The highly concessional taxation of Australian superannuation is of long
standing. The 1915 law establishing federal income tax provided for full tax
deductibility of employer contributions to superannuation, and exempted
super funds from earnings taxation. If, on retirement, benefits were taken as
lump sums, only 5 per cent of the sum was taxed at personal income tax
rates.^15 But in 1988 this architecture was changed radically. Facing a difficult
budget, the then Treasurer Paul Keating imposed a tax of 15 per cent on
contributions and earnings, and lowered benefit taxes to zero for lump sums
up to a moderate indexed amount. This dramatically improved the short-term
position of the budget, but at significant long-termfiscal cost (given the
ageing of the population).^16 While the taxation of benefits was removed and
simplified by a subsequent government in 2006, this basic architecture
remains.
10.3.3Investment Risk
Another unusual, but not necessarily disadvantageous, aspect of Australian
superannuation is the large weighting to more volatile assets. A recent Mercer
survey of eleven major pension systems found in 2014 a‘higher exposure to
equity investments in the Anglo-Saxon markets’, especially in Australia where
equities made up 50 per cent of assets, more than any other country, except
for Hong Kong. Australia had 68 per cent of pension funds invested in
‘growth’assets, again the highest, while the European countries with retire-
ment systems most similar to Australia’s, Denmark and the Netherlands, had
less than 24 per cent (Mercer 2014). Cash andfixed interest investments were
the biggest component of every OECD nation’s pension funds, except the USA
and Finland, but make up less than a third of total Australian pension fund
assets (OECD 2014). Apart from a prohibition on leveraged investing, Austra-
lian superannuation trustees have no more than afiduciary duty to manage
investments prudently, which goes some way to explaining the contrast.
Other jurisdictions often impose restrictions: Mexican pension funds need
to invest at least 65 per cent in government bonds, while in Denmark at least
60 per cent of pension assets must be‘low risk’. Also, the relative rarity of DB
schemes in Australia means trustees do not feel compelled to invest mainly in
less volatile assets.^17
(^15) In 1983 a progressive and higher tax on lump sums (with a maximum rate of 30%) was
introduced, dulling the incentive to take bene 16 fits as lump sums.
One subsequent Labor leader told the author this change in tax may have been the biggest
strategic tax blunder of this generation given the relative growth of funds in the pension phase. 17
Australia’s relatively small corporate bond market and a company tax system that provides
refundable credits to shareholders also add to the appeal of equities.
Adam Creighton