This country’s well-funded super system is the envy of the world, providing Australians with a sense of financial security and reducing long-term Age Pension pressures on the government. Its contribution to the savings pool is significant, allowing Australia to punch above its weight in the international financial system.
The Murray Inquiry sparked a necessary re-focus on the fundamental objective of super; ‘to provide income in retirement to substitute or supplement the Age Pension’ rather than as a wealth accumulation vehicle.
The Treasurer’s pledge that super and a broader retirement income framework will now be considered as part of the Tax White Paper process is also welcome. But, the government’s promise of no changes to superannuation in its term, or indeed no ‘plans… beyond the next election’ is a concern. I believe the principles of equity, simplicity, and encouragement of socially-beneficial behaviours must guide and underpin future tax policy, and a proper debate on reform options, including retirement policy, is urgently needed.
Much discussion has centred on the tax ‘expenditure’ or concessions relating to super. The commonly-quoted figure is $32 billion. However, there is not $32 billion of potential budgetary savings. Tax expenditure is simply a number generated by reference to a benchmark; therefore the key is to understand that benchmark.
This $32 billion of potential savings is based on a big assumption: that the alternative to taxing super contributions at 15 percent, and super earnings at 15 percent and zero percent, is to tax these amounts at the same rates as ordinary income, like salary and wages.
The $32 billion number comprises two components of $16 billion each. The first $16 billion reflects the difference between taxing contributions at a concessional rate and taxing these same amounts at members’ marginal tax rates, like salary and wages. In terms of equity, the discussion on this $16 billion has focused on higher income earners receiving a greater benefit from the 15 percent rate.
However, the current measures in place, such as contribution caps, the low income super contribution and the additional 15 percent tax for persons earning over $300,000, have gone a long way to addressing the equity issues in the allocation of this $16 billion. The concession is approximately 20 percent of contributions across almost all income groups, except for those earning less than $37,000, who do not receive a concession, and those earning between $180,000 and $300,000 who receive a concession of 34 percent, significantly more than any other group.
Labor’s proposal to reduce the $300,000 to $250,000 would further close this equity gap. However, this last group is where the concession may be the most effective in encouraging voluntary contributions and reducing the long-term pressure on the Age Pension. One measure that could increase equity in the treatment of contributions would be to use lifetime caps instead of per annum caps, although there would be a trade-off in reduced simplicity.
The second $16 billion of concessions reflects the difference between taxing super fund earnings at 15 percent in the accumulation phase and zero percent in the pension phase, and taxing these same amounts at members’ marginal rates.
One option to address this would be to remove the zero percent tax rate on fund earnings in the pension phase. Indeed the Henry Tax Review proposed a single rate of 7.5 percent. This could simplify the present system significantly, as the distinction between accumulation and the pension phases has resulted in the need for complex administrative arrangements that reduce efficiency and increase costs.
Another option mooted, appealing on equity grounds, is to allow a zero percent rate in the pension phase up to an agreed member balance, say $2.5 million. This removes a large benefit from the largest member balances and the infrastructure is in place to administer this. It is estimated that there are 8,000 accounts with balances greater than $5 million.
Concessions directed at changing behaviour should clearly articulate the intended behavioural change. In this way, the measures can be carefully crafted and targeted, and their success, or otherwise measured, monitored or modified if they prove unsuccessful.
A holistic approach is critical and the welcome broadening of the Tax White Paper’s scope to include interactions with the Age Pension, and other factors contributing to retirement outcomes, is a positive first step forward. But talk must be followed by action and the reality is that changes to superannuation concessions are a necessity.
Article courtesy of Superfunds Magazine