It’s crystal clear: super tax concessions have got to go

by John Daley

Published by The Australian, Friday 12 June

It is increasingly accepted that Australia’s superannuation tax concessions are poorly targeted, far too generous to high income earners, and in sore need of change.

For the Australian Council of Social Services, the Council of the Ageing, the Australia Institute, the Labor Party and the Greens Party to express this view is not surprising, given their focus on social equity. But the government’s own Commission of Audit, the Murray inquiry into Financial Services, and the Treasury Secretary have all questioned these tax concessions as well.

Even the superannuation industry has begun to concede that reform is necessary, even if their self interest means that their proposals don’t go nearly far enough.

Against this tide, the Prime Minister recently ruled out any changes to the current arrangements, even in the next term of government. Yet this appears to have been a captain’s pick rather than the result of disciplined thought in the tax white paper or cabinet processes.

With a consensus emerging, the lonely few defending the current arrangements, such as Judith Sloan on this page on Tuesday, have resorted to muddying the waters, perhaps hoping to delay the inevitable.

The superannuation system allows some high-income earners, particularly those who are older, to pay much less than their marginal rate of income tax.

Employer super contributions are taxed at a 15 per cent flat rate, meaning that individuals on the highest marginal tax rates receive the greatest concessional discounts.

For those earning more than $180,000 a year, the tax saving is 30 cents for each dollar contributed. For those earning between $18,200 and $37,000 it is a tax saving of four cents for each dollar contributed.

And the Abbott government’s decision to abolish the Low Income Superannuation Contribution means that those earning less than $18,000 will soon pay more tax on money contributed to super than on their take home pay.

These tax concessions don’t help the budget by reducing age pension liabilities much, since high-income earners were never going to qualify for the age pension anyway (or at least they wouldn’t if the eligibility criteria were set up properly).

And the lost income tax revenue is big enough to care. Every year, contributions concessions cost about $17 billion and earnings concessions about $16bn — and mostly benefit the top 20 per cent of income earners. Although you can’t add these numbers and not all the revenue would be collected if there were reforms, it is the biggest leak in the income tax system. It means government can’t afford to reduce bracket creep, which hits middle Australia hardest.

Sloan questions ACOSS’s statement that 50 per cent of the tax concessions go to the top 20 per cent of income earners. This “fact” (her quotation marks, not mine) comes straight from the chart on page 138 of the final report of the Financial Services Inquiry.

One can confuse the issue by pointing out that two-thirds of the superannuation concessions go to those earning between $37,000 and $180,000, as the Australian Superannuation Funds Association did in a recent submission.

But this completely misses the point: an income range of this kind covers an enormous spread between those with incomes in the bottom third to those in the top three per cent. And it conveniently passes over the 20 per cent of super tax concessions going to the 3 per cent of the population who earn more than $180,000 a year.

Sloan quibbles with Treasury’s forecasts. But the forecasts are well founded: both super tax receipts and the cost to government of the tax concessions are expected to rise over time, and the latter will rise faster as more people turn 60 and the tax rate on their superannuation earnings drops from 15 per cent to zero.

Sloan and others also confuse matters by claiming that tax reforms will have minimal impact on the budget bottom line, despite the large forecast growth in tax expenditures. Tax reforms will lead people to change their behaviour and put less into superannuation. But my guess is that changes in behaviour won’t reduce tax collection much.

It’s hard to beat superannuation contribution concessions as a way of allowing people to save from their pre-tax income. Try other ways, and there’s a fair chance the ATO will be calling your accountant.

Similarly, even if government increases the tax rate on super earnings in pension phase from zero to 15 per cent, few wealthy people will shift their investments out of superannuation. Other investment structures that pay less than 15 per cent tax on earnings also tend to raise eyebrows at the ATO. In any case, no one is suggesting that all superannuation tax concessions should go. The real target is the scale of concessions to high-income earners. Grattan Institute’s 2013 report, “Balancing Budgets”, estimated that government would raise an extra $9bn a year if it simply reduced the amount that can be contributed from pre-tax earnings to $10,000, and taxed superannuation earnings at 15 per cent for over 60s.

With such serious money on the table it is no surprise that some want to muddy the waters. But it is crystal clear that we need to reduce the generosity of superannuation for those at the top so that they pay tax on their incomes at something approaching their personal income tax rates.