PNG Superannuation Taxation Reform

Purpose

The purpose of this paper is to seek a review of the taxation treatment applied to interest and earnings on superannuation.

Background

To date the Superannuation Industry has been - fortunate in the reform of taxation on superannuation. The tax system on the recommendation from the taskforce and the ASFPNG have seen taxation on superannuation overhauled. We have been fortunate that Treasury has been - receptive -to our proposals. In the 2003 Budget the following reforms were implemented.

Tax is levied on your superannuation at the time that you withdraw. The tax system is designed to favour long-term contributors and substantial tax benefits are incurred for those who remain in the system long term. Different rules therefore apply depending on the years of service for employer and interest components of superannuation.

Years of Membership	<5 years	<5 years and <9 years	<9 years <15 years	<15 years
Rate of Tax	Marginal Rate of Tax	The lesser of 15% or the marginal tax rate	The lesser of 8% or the marginal tax rate	2% tax on interest and employer contribution

A concessional rate of tax of 2% also applies to distributions where the payments relate to benefits accrued before 01 January, 1993.

Similarly, tax on earnings was reduced below the company tax rate of 30% to 25% (the rate prevailing before the increase in the company rate).

The tax application on superannuation in PNG is far less complicated and more user friendly than in Australia, and we need to keep it that way. We are indeed fortunate that Superannuation in PNG does not carry excessive legislative baggage.

Proposed Further Reform of Taxation on Superannuation

Nasfund believes that - there is still one anomaly that requires addressing.

Currently tax is applied on superannuation earnings at 25% on income generated from fixed interest securities of less than 5 years maturity- which is unavoidably the predominant form of investment in present circumstances for most Funds. ---Earnings are then taxed again at the member level on member withdrawal. This appears to be unfair. –
- a Member currently on the maximum tax threshold could pay through the Fund 25% on the income generated and then if withdrew under five years of membership, pay a further 47%. In effect the taxation would be 72% over all on the income.
- A more common example would be a member with between 5 and less than 10 years standing, who has to pay 15% on exit- a total tax rate of 40% on earnings

These are penal rates on mandatory contributions.

Moreover, with the recovery in confidence in superannuation, there is growing interest among some members in voluntary contributions, which would be to the benefit of the country as well as the member, but the double taxation of fund earnings constitutes a barrier to this development.

The situation is actually much worse than it appears when it is remembered that taxation applies to nominal, not real, earnings.
- for example, if the rate of interest on the fixed interest earnings of a Fund is, say, 10%, and the rate of inflation is 7.5%, then the real return is only 2.5%- and after tax at 25%, the real return on members’ funds is zero.
- but the member on exit is still required to pay tax on the after-tax nominal earnings, meaning that he has suffered an outright loss in real terms on his savings.

Nasfund believes that this is iniquitous and that tax on income on withdrawal should be awarded the same status as member contributions, (i.e tax is paid once at the source only [? Do you mean ‘ in the hands of the fund, & not upon exit’?])

Recommendation

That the ASFPNG write to Treasury seeking a review on the taxation treatment on income with the view to amending the Tax Act to remove taxation on interest on withdrawal.

Rod Mitchell

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TAXATION OF SUPERANNUATION BENEFITS

Tax on Investment Earnings at the Fund Level

The tax on investment earnings of an Authorised Superannuation Fund is as follows

· Income generated by the Fund is taxed at 25%
· Income from Government Securities with maturity greater than five years are tax free
· Dividend income is tax-free.
· There is no capital gains tax on investment appreciation.

Tax on the Member

· Member or employee contributions are paid from after tax income. The employee contributions have already been taxed at the employee level and as such there is no taxation on withdrawal.

· Employer contributions to the member are paid by the employer before deduction of tax. As such these benefits are taxable on withdrawal by the member.

Taxable Components:

There are three (3) components that make up your total contributions.

(a) Employee contribution; and

(b) Employer contribution; and

(c) Interest from the above contributions.

The employee contribution of 5% and any voluntary contributions above this level is not subject to tax. The Member will receive the Employee component of contribution in full on withdrawal

The employer contribution and the interest component are the part of your contributions that will be taxed.

Tax is levied on your superannuation at the time that you withdraw. The tax system is designed to favour long-term contributors and substantial tax benefits are incurred for those who remain in the system long term. Different rules therefore apply depending on the years of service for employer and interest components of superannuation.