Taxing Pensions: The Australian Approach

The increasing prevalence of funded private pension systems world- wide raises questions about how retirement savings and benefits should be taxed. The three most important questions in pension taxation are: (1) At what point should pension savings be taxed? (2) Should the tax regime for pensions be integrated with personal income taxes or be sepa- rate? (3) How preferential should the taxation of pensions be? Australia’s experience with the tax treatment of private retirement savings (known in Australia as superannuation) brings considerable insight to these questions.

Pension savings can be taxed at one or more of three points—at the time of contribution, as fund earnings accrue, and/or at the time ben- efits are received. Most countries exempt (E) contributions and fund earnings from taxation and tax (T) benefits under a postpaid expendi- ture tax (EET) regime. In most cases, the benefits are treated as ordinary income and taxed progressively under the personal income tax sched- ule. Some countries tax contributions and fund earnings under a com- prehensive income tax (TTE) regime. Alternatives include a prepaid expenditure tax (TtE) under which contributions are taxed, fund earn- ings are exempt (except for excess returns),1 and benefits are exempt, or a hybrid approach (TTT) whereby pension savings are taxed at all three points.