We do not anticipate much Budget night action in the super tax area – unlike the last two years.
But it is worth thinking about Treasury’s recent release on the costs to the public purse of current ‘concessions’ provided to the superannuation industry – a subject which has been the source of much debate in recent years.
Last year’s changes sparked a major debate – a $1.6 million cap was imposed on superannuation balances in pension phase and reductions to contribution caps coming into effect from 1 July 2017. These were universally seen as being primarily directed at the concessions for those on high incomes or balances.
Given the heat of debate surrounding last year’s changes, it could have been expected that the value of these super concessions would have largely been contained into the future. However, these significant tax changes to superannuation (which were announced in the May 2016 Budget) do not appear to have resulted in significant changes to Treasury’s calculations for the present and projected level of superannuation tax expenditures.
Indeed, perhaps surprisingly, we see that the cost of Super Concessions is still projected to rise from $36b to $50bn by 2021 (nearly 40 percent in 3 years). This is actually higher growth than was projected before the Budget 2016 changes were announced.
Intriguingly, this growth in the cost to government has actually happened after the imposition of those caps. This is driven mainly by the earnings concession, which is highly dependent on Treasury’s assumed rate of return within funds. It may therefore be inferred that Treasury has significantly revised upwards the rate of returns in the future.
So what do we conclude?
- Future projections of the cost of superannuation concessions should be carefully interpreted and we would caution against further inflammatory commentary – given the value of the tax concessions disclosed in the Tax Expenditures Statement is highly dependent on the volatility of markets and assumed rates of return by Treasury.
- It seems there is little to be gained by further reductions in concessions affecting only the high income earners. There appears not to be enough of these to make much of a difference to the total cost of concessions. It may be possible to further contain the growth in the cost of the earnings concession for high balances if there was a cap on balances in the accumulation as well as the pension phase – but this would be highly controversial as it would likely trigger a one-off outflow of cash from the superannuation industry, although ATO statistics indicate that there are only 6,000 taxpayers with balances over $5m.
- More generally, the small effect of the 1 July 2017 changes on the projections indicates that most of the value of the superannuation tax concessions accrues within middle income groups, and thus it may be argued are already well targeted.
- This means that if the present or a future Government wanted to reduce the cost of the concessions more significantly, they would need to be ready for the much more difficult political conversation associated with reducing the concessions presently available to middle Australia (i.e., for incomes 1-2 times average weekly earnings).