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Forward Thinking Magazine : August 2010
15 Techtalk Where does Australia fit in? Table 3 : EET model (from Table 2) Australia (1 July 1988 – 30 Jun 07) TTT Australia (from 1 Jul 07) TTE New Zealand (current) TTE Contribution $100.00 $100.00 $100.00 $100.00 Within tax free threshold Above tax free threshold Tax Rate Assumptions 25% benefits 15% conts 12.5% earnings1 0% benefits 15% conts 12.5% earnings1 16.5% benefits2 15% conts 12.5% earnings1 21% conts 15% earnings3 Tax on conts - $15.00 $15.00 $15.00 $21.00 Net in fund $100.00 $85.00 $85.00 $85.00 $79.00 Net investment return 4 $61.05 $44.29 $44.29 $44.29 $39.79 Fund value at retirement $161.05 $129.29 $129.29 $129.29 $118.79 Tax on benefit $40.26 - $21.33 - - Net benefit $120.79 $129.29 $107.96 $129.29 $118.79 NPV of tax paid 5 $25.00 $19.72 $32.97 $19.72 $26.24 It is interesting to note the evolution of the Australian superannuation system in terms of this taxing point representation. Prior to July 1983, the Australian superannuation system was best represented as EEE, being generally free from tax at any of the taxing points (with the exception that 5% of lump sum benefits were included in the individual’s assessable income). With the 1 July 1983 introduction of benefits taxation, the Australian superannuation system evolved into an EET structure. However, from 1 July 1988 when contributions tax and earnings tax were introduced, the system may have been labelled TTT, with taxation on contributions, earnings and benefit payments, albeit at concessional rates at all points. Since the 1 July 2007 removal of most benefits taxation, the Australian superannuation system is perhaps best represented as TTE, as noted in Table 1. Labelling the Australian model as TTE is unflattering, and not an accurate indication of its true status in terms of tax concessionality. When the concessional rates of tax applicable at the various taxing points are incorporated into the analysis, the Australian system looks relatively attractive. Table 3 extends the analysis method used in Table 2 (retaining the general EET example as a reference point) to the specific situations, Australia (pre and post 1 July 2007) and New Zealand. Table 3 demonstrates that the current Australian regime is an attractive alternative based on the assumptions used. Source: Adapted from Warburton & Hendy, International Comparison of Australia’s Taxes (2006) 228, sourced from Whitehouse (1999). Assumptions: 1 Earnings comprise 50% income taxed at 15%, 50% capital gains of which 100% attracts 1/3 CGT discount. 2 Lump sum benefits in excess of tax free threshold, or pension benefits taxed at marginal rate of 31.5% less 15% rebate. 3 Earnings are 50% income taxed at 30%, 50% capital gains which are tax free. 4 10% pa return (nominal), 5 yr investment term. 5 10% pa discount rate.