Australia's Future Tax System

Architecture of Australia's tax and transfer system

5.5 Approaches to taxing retirement savings

In Australia, retirement savings vehicles are subject to tax. Superannuation contributions and earnings are generally taxed at a flat rate of 15 per cent and benefits from a taxed fund are paid tax free from age 60 (see Section 2 for further detail).

Warburton and Hendy (Australian Government 2006) found that it was not possible to draw a conclusion about the relative ranking of the concessionality of the taxation arrangements applying to Australian retirement savings, owing to the lack of data and methodological issues with the various studies on the subject. However, their study found that Australian retirement savings are taxed concessionally compared to other savings. Section 8 compares the nominal effective marginal tax rate of superannuation with other assets and financing arrangements.

Australia's approach to taxing retirement savings follows a comprehensive income tax model, although generally at concessional rates of tax on contributions and earnings compared to the rates applied to income. In contrast, most retirement savings systems across the world follow variants of the expenditure tax model (Box 5.2).

Box 5.2: Definitions of alternative taxation regimes

In the academic literature, retirement savings tax regimes are generally classified by three letters which indicate the point(s) at which taxation is imposed. The presence of a 'T' reflects the imposition of tax, while an 'E' indicates an exemption from taxation. It does not reflect the overall burden of the tax imposed (for example, a system that imposes 1 per cent tax on contributions, 1 per cent tax on earnings, and 1 per cent tax on benefits would be described as 'TTT').

An expenditure tax model exempts contributions and earnings from tax, and taxes benefit payments ('EET'). In contrast, a comprehensive income tax model taxes contributions and earnings, and exempts benefit payments from tax ('TTE').

From a theoretical perspective, a TEE model produces an equivalent retirement income outcome to an EET model (for the same value of 'T'). Similarly, an ETT model produces an equivalent retirement income result to a TTE model.