is inherently inequitable to taxpayers not in the

superannuation system and unable to benefit from the tax concessions, because

theyarenotpartofthesuperannuationsystem.Accordingly,theappropriatepoint

ofevaluationinthispaperiscomparingtheequitablerelationshipofmemberswith

othermemberswithinthesuperannuationsystem.

Accordingly, the focus of this paper is not on equity in the taxation system but

whethertaxationinthesuperannuationsystemisequitable.Themeasuresthatwill

be discussed following are components that are taxed uniquely in the

superannuation system,and it is thesecomponents thatare reviewed in termsof

theirhorizontalandverticalequity.

Theseconceptsofhorizontalandverticalequityarerelevanttothesuperannuation

systemwheretaxislevied-oncontributions,onfundincomeandonbenefits.Itis

showninthefollowingdiscussionandAppendixA,thatmanyofthecomponentsof

the superannuation system are equitable, but some components are inequitable,

requiringfurtherreform.

Giventhebreadthofissuesinthispaper,itishighlyrecommendedthatthereader

turnnowtotheendofthispaperandreview‘AppendixA–SnapshotreHorizontal

and Vertical Equity’. This appendix is a quick reference guide that neatly

summarisestheoutcomesofthefollowingdiscussion,injust2pages.

32 AspreyTaxationReviewCommittee,paras3.10-3.16,aboven11.

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3. Overviewofthetaxationofsuperannuation

3.1 Howsuperannuationiscomplex

DeterminingwhetherthetaxationofAustralia’ssuperannuationsystemisequitable,

is a complex issue because it takes many circumstances into account.33 As an

overview,thesefactorsinclude:

• Contributions – whether a concessional or non-concessional contribution,

differing cap levels or limits to contributing, income levels, whether

employedorself-employed,therateofSuperannuationGuarantee,theage

ofthememberormember’sspouse,orwhetherthecontributionsispaidby

themember,themember’sspouse,employerorgovernment

• Fund income – nature of the fund, nature of the income, whether the

incomeisattheaccumulationphaseorretirementphase,whetherthefund

istaxedconcessionallyat15percentorthepenalrateof45percent,

• Taxationofbenefits–variesdependinguponageandpreservationage,the

condition of release, whether a taxable component has been taxed or

untaxed, whether benefit is from a taxed or untaxed fund, whether the

benefit is in pension or lump sum form, or for minimum income stream

percentageswhetheraccountbasedornon-accountbased.

Forthepurposesofthispaper,onlythemaintaxationissuesinsuperannuationare

discussed.

33 Foranexcellentsummaryofthetaxationofsuperannuationrules,referCPAAustralia,’CPA

AustraliaSuperannuationGuide:2017-18’,https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/financial-planning/superannuation-guide-2017-18.pdf?la=en.

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3.2 Meaningoflow,middleandhigh-incomeearners

Thispaper reviewsequity in termsof low incomeearners,middle incomeearners

and high income earners. These terms are commonly used in language although

theyarenotdefined. Accordingly, the followingdiscussionclarifies theirmeaning

by essentially defining them according to an income range based on Australia’s

income tax rate thresholds. While other areas of government and law, such as

welfare(Centrelink),alsorefertolowincomeearners,suchusageisfromadifferent

basisorbenchmark.Usingbenchmarksoutsidetaxationwouldnotbeappropriate

giventhattaxationisanintegralpartofthesuperannuationsystem.

TaxratesaresetoutunderSchedule7oftheIncomeTaxRatesAct1986andinvolve

5thresholds(seebelow).Itshouldbenotedwhendecidingonwhetherapersonis

low,middleorhighincome,thatthecutoffshouldbeviewedoverarangeandnot

limitedtoonepoint.Forexample,oneextradollarmaymakesomeonefallintothe

next higher tax bracket but itwould not change their status from low income to

middle income,ormiddle income tohigh income.There isa continuumtherefore

fromlowincometomiddleincomeandthentohigherincomes.

TheincometaxthresholdsandtaxratesforAustraliantax lawresidentsnoted34in

thetablebelow,canserveasaguide:

Lowincome $0–$18,200 NilLowincome $18,201–$37,000 19cforeach$1over$18,200

Low-Middleincome

$37,001–$87,000 $3,572plus32.5cforeach$1over$37,000

Middleincome $87,001–$180,000 $19,822plus37cforeach$1over$87,000

Middle-Highincome

Over$180,000 $54,232plus45cforeach$1over$180,000

NB.Forsimplicity,theMedicareLevyisnotincludedinthispaper.

34 IncomeTaxRatesAct1986(Cth)Schedule7.

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Lowincomeearners

Forthe2017–18incomeyear,lowincomeearnersaretaxpayerswhoearnlessthan

$37,000.Taxpayerswhoearnlessthanthetaxfreethresholdof$18,200paynotax,

and thosewhoearnmore than thisamount,pay19cents in thedollarabove the

threshold up to $37,000. Taxpayers who earn less than $37,000 receive the

maximum Low Income Tax Offset of $44535and still pay tax (including Medicare

Levy).However,underthetaxationsystemapersonwhoearnsmorethan$37,000

butlessthan$66,66736isentitledtoapartiallowincometaxoffset,suggestingthat

a low income earner for tax purposes can earn more than $37,000. Therefore

arguably,someonethatearnt$45,000-$50,000perannumcouldstillbeconsidered

alowincomeearner,bearinginmindthelegislativeminimumwageforthe2017–18

isroughly$36,000.37

Middleincomeearners

Middleincomeearnersarethosewhoseincomeisbetweenlowincomeearnersand

highincomeearners.Thisisaverybroadcategoryearningmorethan$37,000and

lessthan$180,000.Middle incomeearnerspay32.5centsperdollarover$37,000

upto$87,000,whilethoseearningmorethan$87,000pay37centsperdollarupto

$180,000. AsatMay2017,theABSadvisedtheaveragewagewas$80,00038and

this statistic would suggest that a middle income earner would certainly have a

wage in this range.Arguably, amiddle incomeearner couldhave incomeperhaps

around$50,000toabout$200,000.

35 IncomeTaxAssessmentAct1936(Cth)s159N.36 Theamountisreducedby1.5cforeverydollarover$37,000.37 FairworkCommission,NationalMinimumWageOrder2017,(6June2017),AppendixA-4.1,

https://www.fwc.gov.au/awards-agreements/minimum-wages-conditions/annual-wage-reviews/annual-wage-review-2016-17/national.

38 AustralianBureauofStatistics,6302.0–AverageWeeklyEarnings–May2017,(17August

2017),Table1,http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0.

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Highincomeearners

Highincomeearners,arethosetaxpayerswhopaythehighestmarginalrateoftax

whichis45percent,anddosowheretheirincomeisabove$180,000.However,it

can be noted that the Div 293 tax39in the superannuation system is currently

imposed at a level of $250,000 for high income earners. In the Superannuation

Guarantee (SG) system, a high income earner is one that receives more than

$211,040perannum,asemployersarenotliableforSGforamountsexceedingthis

level. Arguablyahigh incomeearnermightbeclassifiedassomeonewith income

about$200,000onwards.

3.3 Horizontalandverticalequityregardingtaxationofsuperannuation

Appendix A provides a ‘Snapshot of horizontal and vertical equity’; the details of

whicharediscussedbelow.Asdiscussedabove,taxationofsuperannuationapplies

atthethreestagesandthemainissuespertaintomorethan30componentsofthe

systemwhere horizontal and vertical inequity are reviewed. It can be seen at a

glance that vertical inequity is the main concern with the taxation of

superannuation, although there are some lesser concerns applying to horizontal

equity.

4. Isthetaxationofcontributionsequitable?Contributions to superannuation funds can be made by employers, the self-

employed, employees, spouses and the government. Different rules apply to

employer contributions, individual contributions and government contributions.

Broadly the superannuation system is equitable re is equity in relation to

contributions except where high income earners benefit through tax deductions

becauseoftheirhighmarginaltaxrateandwherethereisunnecessaryagedbased

39 Thisisanadditionaltaxof15percentthathighincomeearnerspayoncontributions.

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discriminationinrelationtovariouscontributions.Inaddition,lowincomeearners

couldbefavouredintermsofahigherSuperannuationGuaranteerate.

4.1 Equityofemployercontributions

AmoreequitablesuperannuationsystembecauseofuniversalSG

TheKeatingGovernmentestablishedtheSGscheme40ofthesuperannuationsystem

basedonaplatformofequity.Inhissecondreadingspeech,thethenTreasurerJohn

Dawkins advised that the introduction of the Superannuation Guarantee would

‘provide a coherent and equitable framework to progress retirement income

objectives’.41In addition, Dawkins stated access to superannuationwould nowbe

much more equitable and the system would move from a concessionally taxed

system for high income earners to a national retirement savings for most

Australians.42 Accordingly,SGcanbeviewedashorizontallyequitable in that the

mandatedminimumcontributionspaidbyemployersapplytoallemployees.

The SG system is broadly universal, although there are some exemptions. These

exemptions were introduced mainly for compliance and administration reasons,

includinginternationalconsiderations.Forexample,noSGappliestoanemployee

paid less than$450 inamonth,43or topart-timeemployees less than18yearsof

ageworking30hoursorlesseachweek,44orforprivatearrangementsforworkpaid

fordomesticdutiessuchasnannieswhoworklessthan30hourseachweek.45Also,

40 SuperannuationGuarantee(Administration)Act1992(Cth)andSuperannuationGuarantee

ChargeAct1992(Cth).41 Commonwealth,ParliamentaryDebates,HouseofRepresentatives,2April1992,1763,(John

DawkinsTreasurer),http://parlinfo.aph.gov.au/parlInfo/download/chamber/hansardr/1992-04-02/toc_pdf/Hpercent201992-04-02.pdf.

42 Ibid.43 SuperannuationGuaranteeAdministrationAct(Cth)s27(2).44 SuperannuationGuaranteeAdministrationAct(Cth)s28.45 SuperannuationGuaranteeAdministrationAct(Cth)s12(11).

