Treasury: pensioners should pay income tax

Article published 8 November 2023

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What with the seniors tax offset and super, few pensioners pay income tax, but more and more people say pensioners should pay. Should they?

“Only 18 per cent of Australians aged 65 and above pay income tax”, the Financial Review reports the federal Treasury Secretary Steven Kennedy saying recently. He meant income tax, not other taxes like the GST, for example.

Mr Kennedy was discussing the fairness or otherwise of the tax and transfer  system.

The problem with income tax

People used to live shorter lives and didn’t cost as much in the pension and in aged care and health-related subsidies.

Birth rates are falling, while baby boomer survival-to-well-beyond-80 rates are rising.

The result?

The income tax burden will fall on a shrinking share of working-age taxpayers.

Personal income tax will soar to an unprecedented almost 60 per cent of the overall federal tax base by the 2060s, up from an already record 50 per cent in this financial year, Treasury projects.

The income tax burden will be shouldered by a smaller share of working-age people unless there is “policy change”, the latest Intergenerational Report warns.

The ‘old-age dependency ratio’, which measures the number of people aged 65 and over for every 100 people of traditional working age (15 to 64), is projected to jump to 38 per cent in 2063 from this year’s 26 per cent.

But maybe the federal Treasury can take heart that life expectancy increases have stalled as a result of the COVID-19 pandemic.

Is it true pensioners don’t pay tax?

Gross household median income for people aged 65 to 74 was $50,700 in 2022, according to the Australian Bureau of Statistics. But as a group their disposable household income, which strips out income taxes, was not much lower at $50,180.

As a group, people aged 65 to 74 are paying only $520, or one solitary per cent of their income, in income tax.

There is no suggestion here that the federal Treasury thinks we should all live shorter lives, but they do seem to think it’s unfair the majority of older people don’t pay income tax.

Should they?

Why pensioners shouldn’t pay income tax

It’s true that pensioners in New Zealand and the UK and quite a few other countries besides do pay income tax (including over their pension!), but here’s the rub.

They get the same pension regardless of their income. It’s called a universal pension, and in the UK King Charles and Mick Jagger get it, as do any number of very wealthy Britons over the age of 65.

But in Australia, the Age Pension is means-tested. It’s not called a tax. Pensioners and retirees overwhelming don’t pay tax, remember. But, a dollar being a dollar, what’s the difference?

The income test means you lose 50 cents in the dollar if your fortnightly income is higher than $204 if you are single and $360 for a couple combined.

Fifty per cent!

Does that sound like a pretty steep income tax to you?

And if you have been a really good saver, there’s an even heftier tax. The assets test means you lose $3 a fortnight (or $76 a year) for every $1,000 your savings are over a none-too-high limit.

That may not be an income tax, but does that sound like a wealth tax to you?

Then again, a wealth tax doesn’t exist in Australia. You can ask the federal Treasury.

Also read:

The rich cost more

Millionaires, superannuation and the pension: next federal election

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