There is a perception that those with more than $1.6 million in super once retired will only have to pay 15% tax on the earnings from assets they have above this threshold. We’re told this is a concessional tax rate.
I think this is misplaced and probably misleading.
As we all know our personal tax rates increase as our income increases. For example, those earning more than $80,000 pay 37% between that amount and $180, 000. They also pay the Medicare levy so the total tax rate is 39%. In last May’s Federal budget the government said the 37% tax rate should cut in at $87,000 rather than $80,000. The amending legislation for this change has been introduced into Parliament and at this stage it looks like it will get through Parliament with the ALP’s support and maybe others.
On the other hand, we tax both super funds and companies at a flat tax rate which is a completely different approach. Many larger companies are taxed at 30% whereas super funds are taxed at 15% for income and assessable capital gains earned on non-pension assets, and 0% per cent for all income and realisable capital gains earned on pension assets.
The problem with how our personal tax rates work is that it clouds decisions and perceptions. How often have you heard that those who pay the highest marginal rate – 49% including Medicare – receive a 34% benefit for investing in super? Thirty four being the different between 49 and 15.
Personally I think this view is incorrect and amazingly lazy research. But we’ve all heard the line of Joseph Goebbels – “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”
As noted, the super tax rates are flat tax rates and the personal tax rates are progressive – you can’t compare the marginal rate of personal income taxes with a flat rate. It’s like the old saying – you’re comparing apples and oranges.
The only way to do a proper comparison is to turn personal rates into an average tax rate so we have comparable data. That is, we need to work out approximately how much tax you pay for every dollar of taxable income – that is, assessable income less allowable deductions you earn.
For example, someone with a taxable income of $90,000 – and a marginal tax rate of 39% including the Medicare Levy – will pay $22,732 in tax. In this case their average tax rate is roughly 25%. Someone with a taxable income of $200,000 has an average tax rate of 34%. All these rates assume the government can legislate an increase to the income threshold to $87,000.
You will pay an average of 15% – including Medicare Levy – on your personal income when you have taxable income of about $43,350.
[1]* assuming the 2% Medicare Rate has to be paid
One point of interest here is when you would pay an average of 30% tax – that is, the same rate as that paid by large companies. The answer is taxable income just under $138,000.
However, many people pay net tax much less than their headline average rate because of tax concessions, refunds and deductions that they claim and are entitled to receive. For example, the Family Tax Benefit and Child Care Rebates/Benefits. Some people also have a large salary and are entitled to substantial tax deductions – for example, because of deductions on the costs of investing in residential real estate or margin lending arrangements.
In reality you have to have personal income of more than $1.7 million to be paying an average of 49% tax on your total income.
So let’s now talk about those with more than $1.6 million in super assets. As I said, the claim is that any money above this amount will “only” be taxed at 15%.
But as we have noted you need about $44,000 income to have an average of 15% tax on that income. Term deposits are currently paying about 3 per cent. This means you need about $1.46 million in non-pension super assets before you would be paying a concessional rate of tax in your super fund compared to the tax you would pay with personal income. For those invested in the share market, they would need an additional $733,000 in net assets above the $1.6 million threshold (assuming a 6% yield including the franking credits, with 75% of dividends franked).
Respectively, this means superannuants would need at least $3.0 million or $2.3 million, depending on where you have you invested your money, in super before you could say that they are receiving a concessional tax rate on their super monies above $1.6 million. These are substantial sums of money that few have now and even fewer will attain in the future because of the limits to the amount of money you can contribute into super.
Now it is true that income and capital gains earned up to the first $1.6 million is tax-free. It’s important to acknowledge this concession.
However it is often said that amounts above the $1.6 million amount are taxed at only 15% and this is a concessional rate. My point is that this statement is only true for people with very high super balances.
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