16

noSGispayableforvariousforeignexecutivesundercertainvisas,46orforresident

employees paid by non-resident employers when work is performed outside

Australia,47or for foreign resident employees paid for work undertaken outside

Australia.48Themostobjectionableequityconcernregardingexemptionsrelatedto

theagebarrier,whereemployeeswerenotpaid if theywere70ormoreyearsof

age. The age limit for SG49was abolished from 1 July 2013 by the Gillard

Government.TheSGsystemisconsideredtobehorizontallyequitable.

SGRate–verticalinequity

However,middleincomeearnershavethebestdealintermsofSG,andthisleadsto

verticalinequity,giventheflatrateof9.5percent.Forexample,awageearnerwho

is paid $50,000 gets $4,750 in SG compared to awage earner receiving $150,000

that gets $14,250 SG which is considerably more. One possible reform is the

introduction of a higher rate of SG for lower income earners to promote vertical

equity. It can also be noted that high income earners still benefit from the SG

system,although thesebenefitsare subject toamaximum limit. Theemployer is

onlyobligatedtopayuptothemaximumsuperannuationcontributionbase50limit.

For the 2017–18 income year, the maximum contribution level is $52,760 for a

quarter,equivalentto$211,040ayear(indexedannually).51Thisisfairintermsof

verticalequity,givenhigh incomeearnershavelessneedtorelyuponSGfortheir

retirement.

46 SuperannuationGuaranteeAdministrationAct(Cth)s27(1)(d).47 SuperannuationGuaranteeAdministrationAct(Cth)s27(1)(c).48 SuperannuationGuaranteeAdministrationAct(Cth)s27(1)(b).49 SuperannuationGuaranteeAdministrationAct(Cth)s27(1)(a).50 SuperannuationGuarantee(Administration)Act1992(Cth)s15.51 AustralianTaxationOffice,MaximumSuperContributionBase,

https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Maximumsupercontributionbase#Maximumsupercontributionbase.

17

Salarysacrificecontributionsandadditionalcontributionsbyemployer

Employers can make contributions beyond the minimum required under the SG

regime through additional voluntary contributions or via salary sacrifice

contributions52 (on behalf of the employee using the employee’s before tax

earnings), subject to certain limits.53Employment arrangements are a private

matter,andadditionalcontributionssuchastheseisnotareallyamatterofconcern

in regard to equity, and such amounts are simply considered as part of the SG

contributionscomponent.

ConclusionreSG

Overall, SG satisfies horizontal equity as it is a national employer sponsored

superannuation scheme, broadly accessible to all Australians. It significantly

improvesequityforlowincomeearners,andmiddleincomeearnerswhofarevery

well, and it does not unduly favour high income earners. However, as discussed

reformmeasuretoredresstheverticalinequitywouldbetoincreasetheSGratefor

lowincomeearners.

4.2 Individualcontributions-concessionalandnon-concessional–ExcessContributionsTax

Tofurtherboostsuperannuationsavings,individualscanmakeprivatecontributions

to their superannuation funds. In general, high income earners have greater

capacity tomake contributions compared to low incomeearners, given theyhave

greaterdisposableincome,andthereisaninherentverticalinequitybecauseofthe

differing income levels. This could be overcome by the government making

contributions for low income earners. Contributions are made during the 52 NatashaCortisandChristineEastman,‘SalarysacrificinginAustralia:arepatternsofuptake

andbenefitdifferentinthenot-for-profitsector?’,(2015)53(3),AsiaPacificJournalofHumanResources,http://onlinelibrary.wiley.com/doi/10.1111/1744-7941.12054/abstract.Thispaperadvisesthatonlyhighincomeearnerstakeupsalarysacrificingwithinthenot-for-profitsectorandacrosstheworkforcegenerally.

53 Employersneedtobecarefulwiththetotalcontributionsmadetoanemployee’s

superannuationaccount,asifthereisanexcesstothecap,thenanexcessconcessionalcontributionstaxispayablebytheemployee.Thecontributionscapfor2017is$25,000underIncomeTaxAssessmentAct1997(Cth)s291-20(2).

18

accumulation phase where the member’s account increases, not the retirement

phasewhenamemberhasmetaconditionofrelease54suchasreachingretirement

age, financial hardship, disability etc., and generally draws down on their

accumulatedsavings.

Thereare twotypesofcontributions;concessionalandnon-concessional. Broadly

speaking,aconcessionalcontribution55isonethatcanbeclaimedbyan individual

(oremployer)asa taxdeductionwhereasanon-concessional contribution56isnot

tax deductible to the individual. Previously, these termswere referred to in the

IncomeTaxAssessmentAct1936as‘deductible’and‘non-deductible’contributions.

Concessional contributions are made from pre-taxed earnings and are limited to

$25,000 for the 2017–18 income year.57These contributions are available to all

Australians of all ages, and contributions above the cap are subject to an excess

contributionstax.Incontrast,non-concessionalcontributionsaremadefromafter

taxearningsandarelimitedtoamaximumof$100,00058perannumforthe2017–

18incomeyear,or$300,00059usingcarryforwardprovisionsovera3yearperiod.

Anyexcessaboveeitheroftheselimitsissubjecttoanexcesscontributionstax.60

EquityofExcessContributionsTaxes(ECT)–concessionalandnon-concessional

As discussed, contributions made to superannuation funds are limited for both

concessional and non-concessional contributions. These limits were primarily a

introducedtomakethesuperannuationsystemsustainableforthegovernment.

54 SuperannuationIndustry(Supervision)Regulations1994(Cth)sch1pt6(Cth).55 DefinedinIncomeTaxAssessmentAct1997(Cth)s291-25.56 DefinedinIncomeTaxAssessmentAct1997(Cth)s292-90.57 IncomeTaxAssessmentAct1997(Cth)s292-20(2).58 IncomeTaxAssessmentAct1997(Cth)ss292-85(2)-(4).59 IncomeTaxAssessmentAct1997(Cth)ss292-85(2)-(4).60 Superannuation(ExcessConcessionalContributionsCharge)Act2013(Cth)and

Superannuation(ExcessNon-ConcessionalContributionsTax)Act2007(Cth).

19

Excessconcessionalcontributionsareaddedtotheassessableincomeandtaxedat

marginal rates of tax less 15 per cent tax offset for contributions. The ruleswere

relaxedsothatataxpayercouldwithdrawtheirexcessconcessionalcontributionsto

paytheECT.Thesameappliesforexcessnon-concessionalcontributions,butifthe

excessisnotwithdrawnfromthefund,thosecontributionswillbesubjecttothetop

marginalrateoftax.61Theserulesapplyequallytoallsuperannuation,andthereis

horizontalequityinrelationtothecontributionlimitsandECT.

4.3 Equityregardingconcessionalcontributions

Concessionalcontributionsbyemployers

Thecontributionsdiscussedaboveareavailabletotheemployerasataxdeduction

whichiswhytheyareaconcessionaldeduction.Thereishorizontalequityinthatall

employerscanclaimataxdeductionforbothSGpaymentsmadeontimeandother

concessional superannuation contributions.62Some employers are companies and

benefitfromthetaxdeductionatonlythecompanyrateof27.5percentforsmall

companiesand30percent forothercompanies. Someemployersare individuals

andtheirbenefitcouldbeashighasthetopmarginaltaxrates.However,thisisnot

an example of horizontal inequity in the superannuation system, but horizontal

inequitywithin the design of the taxation system itself, because different entities

aretaxeddifferently.Thismatterisconsideredbyprincipalswhensettinguptheir

businessstructure.(e.g.soletrader,trust,partnershiporcompany).

61 KaiSwoboda,TaxandSuperannuationLawsAmendment(2014MeasuresNo.7)Bill2014,No.

75of2014-15,23February2015,14,http://parlinfo.aph.gov.au/parlInfo/download/legislation/billsdgs/3676055/upload_binary/3676055.pdf;fileType=application/pdf.

62 IncomeTaxAssessmentAct1997(Cth)sub-div290-B.

20

Horizontal equity for self-employed, non-employed investors and employees –

accesstoconcessionalcontributions

UntiltheNovember2016TurnbullGovernmentreforms,63therewasnothorizontal

equityforcontributionsmadebynon-employedinvestors,employeesandtheself-

employed. All self-employedmembers could broadly claim a tax deduction as an

appropriatebusinessexpense.64Theself-employedwereabletomakeadeductible

contribution since the Menzies Government,65and were financially advantaged

comparedtoemployeesthatwereonlyabletomakenon-deductiblecontributions.

This advantage remained also for self-employed and non-employed until the

November2016Turnbullsuperannuationreformpackagereforms.

Further, concessional contributions apply toemployerswhopay SG contributions,

salarysacrificeandadditionalcontributions,andthesedeductionshistoricallyhave

been seen as an appropriate business expense.66However, there was horizontal

inequity given some employees were advantaged through salary sacrifice

arrangements for superannuation from their employer. Employers that offered

salary sacrifice arrangements benefitted their employees because the employer

contributedtosuperannuationfromtheirpre-taxincomeandtheirtaxableincome

was reduced by that contribution. Employees that are offered salary sacrifice are

advantaged in comparison to those employees not offered salary sacrifice

arrangements. In comparison, the latter could only, make non-concessional

contributionsfrompost-taxincomeandreceivednotaxdeduction.

63 Superannuation(ExcessTransferBalanceTax)ImpositionBill2016(Cth)(Act80of2016)and

TreasuryLawsAmendment(FairandSustainableSuperannuation)Bill2016(Cth)(Act81of2016).

64 IncomeTaxAssessmentAct1997(Cth)s290-150.65 TheMenziesGovernmentintroducedadeductionforsuperannuationfortheself-employed

pursuanttotheLigertwoodCommittee’srecommendation.66 Employershavebeenalloweddeductionssince1915forsuperannuationcontributionsfor

employees-IncomeTaxAssessmentAct1915(Cth)s18(j).

