Australia's Future Tax System

Retirement Income Consultation Paper

Appendix B: A history of superannuation

The retirement income system

Superannuation was first paid in the mid‑1800s as a benefit to certain employees of the public service and larger corporate organisations. Before the introduction of award superannuation in 1986, it is estimated that approximately 40 per cent of individuals were paid superannuation.

The first age pensions were paid by New South Wales (1900), Victoria (1900) and Queensland (1908). A national Age Pension system replaced these schemes from 1 July 1909. The first Age Pension was a modest means tested payment, which was worth around 12 per cent of male total average weekly earnings.

In 1915, the first concessions for superannuation were introduced (with the introduction of income tax), comprising tax deductibility for employer contributions and an exemption of superannuation fund earnings from tax.

Until 1986, Australia had a two pillar system comprising the Age Pension and voluntary savings. Individuals who were not paid superannuation by their employers had to save if they wanted an income above the Age Pension, and were encouraged to do so with superannuation tax concessions. The first compulsory retirement saving scheme begun in 1986, when industrial awards required individuals to have 3 per cent of their remuneration paid as superannuation contributions. The SG extended compulsory superannuation to all employees from 1992 (with some exemptions such as employees earning less than $450 a month and those of certain age).

The taxation of superannuation

Until 1983, only 5 per cent of a lump sum benefit was included in assessable income and taxed at personal rates. In contrast, all income from an income stream was taxed at the individual's personal tax rates (with an exemption for contributions made from after‑tax income).

Reforms to the taxation of superannuation benefits were introduced in 1983. The taxation of lump sum payments was raised to 15 per cent for amounts below a specified threshold, and amounts above this threshold were taxed at 30 per cent. Contributions and earnings remained untaxed and the taxation of income streams was largely unchanged. The reforms were applied to service after 1 July 1983, while the pre‑1983 arrangements were 'grandfathered'.

Further revisions to the taxation of superannuation were announced in 1988, when a 15 per cent tax rate was applied to the contributions and earnings of superannuation funds. To compensate for these changes, the government reduced the tax on lump sums to zero for amounts up to the threshold and 15 per cent for amounts above it. Higher amounts of tax applied if a benefit was greater than the reasonable benefit limit.

Income streams continued to be taxed at personal rates. However, a 15 per cent rebate was introduced to compensate for the tax paid during the accumulation of the benefit. The income earned on assets supporting the income stream remained exempt in the fund, as they were taxed at personal rates once paid to the individual.

In 1996, the superannuation surcharge was introduced to reduce the disparity between the concessions provided to low‑income and high‑income earners. The surcharge added an additional amount of tax on contributions made by or on behalf of higher income earners. The surcharge was abolished in 2005.

Since 1 July 2007, superannuation benefits have been tax‑exempt when paid to an individual aged 60 years or older. Benefits are still taxed when taken before this age, or when paid from a fund which has not paid tax on its contributions and earnings.

Chart B.1: History of the taxation of superannuation

Chart B.1: History of the taxation of superannuation

  1. This resulted in an effective tax rate no greater than 3 per cent depending on the individual's personal tax rate.
  2. The surcharge applied between the 1997‑98 and 2004‑05 income years.
  3. Earnings on income stream assets were exempt. Capital gains are taxed at an effective rate of 10 per cent.
  4. Different rates apply to people who take their benefits before age 60 years and payments from funds that have not paid tax on their contributions and earnings.