New sting in super tax as pension payments to count

In a move likely to infuriate older investors, pension payments will be included when the government calculates the amounts owed under the new tax on super savings.

Under current arrangements, older investors with super savings must, by law, make a drawdown of set amounts each year. These amounts must then be used to underpin private pensions.

But in a surprise outcome under the so-called Division 296 measure, investors who are caught in the new tax net will have the amount of the pension payments they receive added to their assessment.

Many investors already complain about the drawdown rules, believing they should be able to manage their super savings independently of requirements set by the government. The new super tax adds fuel to the debate by creating a penalty relating to pension payments.

Advisers and investors are still struggling to figure out the full implications of the new tax which imposes an extra 15 per cent slug on super earnings on balances above $3m.

Tax experts and advisers have continually argued it’s not the dollar amount at issue in the new tax but the invention of an entirely new tax technique based on unrealised gains – also known as paper gains – which is the key concern.

In the case of super withdrawals for pension payments, money taken out of super is later added back into the total amount liable for the super tax. “But this is not tax avoidance. It is money for pensions and it has to be taken out by law,” Dorset Wealth Management’s Phil Toop says.

Prime Minister Anthony Albanese insists the government will push ahead with the reforms Picture: Jane Dempster

Prime Minister Anthony Albanese insists the government will push ahead with the reforms Picture: Jane Dempster

The latest revelation from the advisory sector is bad news for pension payments. In recent months the sector has revealed that the new tax will also hit franked dividends and will affect amounts inherited from super funds.

“When you put all these issues together we get a much clearer picture of the full nature of the new tax, which was originally sold to us as simply a 15 per cent tax on large amounts,” Toop says.

Drawdown rules are set by the government. The minimum drawdown is 4 per cent of the total of the fund per annum and the amount that must annually be drawn down rises to a maximum of 14 per cent depending on the age of the investor.

Under the terms of the new tax, franked dividends are included because the increase in value of all money in an individual’s super account each year will include franking credit refunds. Inheritance is affected because unused tax credits will lapse but capital gains tax obligations remain in place.

“Division 296 does not remove the valuable tax-free status of the pension account share of earnings below $3m but it reshapes the after-tax returns on every dollar above that level,” Toop says.

Naz Randeria, the auditor who earlier this year publicised how the new tax would hit franked dividends, has described Division 296 as “a time bomb for all Australians”.

The government has consistently said it intends to push ahead with its super tax plan unchanged. This means the new tax will include unrealised gains and it will not be indexed for inflation.

Prime Minister Anthony Albanese reiterated the government’s position last weekend. Even after opposition to elements of the tax had widened to include ACTU secretary Sally McManus, who has called for the tax to be indexed in order to reduce the number of Australians who could potentially be hit in the future.

The new tax is now technically “live” in that it is due to commence on July 1, 2026 and revenue collection will cover the 12 months from July 1, 2025.

 

This article first appeared in The Australian as Pension drawdowns to count in government’s new super tax threshold

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