21

TherecentTurnbullreformsredressedtheaboveinequitiesbyabolishingthe10per

cent rule67putting the self-employed, non-employed and employees on the same

footingbecausenowallAustralianmembersofsuperannuationfundscanclaimthe

samelevelsofconcessionalandnon-concessionalcontributions.Theeliminationof

the10percentrulemeansthatconcessionaldeductionscanbeaccessedbyawider

classofmembers.Thisresultsinanallowabledeductiontothoseself-employedand

non-employed whose earnings from wages are more than 10 per cent of their

assessable income and for those employeeswhose employers do not offer salary

sacrificearrangements.

In summary, the superannuation system for contributions has removed the

horizontal inequity allowing concessional deductions to employees unable to

participate in salary sacrificing privileges and also permitted further concessional

deductions for self-employed andnon-employed groups, by abolishing the 10 per

centrule.

Verticalinequityforhighincomeearnerconcessionalcontributions&Div293Tax

Vertical inequityremainsanissueinrelationtoconcessionalcontributions. Forall

concessionalcontributionswithincertainlimits,thetaxappliedisa15percentflat

rate, and arguably, this tax imposition would appear to be fair. However, this

arrangement is inequitable because individuals can subsequently claim a tax

deduction for concessional contributions and the consequent benefit of the tax

deduction applies at their marginal rate of tax. This means that higher income

earnersreceiveagreatertaxbenefit inreducingtheirtaxburdenincomparisonto

lowerincomeearners.Forexample,ahighincomeearnerthatcontributes$10,000,

paystaxonthecontributionof$1,500,butgiventheyalsoclaimataxdeductionof

$10,000, subsequently receive a tax reduction of their tax liability of $4,500

assumingthehighestmarginalrateoftaxapplies.Essentiallythegovernmentgives

agenerous30percentreturntohighincomeearnerstoencourageinvestmentinto 67 Toenableaconcessionalcontributionasadeduction,the10percentrulerequiredaself-

employedpersontobesubstantiallyself-employedbyhavinglessthan10percentoftheirincomeinwages.Thisappliedsimilarlytonon-employedpersons(investors)toalsohavelessthan10percentassessableincomefromwages.ReferIncomeTaxAssessmentAct1997(Cth),formers290-160.

22

superannuationwhenmakingaconcessionalcontribution.Contrastthisscenarioto

alowincomeearner(whowouldbeveryfortunateindeedtobeabletoaffordthe

sameinvestment),butiftheydid,giventheirmarginalrateoftaxisonly19percent

or0percent,thereductionintaxisonly$400for19percentmarginalrateoftax,

and for thosebelow the tax free thresholda veryunfavourable increaseof taxof

$1,500ifthemarginalrateoftaxis0percent.

Essentially,onthisbasis,thereisnomotivationforlowincomeearnerstoinvestin

concessionalcontributionstosuperannuationfunds, incomparisontohigh income

earners who are positively encouraged to invest if they had the means. Middle

income earners are also encouraged to invest but with a lower benefit in

comparisontohighincomeearners,giventheirlowermarginalratesoftax.

However,thisinequityfavouringhighincomeearnerswasaddressedinpartbythe

GillardGovernmentreformsthatimposedanadditionalcontributionstaxof15per

centonthosememberswithadjustedtaxableincomes(includinganyemployerSG

contributions) that were above $300,000. 68 This threshold was reduced to

$250,00069by the Turnbull Government as part of the November 2016 reforms.

Thisadditional15percenttaxunderDivision293oftheIncomeTaxAssessmentAct

1997,commonlyknownasDiv293Tax,was introducedtoensurethoseonhigher

incomeswhoreceivedthetaxconcessionswouldbealignedmorecloselytolowand

middle-incomeearners.

Insummary,vertical inequityremainsgivenmemberswithhigher incomesreceive

largertaxdeductionsatmarginalrates,althoughthisbenefittohighincomeearners

hasbeenreducedbytheDiv293Tax (anadditional15percent tax). Onereform

measure thatcouldbe implementedcreategreaterverticalequity, is to lower the

68 TaxandSuperannuationLawsAmendment(IncreasedConcessionalContributionsCapand

OtherMeasures)Act2013(Cth)andalsoSuperannuation(SustainingtheSuperannuationContributionsConcession)ImpositionAct2013(Cth).

69 IncomeTaxAssessmentAct1997(Cth)Div293andothersections.

23

threshold for the Div 293 Tax, say to $180,000, Alternatively, the taxation of

contributionscouldbeimposedatanindividual’smarginalrateoftax.

However, if contributionswere taxedat an individualmember’smarginal ratesof

tax, the net effect of allowing the tax deduction which would also be at the

member’smarginal rateof tax, is toeffectivelycancel thetaxoncontributions. It

could be argued that a simple method therefore to promote vertical equity to

individuals in the system would be to withdraw the tax on concessional

contributions for individuals and subsequent tax deductions, and to deny salary

sacrificing arrangements for superannuation. However, while this proposal may

meet the objective of promoting equity, it would fail to meet the government’s

underlyingpolicytoencourageAustralianstoinvestinsuperannuation.70

Finally,anotheroptioncouldbe toadopt theGreensapproachcampaigned in the

last election, to apply a progressive contributions tax, so that concessional

contributionswouldbetaxedatmarginalratesoftax,less15percent.Inthisway

greaterverticalequitywillresult.71

Concessionalcontributionsonbehalfofaspouse–ContributionsSplitting

In 2006, the Howard Government introduced spouse contributions splitting that

may be made using concessional contributions (before tax).72Non-concessional

contributions cannot be split but concessional contributions can be split between

spouses, providing the superannuation fund of the spouse that splits their

contributions permits the contributions splitting. The advantage of contributions

splitting is that the higher income earning spouse, salary sacrifices their

70 AspreyTaxationReviewCommittee,para21.6,aboven11.TheAspreyTaxationReview

Committeeobservedthatthesuperannuationconcessionswereaimedtocorrectthebiasagainstsavings(thatisthetaxonsavings)andalsopromotelongtermsavingsintheprivatesector.

71 AustralianGreens,Progressivesuperannuation:Endingunfairtaxbreaksandbootingsuperfor

low-incomeearners,(Election2016),TheGreens,https://greens.org.au/progressive-superannuation.

72 SuperannuationIndustry(Supervision)AmendmentRegulations2005(No.8)(Cth).

24

contributionsandreceivesthetaxbenefits,whilethelowerincomespousereceives

agreatersuperannuationbenefit. Themaincondition isthatthereceivingspouse

mustbeunderpreservationage,orifolder,mustbelessthan65andnotretired.73

Aspouseincludesapartnerofeitherasame-sexcoupleorheterosexualcouple,and

thissimilartreatmentofcouplespromoteshorizontalequityinthesuperannuation

system. 74 It is considered contributions’ splitting raises no major issues for

horizontalequityasallcoupleshaveequalrightstomakecontributions.However,it

couldbearguedthathighincomeearnerswilltakeupthisoption,andsofavourthe

high income earners. But a counter argument, is that the real benefit is to the

poorer income spouse and the other focus of the policy is an adequacymeasure

thatpromotes superannuation savings for low incomeearners contributed froma

higher taxedspouse. Onbalance it is considered that thispolicyachievesvertical

equity.

Catchupconcessionalcontributions–flexibilityandequitymeasure

The Turnbull Government’s November 2016 reforms, introduced catch-up

concessional contributions allowed to members who have small superannuation

fundaccountbalanceslessthan$500,000.Somemembersinthecommunityhave

irregularworkpatterns,suchaswomenwhotaketimeoff fromtheworkforce for

family reasons, or becauseof contract or casualworkonly being available. For a

periodofupto5yearsandonarollingbasis,unusedportionsoftheconcessional

capcanbecarriedforward.75Thiswasreportedasaflexibilitymeasure,butitisalso

anequitymeasurethatassistsallAustralians,but inparticular lowincomeearners

whosefinancialcircumstanceshaveimproved.Although90percentofAustralians

have lowaccountsbalances, it isexpectedonly230,000memberswill takeupthe

73 AustralianTaxationOffice,Contributionssplittingformembers,

https://www.ato.gov.au/Super/APRA-regulated-funds/Managing-member-benefits/Contributions-splitting-for-members/.

74 Same-sexRelationships(EqualTreatmentinCommonwealthLaws–Superannuation)Act2008

(Cth).75 IncomeTaxAssessmentAct1997(Cth)sub-ss291-20(3)to(7).

25

opportunity to top up their superannuation when they can afford to.76 This is

considered a timing issue, that provides flexibility, and given it is accessible to all

withlessthan$500,000accountbalances,itachieveshorizontalequity.

4.4 Equityofnon-concessionalcontributions

Non-concessionalcontributions-generally

Individualsthatmakenon-concessionalcontributionsfrompost-taxincome,receive

no tax deduction at the contributions stage, irrespective of the size of their

contribution. There are no tax advantages to individuals in relation to non-

concessional contributions, and therefore no impact on vertical equity given

differingmarginaltaxrates.Non-concessionalcontributionsareequallyavailableto

all subject to limits discussed, and therefore there is no adverse impact on

horizontalequity.

Non-concessionalcontributionsonbehalfofaspouse–SpouseTaxOffset

PriortotheTurnbullGovernmentsuperannuationreforms,apersonwhomadenon-

concessional superannuationcontributions toacomplyingsuperannuation fundof

$3,000 or more from after tax income for their spouse received a maximum tax

offset of $540, 77 providing both spouses were Australian residents, and the

benefitting spouse’s assessable incomewas less than $10,800 (including amounts

fromreportablefringebenefitsandreportablesuperannuationcontributions).78The

tax offset was phased out altogether if the eligible spouse’s income was greater

than $13,800. The Turnbull Government 2016 reforms increased the income

threshold of the spouse to $37,000 and to phase out at $40,000.79 This is a

76 Commonwealth,ParliamentaryDebates,HouseofRepresentatives,9November2016,3382,

ScottMorrison,Treasurer,http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=CHAMBER;id=chamber%2Fhansardr%2Fe089c8c3-75b7-4858-80ac-58b4e4c6e749%2F0161;query=Id%3A%22chamber%2Fhansardr%2Fe089c8c3-75b7-4858-80ac-58b4e4c6e749%2F0160%22.

