Author Topic: Are Australian taxes punitive for the early retiree?  (Read 4992 times)

deborah

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Are Australian taxes punitive for the early retiree?
« on: February 23, 2019, 11:27:16 PM »
Recently, there was some discussion in another topic, where an Australian said...

No, it means that I won't retire till I have about 35x my annual living expenses saved away.

Youíre also living in Australia and I think thereís a variation of 4% in Australia.

Possibly, especially given our taxes are much more punitive and our cost of living is far higher. I should have stipulated that, sorry. Maybe 4% works perfectly well in America with its much lower COL and better higher living standards (for the top quintile).

I think we tend to exaggerate our tax burden here. Certainly, Iíve seen articles that say we have a similar tax burden to other places (specifically the US), and other articles that say we have one of the highest standards of living in the world.

In retirement, superannuation is a tax lurk, and if you have a high net worth you probably also have a family trust, so Iíd be surprised if we needed MORE in early retirement than our friends in the US. In fact, Iíd suggest we need LESS. The less well off can rely on cheaper health care and various safety nets that we have in place, while those who (like the one writing here) were high earners with a large stash, can use their various tax lurks to avoid it. Or am I missing something?

We can also carry more risk because of our safety nets. We know that the OAP exists, so if we actually lose our stash, there is some fallback. We know healthcare exists...

mjr

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Re: Are Australian taxes punitive for the early retiree?
« Reply #1 on: February 24, 2019, 02:16:02 AM »
Why call Superannuation a tax lurk ?  The purpose of superannuation is to get people to defer consumption to fund their own retirements.  How can there not be an incentive to do that ?

15% (or 30%) on the way in, 15% on accumulation account income, forced withdrawal rates on pensions and pseudo death duties.  The only cherry and it's a good one, is the tax-free pension, on which you'll cop 10% GST when you spend it,

As far as income tax, I'd say our lower brackets burden is commensurate with other countries.  Our higher tax brackets are definitely punitive.

The cost of living in Australia in Australia is way more than in the US.  Way more.

As a country, we pay ourselves far too much to be competitive in the world.  Which is way our dollar languishes around 70 US cents.

middo

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Re: Are Australian taxes punitive for the early retiree?
« Reply #2 on: February 25, 2019, 08:12:39 PM »
Figures I have seen* show that most countries have similar levels of overall taxation.  From memory, Australia runs about 25% of GDP, the US is about 23%, Japan about 28%, UK about 30%, and most of Europe higher, with Denmark about the highest.

The issues of the 4% rule are around the Australian share market only returning a lesser amount compounding compared to the US market.  There are many reasons for this, but tech stocks are a large part of our "parting of the ways" over the last 20 years.  US stocks tend to be higher growth than Australian stocks, which are more dividend focussed.  Our retirement focus here with dividend imputation may be an issue in the higher dividends and lower growth.

If you are going to live on very low expenses, I would prefer to be in Australia if something goes wrong.  Universal health care and a safety net mean that some retire on a net worth of 0, and live off the social security system.  I suspect it would be a lot more comfortable living off the dole here than in USA.

So ultimately, I think Australia has benefits for early retirees in the health system and a safety net if things go wrong.  This is a frugal retiree.  However, our returns are less over the longer term.



* These are from memory, and may be incorrect.  Please don't burn me for not bothering to look them up properly.

Bloop Bloop

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Re: Are Australian taxes punitive for the early retiree?
« Reply #3 on: February 26, 2019, 04:45:40 AM »
I never said our overall tax burden is high by OECD standards (it's not), because our tax mix is different from that of the U.S. We rely heavily on personal income tax, and our income tax burden is high, and it falls predominantly on high earners.

The top 20% of the population earn about 55% of income but pay a whopping 67% of all income tax.

The top marginal rate in the US is under 40% and that only kicks in above $400,000. Our top rate is 45% + 2% medicare levy and that kicks in at just $180,000.

