Simplifying Superannuation: Radical Tax Reforms Could Save $1 Billion Annually

Australia’s $4.1 trillion superannuation system could soon undergo transformative changes aimed at simplifying its complex tax structure, improving equity, and saving operational costs of up to $1 billion per year, according to a new report by the Actuaries Institute.

The paper, authored by actuaries Richard Dunn, Michael Rice, Jennifer Shaw, and Alun Stevens, proposes three significant reforms to streamline the system, making it fairer for Australians while ensuring retirees use their superannuation savings more effectively.

Key Tax Reforms: From Accumulation to Retirement

1. Unified 10% Tax Rate on Superannuation
The report suggests applying a flat 10% tax rate across all phases of superannuation—both during the accumulation period and in retirement.

During Accumulation: Workers would pay a reduced tax rate of 10%, down from the current 15%, allowing Australians to build stronger superannuation balances from the start of their careers.
In Retirement: Retirees would pay 10% tax on withdrawals, addressing the current scenario where many retirees pay no tax on their superannuation income.

“This change would simplify the system, enabling Australians to manage a single super account throughout their working lives, while reducing fees,” said Actuaries Institute CEO Elayne Grace.

2. Closing Loopholes on Large Withdrawals

To prevent the misuse of superannuation savings as a tax-free estate planning tool, the report proposes adjustments to taxation on high withdrawals and large benefits:

A threshold could be set at $250,000 for couples and $150,000 for individuals annually.
Retirees withdrawing beyond these amounts would face additional taxes, discouraging lump-sum withdrawals that leave retirees dependent on the aged pension.
Compensation for those adversely affected by this change could be offered through adjustments to the age pension.

“These measures ensure superannuation serves its intended purpose—providing income for a dignified retirement—rather than becoming a tool for tax-free inheritance planning,” said report author Jennifer Shaw.

3. Reforming Contributions and Bequest Taxes

The report also addresses inequities in the tax treatment of contributions and inheritance:

Streamlining Contributions: Removing distinctions between concessional (tax-deductible) and non-concessional contributions simplifies how super contributions are taxed once invested in a fund.
Fairer Bequest Taxes: The 17% tax on bequests would apply at age 67, up from the current age of 60. Tax-free thresholds would also reflect whether beneficiaries are dependents or non-dependents.

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Balancing Equity and Functionality

The proposed reforms aim to balance equity across generations. Younger workers would benefit from reduced taxes during the accumulation phase, while retirees contribute more during their drawdown years.

Report co-author Richard Dunn emphasized that while the system is functional, its complexity hinders efficiency and fairness:
“We have a superannuation system that’s working, but it’s one of the most complex in the world. Our proposals make super simpler for consumers and funds while encouraging retirees to spend their savings effectively.”

Benefits and Implications

The proposed changes are expected to:

Save $1 billion annually in super fund operational costs.
Improve fairness for younger and older taxpayers alike.
Incentivize retirees to use their superannuation savings in retirement rather than as a vehicle for tax-free wealth transfer.

Looking Ahead

These recommendations align with the broader objective of superannuation: to provide Australians with a stable and dignified income during retirement. The reforms will require further consultation and policy adjustments but offer a promising path toward a simpler and more equitable system for all.

As discussions continue, the government and stakeholders must weigh the potential benefits of these reforms against their impact on individuals at various stages of retirement planning.