77 IncomeTaxAssessmentAct1997(Cth)s290-235.78 IncomeTaxAssessmentAct1997(Cth)s290-230.79 IncomeTaxAssessmentAct1997(Cth)para290-230(2)(c).

26

horizontalequitymeasurethatagainassistsspousesoflow-incomeearnerstomake

contributionstosupporttheotherpartner’sretirementsavingsmeasure.80

Non-concessionalcontributionsover65-worktestrequirements

Inorder tomakeanon-concessional contribution, superannuationmembersmust

consider whether they are required to meet the ‘work test’.81 The work test

essentially requires that members are working full-time or part-time, but the

specifiedminimum is 40 hours in 30 days,82which is easily achievedworking full

time,andalsoafairlyeasytesttoachieveworkingpart-time.In2004,theHoward

GovernmentabolishedtheworktestrequirementsforAustraliansunder65yearsof

age,butretainedthemforpersonsover65yearsofage.83Giventheagedpension

wasavailabletoallat65,theobjectiveoftheworktestwastoensurethatsenior

Australians were still working for their future retirement needs. This test was

intended to counter abuse of the superannuation system by senior Australians

puttingmoney into superannuation as an investment vehicle that attracted a low

rateofearningstax.However,thisworktestbreacheshorizontalequityandcanbe

easily circumvented, it is discriminatingon thebasisof age, and should simplybe

abolished. The Australian Law Reform Commission also supports removing aged

based restrictions on accumulation, given these limits are not appropriate for

today’sretirementexpectations.84

80 ScottMorrison(Treasurer),ParliamentaryDebates,n76.81 ContributionsareprohibitedbytheSuperannuationIndustry(Supervision)Regulations1994

(Cth)7.01(3)frommembersaged65-74unlessthemembermeetstheworktest.82 Ibid.83 SuperannuationIndustry(Supervision)AmendmentRegulations2004(No.4)(Cth).84 AustralianLawReformCommission,Thesuperannuationsystem–anoverview,para8.1, https://www.alrc.gov.au/publications/8-superannuation/superannuation-system.

27

4.5 Equityregardinggovernmentcontributions

Equityforlowincomeearners-LISCandLISTO

TheLowIncomeSuperContribution(LISC)wasamaximumof$500co-contribution

providedbytheGillardGovernmentfromthe2012–13incomeyearthatappliedto

low incomeearnerswhoseadjusted taxable incomewas less than$37,000.85(The

marginalrateoftaxatthattimewas15percent,buttodayis19percent).Thisco-

contribution was paid by the government directly into an employee’s

superannuationaccountwhereconcessional contributionshadbeenmade (by the

employer through SG or through additional contributions by the employee) and

then taxed at 15 per cent.86 Essentially the LISC refunded the 15 per cent

contributionstax.Thiswasanexampleofanequitymeasuretosupportlowincome

earners, because low incomeearnerswhodidnotpay taxon their income in the

personal taxation system,werepenalised in the superannuation systemwhen tax

wasleviedontheirsuperannuationcontributionspaidbytheiremployers,andalso

whenincometaxwasleviedontheirfundincome.Thismeasurepromotesvertical

equityinthesystem.

TheLISCwasabolishedbytheAbbottGovernmentcommencing from1July2017.

This added to the inequity in the superannuation system. However, the Turnbull

Government November 2016 reforms subsequently introduced a Low Income

SuperannuationTaxOffset(LISTO)ofupto$50087availabletosuperannuationfunds

toreplacetheLISC,whichresultsinthesameoutcomeandsupportsverticalequity.

TheTreasurerstatedthisistoimprovethefairnessofthetaxsystembecauselow-

85 TaxLawsAmendment(Stronger,Fairer,SimplerandOtherMeasures)Act2012(Cth).86 AustralianTaxationOffice,LowIncomeSuperContribution,

https://www.ato.gov.au/Individuals/Super/In-detail/Growing/Low-income-super-contribution/.

87 Superannuation(GovernmentCo-contributionforLowIncomeEarners)Act2003(Cth)pt2A,ss

12B-12G.

28

income earners lose 15 per cent of their contribution, which is higher than their

marginalrateoftax.88

Governmentco-contribution-equityforlowandmiddleincomeearners

In 2003, the Howard Government introduced government co-contributions,89to

benefit lowandmiddle incomeearners thatmadenon-concessional contributions

andthiswasincreasedto$1500in2004.90Thiswasaverticalequitymeasurethat

inparticular,supportedlowincomeearners.Thiswasagenerousmotivationbythe

government of providing a dollar for dollar investment return, that would be

channeledintosuperannuation.Thisbenefitwashoweverreducedinthe2008–09

incomeyearto$1,000bytheRuddGovernmentonthebasisofsustainablepension

reform. 91 The Gillard Government subsequently reduced government co-

contributions to $50092in 2012–13 income year given the LISC was introduced

whichalsoprovidedamaximumof$500benefit.

The co-contributions scheme requires 4 tests to be met,93and for the 2017–18

incomeyearthesetestsare:

• Theworktest,asdiscussedabove,workingfull-timeorpart-time,buta

minimumof40hoursin30days.

• Theincometestisifanindividualearnslessthan$36,813theycanreceive

supportof50centsforeveryaftertaxdollartheindividualcontributestoa

superfunduptoamaximumof$1,000contribution,resultinginamaximum

of$500governmentbenefitthatistaxfreeandpaidintotheindividual’s

88 ScottMorrison(Treasurer),ParliamentaryDebates,n76.89 Superannuation(Governmentco-contributionforLowIncomeEarners)Act2003(Cth).90 Ibid.91 TaxLawsAmendment(2009BudgetMeasuresNo.1)Act2009(Cth). 92 TaxLawAmendment(Stronger,Fairer,Simplerandothermeasures)Act2012(Cth).93 AustralianTaxationOffice,Superco-contribution,

https://www.ato.gov.au/individuals/super/in-detail/growing/super-co-contribution/.

29

superfund.Thisbenefitshadesoutforindividualswhoearnmorethan

$36,813,andtheupperincomethresholdtapersoutat$51,813.

• Theagetestisthattheindividualmustbelessthan71attheendofthe

financialyear

• Thesuperannuationbalancetestisthattheindividualmusthavelessthan

$1.6mintheirbalanceoftheiraccount.

Thetestsarereasonableintermsofequityconsiderations.Individualsneedtobe

working,havelowincomes,andmusthavelessthan$1.6mintheirsuperannuation

account.Inasimilarmannertothenon-concessionalcontributionstestfor

membersagedover65,theagetest94formakingco-contributionsisinequitablein

termsofhorizontalequityandshouldbeabolished.Thisisespeciallysogiven

similarreformsabolishedtheagetestforSG.95TheAustralianLawReform

Commissionalsoquestionswhethersuchatestisappropriatetofostermatureage

workforceparticipation.96

4.6 Summaryandrecommendations The taxation on superannuation contributions is complex involvingmany types of

contributions and many rules. Overall, high income earners benefit most from

makingcontributions.

The SuperannuationGuarantee system has brought equity to the superannuation

system,giventhatallAustraliansbenefitfromemployercontributions,andthereis

somebalancegiventhereareappropriatelimitsforhighincomeearners.However,

94 Superannuation(GovernmentCo-contributionforLowIncomeEarners)Act2003(Cth)

s6(1)(e).95 TheGillardGovernmentoriginallyproposedtoincreasetheagefrom70to75,andthen

decidedtoabolishtheagetestaltogether.ReferSuperannuationGuarantee(Administration)AmendmentAct2012(Cth).

96 AustralianLawReformCommission,Superannuation:aboven84.

30

the flat rate promotes vertical inequity, and one possible reform measure is to

introduceahigherratethatwouldbeappliedtolowincomeearners.

The tax on contributions has been for the most part made more equitable by

allowing all individual taxpayers equal access to both concessional and non-

concessionalcontributionsbyabolishingthe10percentrule.

Low income earners disadvantaged when employers pay tax on their

superannuationcontributionsarecompensatedbytheLISTOthatoffsetsthe15per

centcontributionstax.Similarly,lowincomeearnerstomiddleincomeearnersare

supportedbygovernmentco-contributions.

Low to middle income earners are also supported by the concessional catch up

provisionsandflexibilityisprovidedtosupportlowincomeearnersthroughspouse

contributions in relation tocontributions splitting (concessional contributions)and

thespousetaxoffset(non-concessionalcontributions).

The high concessionary nature of superannuationwas deliberately intentioned to

encourage investment in superannuation, andwith changing government policies

hasbenefittedmiddleincomeandespeciallyhighincomeearners.

Highincomeearnerswhodonotneedsuchlargetaxationincentiveshavehadthese

concessions reduced by the Div 293 tax of an additional 15 per cent tax on

contributions. The Turnbull Government reduced the threshold for high income

earners from $300,000 to $250,000, however one possible reformmeasure is to

reduce this further to a lower level say of $180,000 to promote further vertical

equityinthesuperannuationsystem.

Finally, there are age barriers, in relation to the work test for members over 65

yearsofageand,theagetestforco-contributionstothoseagedlessthan71years

ofage.Theseagerestrictionsshouldbeabolished.

31

5. Isthetaxationoffundincomeequitable?

Themainissuewithfundincomeisthatitslevelofconcessionisunsurpassedbyany

otherformofinvestment,givenitistaxedatonly15percent,meaningthatit

becomesveryattractivetohighincomeearnersseekingtaxadvantages,andthereis

virtuallynobenefittolowincomeearners.Inaddition,despitenewlawssettinga

limittothesuperannuationbalancecapof$1.6m,thiscapislimitedtonewassets

andgrandfatheringrulesapplytoexistingassetspriorto1July2017.