I strongly feel our income tax punishes those on over $200k. I think the Australian ethos is that you shouldn't want more than that much income anyway. It's a populist and anti-tall-poppy stance. 

happy

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Re: Are Australian taxes punitive for the early retiree?
« Reply #4 on: February 26, 2019, 03:02:51 PM »
"Tax the rich!" seems to win elections. Enough said.
Australia's safemax is probably lower than the US. See this research which puts it at 3.5%. https://www.insidersforum.com/sites/default/files/users/InsiderForumLLC/Presentations/Research%20Highlights%20(Insiders%20Forum)%201%20hour-2.pdf
The data is a bit old ie ends at 1981 (!) but I'm guessing Australia is still below US.

If we are talking about taxes for the early retiree (not middle to high income earners trying to save), then unless you are planning on living on a large amount, Australia's taxes rates are not punitive, plus the low income earner has the benefit of our more extensive safety net such as medicare, family tax benefit etc. Pre preservation date, there are fully franked dividends, trusts etc to help you on your way and once you hit super age, provided  your money is in super you pay no tax at all. If you are really rich and not living on a mustachian income , then of course you will pay more tax.


middo

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Re: Are Australian taxes punitive for the early retiree?
« Reply #5 on: February 26, 2019, 04:05:10 PM »
...

I strongly feel our income tax punishes those on over $200k. I think the Australian ethos is that you shouldn't want more than that much income anyway. It's a populist and anti-tall-poppy stance.

...

If you are really rich and not living on a mustachian income , then of course you will pay more tax.

This is exactly the point I was trying to make.  Thank you @happy

deborah

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Re: Are Australian taxes punitive for the early retiree?
« Reply #6 on: February 26, 2019, 04:32:43 PM »
A couple can have $3.4million in pension phase in superannuation ($1.6million each). At 4% that means taking out $136,000 of income from superannuation each year for no tax (either within superannuation or outside superannuation). It also means you can have up to $18,200 income each ($36,400 for the couple) outside superannuation, again without any tax. This doesn't include any other benefits, of which there are several for the pension age retiree.

Because you aren't paying tax on either income, you are much better off then the people of the US, once you hit pension age.

Bloop Bloop

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Re: Are Australian taxes punitive for the early retiree?
« Reply #7 on: February 26, 2019, 05:51:30 PM »
...

I strongly feel our income tax punishes those on over $200k. I think the Australian ethos is that you shouldn't want more than that much income anyway. It's a populist and anti-tall-poppy stance.

...

If you are really rich and not living on a mustachian income , then of course you will pay more tax.

This is exactly the point I was trying to make.  Thank you @happy

If you think $200k (which is 2.4x the average full-time income of $85,000) is "really rich", or a "non-Mustachian" income, then that just proves my point which is that Australians have a very low ceiling of what they think constitutes an outlier. I don't think $200k is really rich, and I don't think the inverse ($35,000, which is 0.4x the average income) is really poor. I think neither is an extreme figure.

And I never said that I am against paying 'more' tax; my point is that the progression upwards in tax is punitive. Refer to my figures on the max marginal rate we face, and compare them to those in the US (or UK).

No doubt, once I retire, the tax treatment goes from overly strict to overly lax; retirees in this country have a million tax breaks, probably more than they deserve.

Don't get me stared on the age pension. I can't believe I'm paying tax to fund people who sit on $1m or $2m of paid-off home, yet they still draw a pension.

marty998

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Re: Are Australian taxes punitive for the early retiree?
« Reply #8 on: February 27, 2019, 12:35:01 AM »
Why call Superannuation a tax lurk ?  The purpose of superannuation is to get people to defer consumption to fund their own retirements.  How can there not be an incentive to do that ?

It's because the people who need an incentive to save don't benefit in a material way, and the people who would save for their retirement and would be fine regardless of super or not, reap the highest amount of tax concessions.

If those that need the tax incentive to save still substantially end up on the age pension anyway, then what is the point of locking up anyones wages in super?

It may have been well designed 25 years ago. It needs to be tweaked now, otherwise you'll continue to see intergenerational economic warfare play out.

mjr

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Re: Are Australian taxes punitive for the early retiree?
« Reply #9 on: February 27, 2019, 03:25:59 AM »
Hey, here's an idea, let's put policies in place that provides no incentive to fund your own retirement.  Then people can quite happily spend like drunken sailors and head off to Centrelink at 67 with their hand out.

