It is widely accepted that superannuation is taxed at 15%, yet research by the Accounting Discipline Group at UTS Business School estimates the average effective tax rate of industry superannuation funds ranges between 8.5% and 10.5%.
With Australia’s superannuation industry valued at approximately $2.7 trillion at the end of the March quarter 2020, this makes a big difference to what Treasury reaps in tax.
The study by Thulaisi Sivapalan analysed the financial statements of up to 32 Australian industry super funds to ascertain the actual rate of tax paid.
As Michael West Media reported earlier this year, Sivapalan joined 31 super funds to gain access to the funds’ statements and found significant discrepancies in reported information received by the financial services regulator Australian Prudential Regulatory Authority (APRA), and in the audited financial statements presented to members.
According to the 2016-2018 Productivity Commission review, and the Treasury’s 2010 Super System review into the governance, efficiency, structure and operation of the superannuation system, tax was highlighted as the single largest expense of superannuation funds.
As a result, the importance of tax awareness was recently incorporated into legislation, so that the funds’ trustees now have to take into consideration the expected tax consequences of investment strategies.
The introduction of this significant legislative amendment in 2014, establishes for the first time the trustees’ statutory obligation under the Superannuation Industry Supervision Act (SIS Act, 1993) to maximise members’ returns, net of fees and taxes.
As a result, superannuation funds that most effectively manage their tax obligations provide better returns to their members and, in the case of retail super funds, their shareholders.
This sentiment was summed up by the chief executive of Qantas Super, Michael Clancy, who in 2018 identified that “tax is one of the largest costs … so managing our members’ assets in a tax-efficient way is really important”.
Despite the significantly lower real rate of tax paid by superannuation funds, Sivapalan found no evidence of tax aggressiveness or avoidance. Instead, he found that the funds were being tax “efficient” and that the divergence was from the advertised statutory rate is a result of the complexity of Australia’s tax system.
This complexity is noted in the reviews of the super industry mentioned above.
The tax structure of Australia’s superannuation industry is unique when compared to retirement income systems around the world.
In the US and UK, for example, superannuation is exempt from tax when members contribute to their accounts and are only taxed when a member withdraws money from their account. In Australia, however, we are taxed as we contribute to super and only receive some tax exemptions when we make a withdrawal.
This difference further complicates Australia’s taxation treatment of superannuation and, as Sivapalan notes, may overburden Australia’s smaller super funds, which cannot manage taxation complexity as efficiently as larger funds.
The question then is: are members of smaller super funds at a disadvantage in regards to structuring their tax obligations.
Whilst the results of Sivapalan’s study shows no statistically significant difference, there seems to be an overall trend that suggests that smaller industry super funds lag the larger funds. A possible explanation is the result of larger funds being able to afford expert tax advice in order to structure their investment revenues in a more tax-efficient manner.
The study recommends a new tax benchmark of 10.5% for superannuation to better align with reality.
All this discussion is a moot point for the more than 500,000 Australians who made withdrawals of up to $10,000 in line with Covid-19 guidelines. Some $30 billion was withdrawn, leaving some accounts with a balance of zero.
Perhaps a rethinking of superannuation tax should be added to the post-COVID policy agenda, alongside PwC’s policy suggestion to increase and extend the GST and end stamp duty.