Grandfatheringpermitstheexcesssuperannuationbalancetosimplymoveto

anotheraccountthatisstillconcessionallytaxedat15percent,favouringhigh

incomeearners.Althoughnon-concessionalcontributionscannotbeaddedtoan

accountoncethe$1.6mbalancecaphasbeenreached,concessionalcontributions

canstillbeadded,againfavouringhighincomeearners.Inthisregard,both

horizontalandverticalinequityapplytotaxationonfundincome.

5.1 Horizontalandverticalinequityretaxonfundincome

Income of a superannuation fund was historically tax exempt.97 The Hawke

Governmentintroducedalowconcessionary15percenttax98onfundincome,and

thisratehasremainedunchanged.99Itwasseenthatabolishingtheexemptionand

the taxationof superannuation fundswould raise revenue and improve efficiency

andequityinagrowthmarket.100

97 IncomeTaxAssessmentAct1915(Cth)s11(f)andIncomeTaxAssessmentAct1936(Cth)s23F.98 TaxationLawsAmendmentAct(No6)1988(Cth).99 Note that superfunds are eligible for a CGT discount of 33 1/3 per cent, Income Tax

AssessmentAct1997(Cth)s115-100(b)andthereforeonlypaytaxof10percentonacapitalgain.

100 Commonwealth,ParliamentaryDebates,HouseofRepresentatives,30November1988,3568,

(PeterMorris)http://parlinfo.aph.gov.au/parlInfo/download/chamber/hansardr/1988-11-30/toc_pdf/Hpercent201988-11-30.pdf;fileType=applicationpercent2Fpdf#search=percent221980spercent201988percent2011percent2030percent22.

32

Complyingvs.Non-complyingfund–differenttaxrates

Theconcessionaryrateof15percenttax101isavailabletocomplyingfunds102

providingtheycomplywithcertainlegalrequirements.103Whenafundregisters,the

complyingstatusisawardedprovidingthefundmeetscertainminimum

requirements.However,shouldthefundbreachlegalrequirementsitcanbemadea

non-complyingfundbytheAustralianTaxationOfficeorAustralianPrudential

RegulationAuthority.

Inthetaxationsystem,Incomeofacomplyingfundthatisonlytaxedat15percent

ishorizontallyinequitableincomparisontotaxpaidbyothers,suchascompaniesat

27.5percentor30percentandindividualswhoaretaxedattheirmarginalrateof

taxrangingfromzeropercentto45percent.

Withinthesuperannuationsystem,thisisverticalinequityashighincomeearners

whohavea45percenttaxrate,areadvantagedbyinvestingintothefundin

comparisontolowincomeearnersandmiddleincomeearners.Lowincomeearner

contributionsthathavea0percenttaxratearesignificantlydisadvantaged,and

thereisverylittlesupportforthoseona19percenttaxrate.However,as

discussed,thisverticalinequityhasbeencounteredbytheLISTO.

Middleincomeearnersremaindisadvantagedincomparisontohighincome

earners.Onereformmeasurethatcouldaddressthisinequity,istoapplyan

additionaltaxtohighincomeearners,oralternativelymiddleincomeearnerscould

receivesomethingliketheLISTO.

101 IncomeTaxRatesAct1986s26(1)(a)(Cth).102 Forthedefinitionofacomplyingandnon-complyingsuperannuationfundrefertoIncomeTax

AssessmentAct1997(Cth)s995.103 Therearemanycompliancerequirementsinvolvingdifferentsuperannuationlaws.For

example,toensureaSMSFisproperlyregulated,referAustralianTaxationOffice,HowyourSMSFisregulated,https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/How-your-SMSF-is-regulated/.

33

Incontrast,ifafundisnon-complying,thenthetaxationratethatappliestoanon-

complyingfund104incomeis45percent.105Allnon-complyingfundsaretaxedat

thisrate,andthisisconsideredtobehorizontallyequitable.

PursuanttotheNovember2016superannuationreforms,themaximumaccount

balanceofanaccumulationaccountthatreceivesconcessionaltaxtreatmenton

returnsfrominvestment,is$1.6m.

Transferofexcessfundsoverthe$1.6mcap

Asdiscussed,fundsforretirementhavebeencappedat$1.6mandaretaxedat15

per cent on fund income in the accumulation phase. With the new $1.6m cap

applying, existing pension accounts at the time in excess of that amount were

requiredtotransfertheexcess,priorto1July2017toanaccumulationaccountin

thefundorwithdrawtheexcessfromthesuperannuationfund. Thenewaccount

containing the excess over $1.6m is treated as an accumulation account, and

earnings are taxed at 15 per cent.106This is because if the fundswerewithdrawn

andsubsequentlyreinvestedtoanotherinvestment,thosefundswouldbetaxedat

theindividual’smarginalrateoftax,orifinvestedintoacompany,wouldbetaxed

at 27.5 per cent or 30 per cent. Accordingly, funds that remain in the

superannuation fund above the $1.6m are being generously treated for tax

purposes.

Accumulationphase(15percenttax)vs.Retirementphase(taxfree)

Accumulationphase

Asdiscussed,superannuationfundsthatareintheaccumulationphasearetaxedat

15percentprovidedtheymeettherequirementsofacomplyingregulated

superannuationfund.

104 DefinedinIncomeTaxAssessmentAct1997(Cth)s995.105 IncomeTaxRatesAct1986(Cth)s26(2).106 ScottMorrison(Treasurer),ParliamentaryDebates,n76.

34

Retirementphase–fundincomeistaxfree

The earnings frompension asset accounts are tax freewhen they are transferred

from the accumulation phase into retirement phase, providing the assets are less

thanthe$1.6mcap.107Thisallocationoccurswhenapersonmeetsaconditionof

release108and can therefore access their pensionbenefits. These earnings finance

the pension income stream on retirement. This is not considered an example of

horizontal inequity, despite other taxpayers who have not retired and who have

their investments ina superfundpay15per cent taxon their investment returns.

Thisisbecausethecircumstancesarenotconsideredsimilar.Theretiredtaxpayers

use their balance to meet retirement needs, whereas the other members are

accumulatingtheirwealthforfutureretirement.Givenearningsaretaxfreefroma

retirement phase account and that this applies to all retirees, horizontal equity is

achieved.

Transitiontoretirement(TRIP)-backtoaccumulationphase

TheHowardGovernmentintroducedtransitiontoretirementpensionsin2005to

allowworkersflexibilitytograduallymovetoretirement.109Workerscouldwork

lessbutreceivesimilarearningsfromacombinationoftheirjobandpension.Under

theseprovisions,memberscouldaccesspensionsearlyonandenableagradual

retirement.Thismeantmemberscouldaccesstheirretirementfundswhilestill

working,andalsohavethebenefitsofthesuperannuationsystem.Superannuation

fundsinaTRIPaccountwerepreviouslyexemptedfromtaxgiventhetransitionto

retirement.

However,theproblemwiththeTRIPprovisionswasthatmemberscouldmake

contributionsandwithdrawalsalmostsimultaneouslyandusethefundtocreatetax

freebenefits.The2016TurnbullGovernmentReformssoughttocurbthisabuse

andimprovetheintegrityoftransitiontoretirementpensions.TRIPaccountsareno

longergrantedthetaxexemptionintheretirementphaseandearningswillnowbe

107 IncomeTaxAssessmentAct1997(Cth)s294-35.108 SuperannuationIndustry(Supervision)Regulations1994(Cth)sch1pt6.109 SuperannuationIndustry(Supervision)AmendmentRegulations2005(No.2)(Cth).

35

taxedat15percent.110However,thetaxationofindividualswhoareover60years

ofagethatreceivetransitiontoretirementpensionsremainsunchanged,andsothis

willresultinpayingnotaxortheywillpaytaxattheirmarginalratealbeitwitha15

percenttaxoffset.Thisintegritymeasureisseekingtopreventabuseofthe

superannuationsystem.Fromawidersystemperspective,andaswithall

superannuationaccountsthatareconcessionallytaxedat15percent,thiswould

appeartoraisetheissueofhorizontalinequity.However,infocusingonlyonthe

superannuationsystemastherelevantmeasure,thetaxtreatmentofTRIPaccounts

appliesequallytoallmembers,andisconsideredhorizontallyequitable.

Non-arm’slengthincome–SelfManagedSuperannuationFunds

Given the concessional taxation treatment of superfunds, taxpayers could be

enticedtotransferincomeintothefundinordertosaveontaxation.SelfManaged

Superannuationfundsmustoperateonanarm’slengthbasis,111andiffoundnotto

because of a scheme or arrangement between close parties that results inmore

incomebeingtransferredintothefundthanwouldhavebeeniftheywereoperating

at arm’s length, then that income is taxed at the highestmarginal rate of 45 per

cent.112 This is consistentwith other anti-avoidance taxation penalties that apply

thehighestmarginalrateoftaxinthetaxationsystemandisconsideredhorizontally

equitable.Giventhismeasureappliesequallytoallsuperannuationmembers,it is

consideredhorizontallyequitable.

5.2 Summaryandrecommendations

Insummary,thelowrateoftaxationonfundincomebenefitshighincomeearners

andisinequitableinthesuperannuationsystemintermsofverticalandhorizontal

equity.

110 TreasuryLawsAmendment(FairandSustainableBill)2016(Act81of2016)(Cth)Sch8.111 AustralianTaxationOffice,Non-arm’slengthincomehttps://www.ato.gov.au/Super/Self-

managed-super-funds/Investing/Tax-on-income/Non-arm-s-length-income/.112 IncomeTaxRatesAct1986(Cth)s26(1)(b)

36

There is vertical inequity given high income earners high marginal rates of tax

providelargetaxsavingsfromthelowrateoftaxonfundincome.

Grandfatheringhaspermittedexcessfundsoverthe$1.6mbalancecaptoremainin

a superannuation fund from existing assets before 1 July 2017. Subsequent

increasesof assets throughconcessional contributions,will continue toadvantage

high incomeearnerswhich ishorizontally inequitable. There isnomeasure (likea

Div293Tax) to reduce suchbenefit tohigh incomeearnersand to createamore

levelplayingfield.

Thelowrateof15percenttaxonincomeofacomplyingfundisconsideredtobe

horizontally equitable for accumulation accounts, including TRIP accounts.

