Treasurer Jim Chalmers yesterday took the first step towards reining in excessively-generous tax breaks in superannuation.

The government proposes to tax at 30 per cent the earnings on super balances larger than $3 million, from 2025-26. This 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 new policy is a step in the right direction and will rein in some of the largest tax concessions for the very well off. But it does not go nearly far enough.

Wealthy people will continue to receive generous tax benefits from super, and younger people and those on low and middle incomes will keep footing the bill.

Instead of only moving on super balances larger than $3 million, the government should set the threshold at $2 million.

There is no reasonable rationale for generous earnings tax breaks on balances between $2 million and $3 million. People with that much in super will have a very comfortable retirement without taxpayer support.

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.

Dr Chalmers’ announcement comes after debate flared about what the objective of superannuation should be. But everyone seems to agree on what it shouldn’t be: a taxpayer-funded inheritance scheme for wealthier Australians.

Yet, that’s exactly what super has become. Our system offers billions of dollars a year in tax breaks to wealthier people who will never spend them in retirement. That will remain true even after yesterday’s announcement.

Superannuation tax breaks mean people pay less tax on their super savings than on other forms of income. These tax breaks cost taxpayers nearly $50 billion a year – about 2 per cent of GDP. Soon they will cost more than the Age Pension. Yet two-thirds of the value of super tax breaks flow to the top 20 per cent of income earners who would have never qualified for an Age Pension in the first place.

Much of the boost to super balances from tax breaks is never spent – because most retirees are net savers. By 2060, one-third of all withdrawals from superannuation will be paid out as bequests. These inheritances tend to transmit wealth to people who are already well off, making Australia more unequal.

Dr Chalmers should go further than the reform he announced yesterday. He should raise Division 293 tax to 35 per cent (from 30 per cent now), and lower the income threshold to $220,000 a year (from $250,000 now). This would save the budget $1.1 billion a year.

He should also increase the Low-Income Superannuation Tax Offset, which rebates contributions tax paid by very low-income earners, and raise the threshold to which it applies to $45,000 a year (from $37,000 now). This change would cost the budget $530 million a year.

These changes would mean lower-income earners would get at least a 15 per cent tax break on their super contributions, whereas people on more than $200,000 a year would only get a 10 per cent tax break.

The government should also make other changes to contribution tax breaks, to limit tax minimisation in super.

Many of the pre-tax super contributions exceeding $20,000 a year amount to tax minimisation by wealthy older Australians, rather than genuine retirement savings. Lowering the cap on pre-tax contributions to $20,000 a year (from $27,500 now) would save a further $1.6 billion a year, mostly by reducing voluntary pre-tax contributions made by older, wealthier men who already save enough for their retirement.

And we need to stop super being used as a tax minimisation and estate planning vehicle by some of Australia’s wealthiest people.

People who will be affected by the reforms announced yesterday will be quick to argue that these changes retrospectively affect superannuation investments. But lots of changes affect investments made in the past, and no-one suggests they are retrospective. If I bought shares in a company yesterday, I expect that the future earnings on these assets will be subject to my marginal income tax rate – which may change in future.

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.

Both sides of politics agree super shouldn’t be a taxpayer-funded inheritance scheme. But it’ll take much more than what the government announced yesterday to turn that aspiration into reality.

Joey Moloney

Economic Policy Deputy Program Director
Joey Moloney the Deputy Program Director of Grattan Institute’s Economic Policy program. He has worked at the Productivity Commission and the Commonwealth Treasury, with a focus on the superannuation system and retirement income policy.

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