Super tax should be just the start

The government’s change is expected to raise $2 billion a year for the budget and affect 80,000 Australians, or less than one in every 200 Australians with super.

The earnings tax breaks on these balances are typically larger than poorer retirees get from the Age Pension.

Claims that not indexing the $3 million threshold will result in the tax affecting most younger Australians, or that it will somehow disproportionately affect younger generations, are simply nonsense.

Rather than being the biggest losers from the lack of indexation, younger Australians are the biggest beneficiaries. It means more older wealthier Australians will in time shoulder some of the burden of budget repair and an ageing population that younger generations will otherwise bear alone.

A mere 0.5 per cent of Australians have more than $3 million in their super, and 85 per cent of those are aged over 60.

Even if the threshold remains unadjusted until 2055 – in the unlikely scenario where it remained unindexed for 10 successive parliamentary terms – it would still only affect the top 10 per cent of retiring Australians, who can expect to earn more than $142,000 a year on average throughout their careers.

It’s true that levying a 15 per cent surcharge on the implied earnings of the account over the year (the change in account balance, net of contributions and withdrawals) will impose a tax on unrealised capital gains on superannuation, as already occurs for state land taxes and council rates.

Treasury has taken this approach to implementing the tax because existing super earnings taxes are levied at the fund level, not on individual member accounts. 

Taxing capital gains as they accrue removes incentives to ‘lock in’ investments to hold onto untaxed capital gains, as the Henry Tax Review recognised, could create cash flow challenges for some investors with large super balances who hold illiquid assets.

Instead of only moving on super balances larger than $3 million, the government should set the threshold at $2 million, saving another $1 billion a year.

The federal government needs to go much further

Yet if the government is serious about reining in excessively generous super tax breaks, the government’s $3 million super earnings tax should be just the start.

Tax breaks on super contributions and fund earnings mean less tax is paid on super savings than other forms of income. Those tax breaks cost the federal budget nearly $50 billion in lost revenue each year.

Super tax breaks should exist only where they support a policy aim.

These tax breaks boost the retirement savings of super fund members, and ensure that workers don’t pay punitively high and compounding effective tax rates on their long-term savings held in super.

But two-thirds of the value of super tax breaks benefit the top 20 per cent of income earners, who are already saving enough for their retirement and whose savings choices aren’t much affected by tax rates.

And it appears unlikely that much, if any, of this boost to super balances from tax breaks gets spent in retirement.

Few retirees draw down on their retirement savings as intended, and many are net savers – their super balance continues to grow for decades after they retire. By 2060, Treasury expects one-third of all withdrawals from super will be via bequests – up from one-fifth today.

Superannuation in Australia has become a taxpayer-subsidised inheritance scheme.

These generous tax breaks for super savers mean other more economically distorting taxes, such as income taxes and company taxes, must be higher to make up the forgone revenue.

Contributions tax breaks need to be wound back

Currently, many wealthier Australians receive a larger tax break per dollar contributed to super than many low-income earners.

To change that, the pre-tax contributions of people earning more than $220,000 a year should be taxed at 35 per cent, instead of the 30 per cent charged to those earning more than $250,000 currently. This would save the budget $1.1 billion a year.

And the annual pre-tax contributions cap should be lowered from $30,000 to $20,000. This would save upwards of $1.6 billion a year. Contributions above this level tend to amount to tax minimisation by wealthy older Australians, rather than genuine retirement savings.

Co-contributions and carry-forward provisions – both intended to encourage catch-up contributions – instead facilitate tax minimisation and should be abolished, saving $1.1 billion a year.

These changes could save the federal budget a further $4 billion a year, largely by reducing tax breaks that benefit the wealthiest 10 per cent of Australians.

Super earnings shouldn’t be tax free in retirement

But Australia’s super system won’t be sustainable so long as most retirees can opt out of the tax system altogether from age 60.

Super earnings in retirement – currently untaxed for most people – should be taxed at 15 per cent, the same as superannuation earnings before retirement. More than half of the benefit of tax-free earnings in retirement goes to the wealthiest 20 per cent of retirees. This change would save at least $6 billion a year today and much more in future.

Retirees would pay some tax on their superannuation savings – the same as those working today – but still much less than younger workers pay on their wages.

Super tax breaks should only exist where they achieve a policy aim. There’s a long way to go before that vision is reality.