Retirementphaseaccountsaretaxfree,butthisisconsideredfair,giventheuseof

thesefundsistopayforamember’sretirementneeds.

Thetaxationoffundincomeattherateof45percentonnon-complyingfundsand

fromnon-arm’slengthincomeisalsoconsideredfairintermsofhorizontalequity.

6. Isthetaxationofbenefitsequitable?

6.1 Superannuationbenefitsandtaxation

Thepolicytopromoteworkinglongerintheworkforceisinitselfnotanissueof

equitybutoneofsustainabilityforthegovernment.Concessionsareprovidedto

motivateemployeestoretireatage60andthereisverticalinequityinthathigh

incomeearnerspaynotax(despitetheircapacity)justasmiddleincomeearners

andlowincomeearnerspaynotax.Inlinewiththepolicyofworkinglongerinthe

workforce,greaterconcessionsareprovidedtothosewhoreceiveabenefitafter

age60,incomparisontothosebetweenpreservationageandage60.Theleast

concessionisprovidedtothosememberswhoreceivebenefitsbeforepreservations

37

age.Thetaxingofbenefitsisconsideredfairandequitableincomparisonbetween

membersoftaxedanduntaxedfunds,forbothpensionsandlumpsums.

TaxingBenefitsiscomplex

ThetaxationofbenefitsisacomplexareabutfortunatelyformostAustralians,the

personnelsection/superfundadvises,calculatesandwithholdstaxationobligations

basedonthevarioussuperannuationcomponents.

Therearemanyfactorsaffectinghowtaxationimpactsonsuperannuationbenefits,

butbroadlytheseincludeageandpreservationage,theconditionofrelease,

whethertheamountsaretaxfreeortaxableandinvolvetaxedelementsoruntaxed

elements(basedontypeofcontributionandwhethertaxhasalreadybeenpaid),

whetherpaidasalumpsumorincome,andthelevelofthebalanceoftheaccount.

Asageneralapproach,amountspaidtomembersover60yearsofagefromtaxed

fundsaretaxfree,whileamountspaidtomembersunder60yearsofageinvolve

sometax,andmoretaxifabenefitisreceivedlessthanthepreservationage.

Moniesreceivedfromataxedfundaretreatedmoreconcessionallyincomparison

tountaxedfunds.Deathbenefitsaretaxfreewhenpassedontodependentsand

areconcessionallytaxedwhenpassedontoadultnon-dependents,althoughage

considerationsofboththedeceasedanddependentsvarythissomewhat.

Amountsaretaxfreeortaxablebasedonthetypeofcontributionandwhethertax

hasalreadybeenpaid. Non-concessionalcontributionspaidfromaftertaxincome

willbenontaxablewhenreceivedasabenefit,whereasconcessionalcontributions

made frompretax incomeandwherea taxdeductionhasbeenpreviously sought

willbetaxable.Ataxfreecomponentisalwaystaxfree,whileataxablecomponent

–fromataxedfundistaxfree,but if it isfromanuntaxedfundistaxedat15per

cent.

38

Conditionsofrelease

Aconditionofrelease113istherequirementthatmustbemetunderlegislation

beforeamembercanaccesstheirsuperannuationentitlements.Superannuation

benefitscanbeaccessedwhenamembermeetsthefollowingconditionsofrelease:

• 65yearsofage(regardlesswhetherretiredornot)114

• Preservationageandretires115

• Preservationage116andtakesatransitiontoretirementincomestreamwhile

working.117

Accessingsuperannuationbeforeaconditionofrelease,constitutesanillegalearly

release.Membersneedtobecarefulofunscrupulousschemepromotersthatmake

financialgainfromencouragingearlyrelease.Promotersuntruthfullyadvise

memberstheycantransfertheirretirementfundsintoanewlycreatedSMSFand

subsequentlyaccessthemforpersonalpurposes,whichisillegal.Inthisprocess,

thepromotersreceivealargecommission.118

However,therearespecialcircumstancesorconditionsofreleasewhere

superannuationentitlementscanbeaccessed,andareconsideredequitable,and

applytoaminorityofmembers.Theseexceptionalcircumstancesinvolve

conditionsofreleaseoncompassionategrounds,119severefinancialhardship,120

113 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1.114 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item106.115 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Items101,110.116 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item110.117 SuperannuationIndustry(Supervision)AmendmentRegulations2005(No.2)(Cth).118 AustralianTaxationOffice,Illegalsuperschemes–bewareofofferstowithdrawyoursuper

early,https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Illegal-super-schemes---beware-of-offers-to-withdraw-your-super-early/.

119 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item107.120 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item105.

39

permanent121ortemporaryincapacity,122anddeathbenefits.123Entitlementscan

alsobeaccessediflessthan$200124foradministrativeexpedienceandalsoin

relationtotemporaryresidentsdepartingAustralia.125

PreservationAge

Preservationageistheageatwhichamembercanaccesstheirsuperannuation

providingtheymeetaconditionofrelease.Thiswasinitially55yearsofageunder

theHawkeGovernment126butwasraisedbytheHowardGovernmentincrementally

to60yearsofage127andnarrowsthegapbetweenpreservationageandpension

age(currently65.5yearsforthe2017–18incomeyear,increasingto67yearsofage

in2023/24).By2024/25thepreservationagewillbe60yearsofageforall

members.128Thefollowingchartreferstopreservationages.

DateofbirthBefore1July1960

Preservationage55

1July1960–30June1961 561July1961–30June1962 571July1962–30June1963 581July1963–30June1964 59From1July1964 60

121 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item103.122 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item109.123 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item102.124 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item104.125 SuperannuationIndustry(Supervision)Regulations1994(Cth)Sch1Item103A.126 OccupationalSuperannuationStandardsAct1987(Cth).127 SuperannuationIndustry(Supervision)RegulationsAmendment1999(Cth).128 MercersaysAustraliacouldimproveitssuperannuationsystemiftherewereonly5years

apartbetweenretirementageandpensionage.However,In2025,thereisscheduledtobe7yearsdifference.Mercer,MelbourneMercerGlobalPensionIndex2017,(October2017),AustralianCentreforFinancialStudies,https://australiancentre.com.au/projects/melbourne-mercer-global-pension-index/.

40

Mostconcessionaltaxation-Retiringafter60– Taxedvs.untaxedfunds–income

vs.lumpsums

Pensions-taxedfunds

The SimplerSuper legislation129intended that the taxation of benefits from taxed

funds for retireeswhowere over 60 years of agewould be tax free.130 The then

Treasurer, Peter Costello, announced, ‘Cutting taxes will increase retirement

incomes,improveincentivestosaveandstrengthenincentivesforolderAustralians

toremainintheworkforce’.131Whilethesemaybeviewedasadmirableobjectives,

the tax free policy fails the test for vertical equity in regard to taxation of the

superannuation system. Although high income, middle income and low income

earnersallpaynotaxonpensionsandlumpsums,thisisverticallyinequitablegiven

thathighincomeearnershavethecapacitytopaymore.

Further,equityaboutthistaxfreepolicyat60yearsofageshouldalsobecompared

tomemberswhoreceivebenefitsfromuntaxedfunds.

Pensions–untaxedfundsand10percenttaxoffset

Members from untaxed funds also receive concessional treatment, but when

comparingbenefitsfromtaxedanduntaxedfunds,thereishorizontalequity.

Pensionsreceivedfromuntaxedfunds(publicservicepensions)bythosemembers

who turn 60 years of age receive a 10 per cent tax offset based on the pension

amount.132Forapersonwhoreceived$100,000pension,thetaxpayable133would

129 ForfurtherdetailsregardingtheSimplerSuperpolicy,refertoTreasury,Simplified

Superannuation,https://simplersuper.treasury.gov.au/documents/.130 IncomeTaxAssessmentAct1997(Cth)ss280-30(2),301-10.131PeterCostello(Treasurer),‘SimplifiedSuperannuationLegislationintroducedintoParliament’,

(PressRelease7December2006),http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2006/131.htm&pageID=003&min=phc&Year=2006&DocType=0.

132 IncomeTaxAssessmentAct1997(Cth)ss280-30(3),s301-100.133 Tocalculatetaxpayablerefertohttps://www.taxcalc.com.au.

41

be $26,632 in the 2017–18 income year reduced by a $10,000 tax offset (the

maximumoffset allowable), the taxwould only be $16,632 or 17 per cent of the

pension in round terms. For a person who receives $50,000, the tax payable is

$7,797 lessa$5,000taxoffset, leavingtaxpayableofonly$2,797or6percent in

round terms. For a personwho receives income of $25,000 from a pension,who

wouldalso receiveanagedpensionofapproximately$13,000,being total taxable

income of $38,000 - the tax liability would be $5,307 less a $2,500 tax offset –

leaving $2,807 tax payable, or 7 per cent rounded. There is vertical equity in

relationtopublicservicepensionsinthatthehigherincomeearnerpensionerspay

higherratesoftaxincomparisontothelowerincomeearners.

Theaboveexamplealsoshowsthatlowerincomeearnersareverymuchsupported

by the aged pension in addition to their superannuation, and have increased

benefits,whichalsoassistsintermsofverticalequity.

Fromahorizontalequityperspective,publicservantsover60yearsofagepaytaxin

comparison to those who receive a pension from taxed funds that pay no tax.

However,withacloserview,thisisnotinequitable.Taxedfundmembershavepaid

taxof15percentonthefundincomeeveryyear-accordingly,thereisahorizontal

equityastheuntaxedfundmembersabovepaybetween7percentand17percent

tax. Therefore, it isa roughly fairdeal that thetaxedfundmembersreceivetheir

pensions tax free as they had already paid tax in deriving those pensions (15 per

centforconcessionalcontributionsand15percentonfundincome)incomparison

tountaxedfundmemberswhogavecontributionsfromaftertaxmoniesbutnever

paidtaxonfundincome,andthereforepaytaxatthebenefitsstageafteroffsetting

10percent.Thisroughlyachieveshorizontalequity.