Cost of a single age pension for 25 years:  over half a million dollars.

"Cost" of the tax concession for a tax-free pension of $50,000 for 25 years:  $195,000.  This is assuming it's all income too, not drawing down on the principal.

If everyone heads off to Centrelink with the smaller younger-aged generation trying to fund them, then you'll see some inter-generational wealth transfer.

Hmm, let me think.


marty998

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Re: Are Australian taxes punitive for the early retiree?
« Reply #10 on: February 27, 2019, 01:41:01 PM »
Hey, here's an idea, let's put policies in place that provides no incentive to fund your own retirement.  Then people can quite happily spend like drunken sailors and head off to Centrelink at 67 with their hand out.

Cost of a single age pension for 25 years:  over half a million dollars.

"Cost" of the tax concession for a tax-free pension of $50,000 for 25 years:  $195,000.  This is assuming it's all income too, not drawing down on the principal.

If everyone heads off to Centrelink with the smaller younger-aged generation trying to fund them, then you'll see some inter-generational wealth transfer.

Hmm, let me think.

Can you give me the maths on that? I think it substantially underestimates the cost of the initial tax concessions (gap between marginal rate on wages and 15% contributions tax), the concessional tax on earnings in the fund over a 42 year working life from 18 to 60, and the zero tax rate on earnings in the post 60 years pension phase.

urbanista

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Re: Are Australian taxes punitive for the early retiree?
« Reply #11 on: March 07, 2019, 04:43:42 PM »
Don't get me stared on the age pension. I can't believe I'm paying tax to fund people who sit on $1m or $2m of paid-off home, yet they still draw a pension.

Plus they can now downsize their home "for free", i.e. a couple can put up to $600K from the proceeds of selling their home into super with no tax PLUS purchase a new home (up to $750K in Victoria) with no stamp duty.

Did I mention discounts on council rates, car rego, electricity, gas, public transport? These totals easily $2K per year.

And now Labour wants to add another tax concessions for pensioners: franking credits.

 
 

middo

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Re: Are Australian taxes punitive for the early retiree?
« Reply #12 on: March 07, 2019, 04:54:49 PM »
<snip>

And now Labour wants to add another tax concessions for pensioners: franking credits.

I think you have that the wrong way around?  They already have that tax concession.

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Re: Are Australian taxes punitive for the early retiree?
« Reply #13 on: March 07, 2019, 05:24:03 PM »
...

I strongly feel our income tax punishes those on over $200k. I think the Australian ethos is that you shouldn't want more than that much income anyway. It's a populist and anti-tall-poppy stance.

...

If you are really rich and not living on a mustachian income , then of course you will pay more tax.

This is exactly the point I was trying to make.  Thank you @happy

If you think $200k (which is 2.4x the average full-time income of $85,000) is "really rich", or a "non-Mustachian" income, then that just proves my point which is that Australians have a very low ceiling of what they think constitutes an outlier. I don't think $200k is really rich, and I don't think the inverse ($35,000, which is 0.4x the average income) is really poor. I think neither is an extreme figure.

And I never said that I am against paying 'more' tax; my point is that the progression upwards in tax is punitive. Refer to my figures on the max marginal rate we face, and compare them to those in the US (or UK).

No doubt, once I retire, the tax treatment goes from overly strict to overly lax; retirees in this country have a million tax breaks, probably more than they deserve.

Don't get me stared on the age pension. I can't believe I'm paying tax to fund people who sit on $1m or $2m of paid-off home, yet they still draw a pension.

Hang on for a minute. If you earn ~$250k you are in the top 1% of earners in Australia. The top ten percent only earn just over $100k. So 200k must surely put you in the top 2% and relatively speaking, that's rich surely? 

If the gap between the lower earners on $35k and the top 1% is not all that big, then that means we have a more equal society. IMO that is overwhelmingly a good thing for so many reasons of better health, lower violent crime, just generally better living standards. I'm drawing on the book "The Spirit Level" plus my economics and geography quals to have that opinion.

Having said all that, it would be totally normal human nature for everyone in the top 1% to have the shits about how much tax they pay. They just won't get much sympathy from the unwashed masses, lol.