Almost everyone agrees that Budget repair will only be possible if both the revenue side of the Budget is reviewed as well as the expenditure side. In that context, the tax concessions for superannuation have loomed as a prime target.
Indeed, the Treasury Statement of Tax Expenditures shows that the annual cost of the present superannuation concessions is almost $30 billion and rising. Furthermore, it appears that 37 per cent of the total value of these concessions flows to people in the top decile of the income distribution.
No wonder so many other people are calling for the government to limit these concessions. So now the government has responded by announcing new caps for the taxation of
superannuation concessions. The two caps that have excited the most discussion have been
- the limit of $1.6 million that can be transferred into the tax free retirement phase, and
- an annual cap on post-tax contributions of $100,000, and these contributions will in future only be available to individuals whose superannuation balances are no more than $1.6 million.
These changes will save nowhere near the $30 billion estimated as the cost of superannuation tax concessions, so the first question is whether these changes in caps go far enough.
In fact, this Treasury measure of the cost of the superannuation tax concessions is based on a comparison against a Comprehensive Income Benchmark. This benchmark assumes that the contributions to superannuation and the earnings thereon should be taxed as they accrue.
However, the actuarial firm, Mercer, has identified the criteria against which the effectiveness of retirement income systems should be assessed, and has concluded that this Comprehensive Income Benchmark ‘is not considered a valid benchmark for many reasons’.
Instead the Committee for Sustainable Retirement Incomes (CSRI) has proposed that an Expenditure Benchmark would provide a better basis for assessing the extent to which superannuation taxation is actually concessional. This Expenditure Benchmark is much more consistent with the purpose of superannuation which is to allow people to smooth their incomes over their lifetimes. It would mean that instead of assessing tax on superannuation as it accrues, the tax would be assessed when the superannuation was accessed, and the cash flow to pay the tax is created; which incidentally is also the principle followed for the taxation of capital gains.
Modelling commissioned by the CSRI from Industry Super Australia shows that measured against an Expenditure Benchmark Australia’s present taxation arrangements for superannuation are not at present concessionary for the vast majority of contributors. Nor are they likely to be concessionary in future when the mandatory Superannuation Guarantee (SG) scheme is fully mature.
Furthermore, people earning around the mean income of $80,000 a year, will probably always need to make some relatively modest voluntary contributions to achieve an adequate retirement income. This is, of course, also true for those people who have lower incomes until the mandatory SG scheme reaches maturity, but that will take another next twenty years.
Even after allowing, however, for relatively modest voluntary superannuation contributions by people who are not in the top decile of the income distribution, the present taxation arrangements for superannuation are not and will not be concessionary when measured against the preferred Expenditure Benchmark.
Instead, where the present taxation arrangements are concessional is for very large voluntary contributions, which are mostly made by very high income people. These contributions do not take any pressure off the cost of the Age Pension, and are often unfairly used for tax minimisation purposes and to fund future bequests.
So the Government’s proposals to cap these large voluntary contributions are to be welcomed. Furthermore, they are not ungenerous.
For example, a cap of $1.6 million on superannuation account balances can support an income stream in retirement equivalent to around four times the level of the single Age Pension. That in turn would be sufficient to provide an adequate retirement income for all but the top decile of retirees, none of whom could ever be expected to access a part-Age Pension.
Furthermore, if someone exceeds that $1.6 million cap, they can continue to contribute to their superannuation. It is just that any excess will be taxed at the still very concessional rate of 15 per cent after they retire.
Similarly, a capped annual contribution of $100,000 is also very generous. It represents a contribution rate of 15 per cent for someone on an annual income as high as $666,667.
In short, those arguing against these changes are really arguing for extraordinarily generous tax concessions to a few very rich people. This assistance comes at a cost to the Budget and is quite unfair and unnecessary.
Michael Keating was former Chairman, Committee for Sustainable Retirement Incomes. He was also formerly Secretary, Department of Finance and Secretary, Department of Prime Minister and Cabinet.