42

Inaddition,itshouldbenotedthatintermsofequity,thetaxoffsetof10percent

afforded to public servants of untaxed funds, cuts out at $100,000134so that it

broadlyandfairlyequatestothe$1.6mcaplimitations.Thisalsoisafairmeasurein

termsofbothhorizontalequityincomparingmembersoftaxedanduntaxedfunds,

andverticalequityincomparinghighincomeandlowincomemembersofuntaxed

funds.

Lumpsums

Lumpsumsreceivedfromtaxedfundspaidtoretireesover60yearsofagearetax

free.135Lumpsumsreceivedfromuntaxedfundsforretireesover60yearsofage

stillreceivesomeconcessionaltreatment.Taxispayableatthemarginalrateoftax

or15percent,whichever is the lower,unless the lumpsumexceeds theuntaxed

plancap($1.445minthe2017–18incomeyear),wherebytheexcessistaxedatthe

highestmarginal rate of tax (45 per cent).136 For the same reasons as discussed

abovethisisbroadlyequitableintermsofhorizontalequity.

Less concessional taxation - Age between preservation age and 60 – taxed vs.

untaxedfunds–incomevs.lumpsums

Ifamembermeetsaconditionofreleaseandretiresbetweentheirpreservationage

and60yearsofage,thetaxationimpactismorecostlythanifovertheageof60

yearsofage.Thisisanexampleofverticalinequity.Thisisapolicychoice

encouragingAustralianstoworkuntil60yearsofage,andprovidesaless

concessionalarrangementincomparisontothosewhoretireat60yearsofage

onwards.Therulesapplycommonlytoallwhochoosetoleavetheworkforceprior

toage60andthereforethereishorizontalequity.Asdiscussedabove,greater

concessionsareappliedtothosefromtaxedfundscomparedtountaxedfundsand 134 IncomeTaxAssessmentAct1997(Cth)s294-30(1).ReferalsoAustralianTaxationOffice,

Superannuationreform:Cappeddefinedbenefitincomestreams:pensionsorannuitiespaidfromnon-commutable,lifeexpectancyormarket-linkedproducts,s32(c),

https://www.ato.gov.au/law/view/document?DocID=COG/LCG20171/NAT/ATO/00001.135 IncomeTaxAssessmentAct1997(Cth)ss280-30(2),301-10.136 IncomeTaxAssessmentAct1997(Cth)s301-95.

43

thisisequitableasdiscussedabovebecausetaxedfundmemberspaidtaxontheir

fundincome,whileuntaxedmembersdidnot.

However,thesearrangementsareverticallyinequitableincomparisontothetax

freeincomeandlumpsumsifpaidoutafter60yearsofage.

Notaxispaidonthetaxfreecomponent.137

Pensions

Intaxedfunds,membersunder60yearsofageasretireesfromtaxedfundspaytax

ontheirmarginal ratesof tax,andreceivea15percent taxoffset tocompensate

themforearlieryearswheretheypaid15percenttaxontheircontributions.138In

contrast,thosepublicservantswhoarelessthan60yearsofagepaymarginalrates

of taxonpension income,until theyreachage60andthenareeligible for the10

per cent tax offset.139 This is broadly fair in termsof horizontal equity given that

thereisnotaxpaidonincomeofthepublicservicefund.

Lumpsums

Forataxedfundmember,thetaxpayableforalumpsumfromataxedfundistax

freeunlessthelowratecap($200,000inthe2017–18incomeyear)hasbeen

exceededandifso,theexcessonlyabovethecapwillbetaxedatthemarginalrate

oftaxor15percent,whicheverislower.140

Foranuntaxedfundmember,thetaxismorecostly.Thetaxonthelumpsumwill

bethemarginalrateor15percent,whicheverislower.Ifthelumpsumisabove

thelowratecap($200,000inthe2017–18incomeyear)theexcessabovethecap

willbetaxedatthemarginalrateoftaxor30percent,whicheveristhelower.Ifthe 137 IncomeTaxAssessmentAct1997(Cth)s301-15.138 IncomeTaxAssessmentAct1997(Cth)s301-25.139 IncomeTaxAssessmentAct1997(Cth)s301-100.140 IncomeTaxAssessmentAct1997(Cth)s301-20.

44

lumpsumisabovetheuntaxedplancap($1.445minthe2017–18incomeyear),the

excesswillbetaxedatthetopmarginalrate.141

Least concessional level of taxation - Age below preservation age - taxed and

untaxedfunds–pensionsandlumpsums

Ifamembermeetsaconditionofreleaseandretiresbeforetheirpreservationage,

thetaxationimpactisthemostcostlyoptiontothemember.Thisisapolicychoice

aroundencouragingmemberstoretireatage60.However,thesearrangementsare

verticallyinequitableincomparisontotaxfreeincomeandlumpsumspaidoutafter

60yearsofage.

Notaxispaidonthetaxfreecomponent.142

Pensions

Inrelationtothetaxablecomponent,theincomestreamwillbetaxedatthe

member’smarginalrateoftax,whetherreceivedfromataxedfundoruntaxed

fund.143Thisishorizontalequityasnotaxconcessionhasbeenprovided.These

arrangementsareverticallyinequitableincomparisontothetaxfreebenefitsatage

60.

Lumpsums

Inrelationtoataxedfund,thelumpsumwillbetaxedat20percentoratthe

marginalratewhicheveristhelower.144Inrelationtoanuntaxedfund,thelump

sumwillbetaxedat30percentoratthemarginalrate,whicheveristhelower,

unlessthelumpsumismorethantheuntaxedplancap($1.445minthe2017–18

141 IncomeTaxAssessmentAct1997(Cth)s301-105.142 IncomeTaxAssessmentAct1997(Cth)s301-30.143 Generalratesoftaxapply.144 IncomeTaxAssessmentAct1997(Cth)s301-30.

45

incomeyear),inwhichcasetheexcessistaxedatthetopmarginaltaxrate.145This

isbroadlyequitableintermsofhorizontalequity.Thesearrangementsarevertically

inequitableincomparisontotaxfreebenefitsatage60.

DeathBenefitspaidtofamilymembersand$1.6mcap

Alldeathbenefitspaidtodependentsinalumpsumaretaxfree.146

Benefits paid in a pension depend on age of the deceased and dependents.

Dependents include spouse, children under 18 or those children financially

dependent upon the member, or any persons who are interdependent in their

relationshipwiththemember,oranypermanentdisabledchildregardlessofage.147

Thetaxfreecomponentofadeathpensionistaxfree.148Thisapplieswhetherfrom

ataxedoruntaxedfund.

Where a death pension is paid from a taxed fund and either the deceased or

dependentwere60yearsofageorover,theincomeistaxfree.149Whereinataxed

fundboththedeceasedandthedependentwereunder60yearsofage,theincome

istaxedatmarginalrateslessa15percenttaxoffset.150

Where a deathpension is paid fromanuntaxed fund and either thedeceasedor

dependentwere60yearsofageorover,thedependentisentitledtoa10percent

taxoffset.151Whereinanuntaxedfundboththedeceasedandthedependentwere

145 IncomeTaxAssessmentAct1997(Cth)s301-115.146 IncomeTaxAssessmentAct1997(Cth)s302-60.147 IncomeTaxAssessmentAct1997(Cth)ss302-195–200.148 IncomeTaxAssessmentAct1997(Cth)ss302-70–80.149 IncomeTaxAssessmentAct1997s(Cth)302-65.150 IncomeTaxAssessmentAct1997s(Cth)302-70.151 IncomeTaxAssessmentAct1997s(Cth)302-85.

46

under 60 years of age, the income is included in assessable income and taxed at

marginalrates.152

Deathbenefitspaidtonon-dependentscanonlybeintheformofalumpsumand

involve a benefits tax. Non-dependents include adult children, who are not

dependentsandhavenodependencyrelationship.153Notaxispaidonthetaxfree

component.154Ataxof15percentispayablefromtaxedfundsandataxof30per

centfromuntaxedfundsapplies.155

The $1.6m balance cap needs to be considered in situations with death of a

member. If one partner dies, and if their balance is transferred to the surviving

partner,thisamountwillbeincludedinthesurvivingpartner’snewbalance.Ifthis

results in the surviving partner’s cap being exceeded, the excess will need to be

transferredtoanaccumulationaccount.156

The policy regarding death benefits is broadly consistent with the taxation of

benefitsabove thathighlightsvertical inequity,but is consideredequitable froma

compassionateperspective.

6.2 OtherBenefits Aspreviouslymentionedvariousbenefitsareprovidedinotherexceptional

circumstances.Differenttaxingratesapplyinrelationtodifferentconditionsof

releasesuchasmedicalcondition,permanentincapacity,temporaryresidents,etc.

–buttheseuncommoncasesarenotdiscussedhere.

152 IncomeTaxAssessmentAct1997s(Cth)302-90.153 Non-dependentsarethosewhoarenotdependentsnorhaveadependencyrelationship.154 IncomeTaxAssessmentAct1997(Cth)s302-140.155 IncomeTaxAssessmentAct1997(Cth)s302-145.156 IncomeTaxAssessmentAct1997(Cth),s294-35.

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6.3 Summaryandrecommendations

Thetaxationofbenefitshasbeenconsideredaboveinrelationtoitsmain

components.Broadlyithasbeenfoundthatthetaxationpolicyhasbeenoneof

verticalinequityprovidingtaxfreebenefitstohighincomeearnersover60yearsof

agewhohavegreatercapacitytopaymore.Thetaxingofbenefitsfavoursmembers

whowereagedover60,providinglessconcessionaltreatmenttothosewhoretire

under60yearsofageatorovertheirpreservationage,andthenagainless

concessionisaffordedtothosewhoretireundertheirpreservationage.Apossible

reformoptionwouldbetoprovidetaxfreeearningstoallretireesregardlessof

theirageorpreservationage.However,toaddresshorizontalequity,those

memberswhoreceivedtheirbenefitsfromanuntaxedfund,wouldpayataxoften

percentontheirretirementbenefitsortheirmarginalrate,whicheveristhelower,

incomparisontotaxedfundmemberswherefundincomehasalreadybeentaxed.

