Superannuation tax changes and budget repairMar 4, 2023
The very modest superannuation changes have been well received by most people, but the worry is the unwillingness of the Government to acknowledge, let alone tackle, the much bigger fiscal challenges that lie ahead.
On Tuesday, the Government announced what it termed a “modest change” where from 2025-26 the earnings on superannuation balances above $3 billion will be taxed at 30 per cent instead of the present 15 per cent. As the Government has made clear, this change will affect only 0.5 per cent of Australians with superannuation accounts, but the counterpart is that the change will only raise about $2 billion extra a year.
As the Government no doubt expected of this Opposition, it immediately denounced what it described as a broken promise. But does the Opposition really want to go to the next election promising to increase the tax subsidy for the top 0.5 per cent of the community, knowing that any such policy reversal will inevitably be paid for by the other 99.5 per cent of Australians.
The media – or at least the media that I read – have generally accepted the Treasurer’s justification for this change. It will make superannuation (slightly) more equitable, and a bit more sustainable. In addition, the Treasurer was reported as saying that the change was to improve “the structural position of the budget” and the money would not be used for another purpose.
So far so good, but frankly this change to superannuation which only raises another $2 billion a year comes nowhere near meeting the future budget challenges the nation is facing, and which will be summarised further below.
How much extra revenue is needed?
First, Australia presently is running a structural deficit of around 1.5-2 per cent of GDP, or about $36 billion at present. By definition, economic growth is not going to fix a structural budget deficit. Instead, some hard decisions have to be taken.
Second, according to the October budget there will be very large increases in defence (4.4 per cent a year), NDIS (12.1 per cent a year), hospitals (6.1 per cent) and aged care (5 per cent). While interest payments are expected to increase at around 14 per cent a year, with the risk of even higher payments if interest rates rise further.
Third, there are major government programs that are clearly underfunded. Following last October’s budget, I noted (see, Pearls & Irritations 8 November) that the following government functions still needed further funding:
- Housing and community amenities, where funding is projected to fall;
- Rental assistance and social housing, both of which are inadequate, and rent assistance is not indexed to keep pace with rising rents;
- Recreation and culture where real funding is projected to fall, including a further 4.5 per cent cut in funding for broadcasting between 2022-23 and 2025-26, coming on top of years of previous cuts;
- Higher education where the funding per student is projected to fall over the next three years;
- VET funding is projected to increase by only 1.3 per cent over the same three year period, notwithstanding a 20 per cent decline between 2019 and 2021 in the number of VET students;
- Medical benefits are projected to increase in real terms by 4.5 per cent over the next three years, but that is unlikely to be sufficient;
- Aged care and child care have had significant increases in the funding under this government, but again it is doubtful that funding is sufficient to support the necessary wage increases to attract the staff needed to maintain service levels.
After summing all these various demands for additional funding, a rough guesstimate is that the extra revenue needed is equivalent to around 3.5-4 per cent of GDP, or roughly $85-90 billion in today’s prices.
That sounds like a lot of money, but it would still leave total government expenditure in Australia about the same as in the UK and Canada, and well below the Euro Area.
The next question is how this additional revenue could be raised.
Possible sources of additional revenue
Much of the current debate focusses on what could be raised by removing or reducing various tax concessions, a discussion no doubt encouraged by the release of the Treasury Tax Expenditures Statement at the same time as the superannuation changes were announced last Tuesday.
According to the Treasury the ten biggest tax expenditures are worth more than $150 billion – on the face of it, more than enough to fix the budget. Of this $150 billion total, the two biggest tax expenditures are estimated to be:
- Superannuation tax concessions ($50.5 billion), and
- the exemption of the family home from capital gains tax ($48 billion)
Not surprisingly therefore the public debate about how to raise more revenue has been very much focussed on these two alleged tax concessions. On the face of it, removal of these two concessions would fix the budget, ensuring adequate service provision and a structural budget balance.
There are, however, good reasons for doubting that “reform” of these two concessions should or could raise the implied extra revenue, as will be explored further below.
Superannuation tax concessions
The Treasury estimate of each tax expenditure measures the difference in revenue between the existing treatment and what Treasury calls “benchmark tax treatment”. Thus, the amount estimated depends critically on the benchmark chosen.
For superannuation contributions and earnings the benchmark is the account owner’s current income, but arguably the benchmark should be their income after they retire, as it is only then that the beneficiary can actually access this income. Furthermore, their retirement income is usually much less than when they were working and accumulating their superannuation; typically only around 65 per cent of their pre-retirement income, in which case their tax rate would also be much less than is used in the benchmark calculation.
Indeed, for that reason, modelling done some years ago showed that the taxation of most taxpayers’ superannuation contributions and earnings involves no significant tax concession if the benchmark was their income in retirement. The exception was people with very high superannuation accounts, who indeed have been lowly taxed at 15 per cent.
That is the reason for changing the taxation of large superannuation accounts, but we should not assume that changing the rules more broadly would be fair, nor accordingly that as much as $50 billion should be raised by removing superannuation tax concessions.
Extending capital gains tax to the family home
The problem with removing the exemption of the family home from capital gains tax is that most families sell their home to finance the purchase of an alternative home, that presumably better meets their needs. As both homes have experienced much the same rate of capital appreciation, if the family does not retain the full proceeds from the sale of their former home, then it is likely that they will not be able to afford the new alternative home.
In other words, the family need all the capital gain from their former home to pay for the capital gain on their new home. The reality as they would see it, is that they haven’t obtained any capital gain at all, as the capital gain has not made them any better off until they finally sell and do not own a home anymore.
Therefore, if society wants to tax the capital gains on homes that should only occur at the end of home ownership. But practically estimating the capital gain over the taxpayer’s total home ownership period is far too difficult, and the obvious alternative would be to restore death duties where the value of the estate would include the family home.
The taxation concessions for superannuation come at much less cost to budget revenue than the Treasury estimates. Accordingly, the scope for raising extra revenue, while more than the $2 billion proposed by the Government, is not likely to be a whole lot more.
Similarly, the taxation of capital gains on the family home should not be on the agenda, and Albanese was right to take it off.
But as these two forms of alleged tax concessions accounted for two thirds of the estimated total revenue at stake, removing them means that other sources of revenue will have to be explored if we want to ensure adequate service provision and a balanced budget over time.
It is understandable that the obvious place to look for more revenue is the tax expenditures. These concessions are exemptions from the rules covering the relevant taxes, and arguably these exemptions are frequently not merited, or at least are not a priority. But if we do not tax superannuation more heavily and continue to exclude the family home from capital gains tax, then the remaining tax concessions only add up to around $50 billion, which is less than needed, even if all of it could be obtained, which seems unlikely.
Thus, not only do we need a serious conversation about taxation, we also need to recognise that reform will have to examine changes to both the income tax schedule and the GST. But in the meantime, getting rid of the Stage 3 tax cuts which will hand around $37 billion annually back to Australia’s highest earners. would be a good start and make much more difference than the changes just announced to superannuation.
While Albanese’s timid approach to policy changes might have helped win the last election, the future worry is how long can the Government avoid the critical challenges that lie ahead?