Thispaperfindsthatthereishorizontalequityintermsoftaxationtreatmentfor

membersagedover60,whethertheywerepaidbenefitsfromataxedoruntaxed

fund.Taxedfundmemberspaynotaxonincomeandlumpsumsatthebenefit

stageandhavealreadypaidtaxonconcessionalcontributionsandfundincome.In

comparison,publicservantsandothermembersfromuntaxedfundspaidtaxon

theircontributionsbutdidnotpaytaxonfundincome.

Members,whoretirebutarelessthan60yearsofageandhavereached

preservationage,havelessfavourableconcessionaltaxingarrangementscompared

tothose60yearsofageandover.Fortaxedfundmembersunder60yearsofage,

theypaytaxonbenefitsatmarginalratesandreceivea15percentrebatein

recognitionofthetaxpaidoncontributions.Untaxedmemberspaytaxatmarginal

ratesanddonotreceivea15percentrebate.

Memberswhoretirepriortotheirpreservationagereceivetheleastfavourable

concessionandaretaxedatmarginalratesregardlessofwhethertheirincomeis

fromataxedfundoruntaxedfund,andreceivenorebate.

48

Intermsoflumpsums,thesamepatternapplies.Thegreatestconcessionsare

providedtothosewhoare60yearsofageandfortaxedfundmembers,thelump

sumsaretaxfree,whileforuntaxedfundmemberstaxispaidat15percent

maximum(buthigherwherethelumpsumisverylarge).Forthoselessthan60

yearsofage,anadditionaltaxof15percentisimposedonbothtaxedanduntaxed

membersi.e.15percentmaximumfortaxedfundsand30percentmaximumfor

untaxedfunds.Forthosewhoretireundertheirpreservationage,thetaximposed

is20percentmaximumfortaxedfundsand30percentforuntaxedfunds.

Thedisadvantagestomembersbytheabovearrangements,issomewhat

temporary,aswhenallmembersturn60yearsofage,theywillreceivethesame

concessionsfortheincomestreamatage60asdiscussedabove.

Deathbenefitsaretreatedsimilarlytotheabovebenefitsframework.A

concessionarytaxationappliestodependentsofdeathbenefits,andlessconcession

appliestonon-dependents.Thisisconsideredfairandequitableincompassionate

terms.

7. FutureReform

7.1 Summarisinghorizontalandverticalequity-AppendixA

Inreviewingthecomponentsofthetaxationofsuperannuationcontributions,fund

incomeandbenefits,asummaryofthefindingsconcerninghorizontalandvertical

equityaresummarisedinAppendixA.

AppendixAidentifiesthatthemajorityofthetaxingcomponentsarebroadly

equitableintermsofhorizontalandverticalequity,andtheTurnbullGovernment

November2016reformshaveassistedtoimprovetheequityinthetaxationsystem.

49

However,thereremainsverticalinequityacrossthesuperannuationsystem:

• Superannuationguaranteeadvantageshighandmiddleincomeearners

comparedtolowincomeearners,becauseofitsflatrate

• Concessionalcontributionsgivehighincomeearnersanadvantagecompared

tomiddleandlowincomeearners.Thisremainssodespitetheadditional

taxof15percentundertheDiv293tax.

• Thelowtaxationoffunds(15percent)advantageshighincomeearners.

• Highincomeearnersaged60andoverareadvantagedsignificantlyasthey

paynotaxbuthavethecapacitytopaycomparedtomiddleandlower

incomeearners.Inaddition,highincomeearnersover60yearsofageare

advantagedcomparedtothosewhohaveretiredaftertheirpreservationage

butbefore60yearsofage,orhaveretiredpriortotheirpreservationage.

Intermsofhorizontalequity,thegrandfatheringofassetsthatareexcesstothe

$1.6mcap,whicharetaxedat15percentonly,shouldbetaxedatthemarginalrate

oftax.Finally,thereishorizontalinequitygivenvariousagediscriminationinthe

concessionalcontributionsworktestover65yearsofage,andthegovernmentco-

contributionstothoseover71yearsofage.Bothrequirementsshouldberemoved.

7.2 Futurereformoptions

BasedontheprecedingdiscussionandasoutlinedinAttachmentA,thefollowing

reformsaddresshorizontalandverticalinequityinthetaxationofsuperannuation.

Contributions

1. IntroduceahigherrateofSGforlowincomeearners.

2. ThethresholdfortheDiv293Taxbelowered(sayto$180,000)to

50

promotefurtherequityoralternatively,thetaxationofcontributions

couldbeimposedatanindividual’smarginalrateoftaxless15percent.

3. Abolishtheworktestforpeopleover65makingcontributions

4. Abolishtheagetestinrelationtogovernmentco-contributions

FundIncome

5. Forfundaccountslessthan$1.6m,Increasethetaxforhighincome

earnerssayto27.5percent(thelowesttaxpaidbysmallbusiness

companies).Alternatively,tomatchthebenefitsofhighincomeearners

regardingfundincome,providemiddleincomeearnerswithsomething

akintotheLISTOaffordedtolowincomeearners.

6. Also,forfundaccountsthatexistedpriorto1July2017andweregreater

than$1.6m,increasethetaxto27.5percent.

Benefits

7. Toputallretireesatthesamelevelasthosewhoturn60yearsofage,all

retireesfromataxedfundwhohavemetaconditionofreleaseshouldbe

providedbenefitstaxfree.(Beinglessthan60yearsofageandlessthan

preservationageshouldbedisregarded).Topromotehorizontalequity

underthisarrangement,retireesbenefitsfromanuntaxedfundbe

subjecttoa10percenttax,ormarginaltax,whicheveristhelower.

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8. ConclusionThetaxationofsuperannuationhasmostcomponentsthatareequitableintermsof

horizontalandverticalequity.

However,someareinequitable,inparticularregardingverticalequityinthe

contributionsstage,fundincomestageandbenefitsstage.Thegrandfatheringof

accountsinexcessof$1.6mbreacheshorizontalequityasdoestheworktestfor

concessionalcontributionsandtheagetestforgovernmentco-contributions.

Furtherlegislativereformshouldbemadetolimittheseconcessionaltaxation

advantages,inparticulartohighincomeearners.

52

Appendix A – Snapshot re Horizontal and VerticalEquity Contribution,fundincomeorbenefits

SpecificcomponentIssue Horizontal

Vertical

EquitableYes/no

EmployerContributionsforemployees

4.1 SuperGuarantee–almostuniversalaccess

Horizontal Yes

SuperGuarantee–flatrate Vertical No

4.3ConcessionalContributions

Employer Horizontal Yes Self-employed,non-employedand

employees-equallyclaimHorizontal Yes

Higherincomeearners(comparedtolowincomeearners),redressedinpartbyDiv293Tax

Vertical No

Contributionssplitting–equalrights Horizontal Yes

Catchup-flexibility Horizontal Yes

4.2-ECT ExcessContributionstax Horizontal Yes

4.4Non-concessionalContributions

Individuals–High–lowincome Horizontal Vertical Yes

SpouseTaxOffset Horizontal Yes

Worktestforover65 Horizontal No

4.2-ECT ExcessContributionsTax Horizontal Yes

4.5GovernmentContributions

LISC/LISTO Vertical Yes

GovernmentCo-contributions-Agetest

Horizontal No

GovernmentCo-contributions Vertical

Yes

5.1FundIncome

Complyingfundincome<$1.6mcap Vertical No

Non-complyingfund Horizontal Yes

Grandfatheredaccounts>$1.6mcap Horizontal No Retirementphase–incometaxfree Horizontal Yes

TransitiontoRetirementPensions Horizontal Yes

Non-arm’slengthincomeforSMSFs Horizontal

Yes

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6.1TaxingofBenefits

Retiringafter60–income-taxedfundistaxfreeanduntaxedfundreceives10percenttaxoffsetappliedtoincome–greatestadvantagetoover60–unfairashighincomeearnersbenefitmorethanlowincomeearner

Vertical No

$100,000capforuntaxedfundreceive10percenttaxoffset-highincomepensionspaymoretaxthanmiddleandlowincomepensions

Horizontal Vertical

Yes

Retiringafter60–income-taxedfundsvsuntaxedfunds–comparingtaxingbenefitsofincome

Horizontal

Yes

Retiringafter60–lumpsums-taxfreefortaxedfundscomparedtountaxedfunds,lumpsumsincur15percenttaxormarginaltaxrate(whicheverislower)andexcessoveruntaxedplancapistaxedat45percent

Horizontal

Yes

Retiringafterpreservationagebutbefore60-comparedtoretiringafter60-middledisadvantage

Vertical No

Retiringafterpreservationagebutbefore60–income-taxedfundtaxedatmarginalratesless15percentoffset,untaxedfundstaxedatmarginalrates

Horizontal

Yes

Retiringafterpreservationagebutbefore60–lumpsums-taxedfundlumpsumtaxfreeunlessexceededthelowratecap($200,000),excessonlytaxedatmarginalrateor15percentwhicheverislower&untaxedfundlumpsumsaretaxedatmarginalrateor15percentwhicheverislower,excessabovelowratecapistaxedatmarginalrateor30percent,whicheveristhelower

Horizontal

Yes

Retiringbeforepreservationage–comparedtoretiringafter60–greatestdisadvantage

Vertical No

Retiringbeforepreservationage–income-taxedatmarginalratewhetherreceivedfromtaxedfundoruntaxedfund

Horizontal

Yes

Retiringbeforepreservationage–lumpsums-taxedfundlumpsumsaretaxedat20percentormarginalratewhicheveristhelower-untaxedfundlumpsumstaxedat30percentormarginalratewhicheveristhelower,unlesslumpsumexceedstheuntaxedplancapwheretheexcessistaxedatmarginalrates.

Horizontal

Yes

DeathBenefits–complex–broadlysimilartoaboveconcessions–butoncompassionategroundsconsideredfair

Horizontal

Yes

54