Tax discussion paper: Superannuation tax breaks for the rich in crosshairs

Both sides of politics have signalled reform to the superannuation tax breaks enjoyed by the wealthy should be seriously considered as part of the federal government’s sweeping review of the tax system.

The tax discussion paper released yesterday highlighted the differential treatment of superannuation earnings, which make tax concessions more accessible to high-income earners.

In an interview with ABC Radio’s Michael Brissenden, Treasurer Joe Hockey conceded the current super concessions overwhelmingly favour wealthy Australians.

“That’s right, they contribute more, and, quite obviously, if you change the rules now, it’s got to be on a prospective basis,” Hockey said.

While Hockey argued the issue could not be looked at in isolation without considering the effect of the age pension, he all but confirmed reform of super breaks would be considered as a part of the government’s review of the tax system. 

“We haven’t done what our predecessors did and start ruling things in and out, because if you’re having a fair dinkum conversation with the Australian people, everyone should be fully informed about what the pressures are on the tax system,” he said.

“Superannuation is a very good example where governments come along and constantly tinker at the edges and sometimes make substantial changes when people have spent all of their working life contributing to superannuation and expect that the system will be consistent for their retirement,” he added.

Meanwhile, shadow treasurer Chris Bowen has indicated Labor’s support for super tax reform and slammed the government’s handling of the super system as a whole.

“Australians don’t trust the Abbott government to deliver a fairer and sustainable system for superannuation tax concessions,” said Bowen in statement.

Bowen said the government had made decisions that “exacerbate the inequities” of superannuation tax concessions.

“They froze the Super Guarantee at 9.5% for six years, they’ve abolished the only super tax concession low-income earners have, while cutting super taxes for high-income earners,” he said.

Pitcher Partner superannuation director Brad Twentyman told SmartCompany there were two main tax concessions available to superannuants.

Firstly, there are tax breaks on pre-tax contributions or contributions from pre-tax income, which are taxed at 15% in super funds. Secondly, there are concession on investment earnings, meaning the profits made in a super fund are taxed at 0-15%.

The tax discussion paper explains because superannuation contributions and earnings are generally taxed at flat rates, the level of concession differs depending on the individual’s marginal tax rate.

“Those with high incomes receive the greatest tax discount relative to their marginal tax rates, and will generally save a higher proportion of their income,” says the report.

“As such they will receive the largest aggregate level of tax expenditure, measured against a benchmark of full nominal income taxation.”

Twentyman says measuring these concessions against different marginal tax rates is what leads to the “fairness debate”.

“This seems to come up every year, particularly around budget time,” he says.

“It’s an easy target, because it’s right up the top of the expenditure list.”

But Twentyman says the concessions are doing what they were designed to do: help people fund their own retirement.

“The system wasn’t designed to be fair, the system was designed to fund retirement. Naturally people on higher incomes have more of a capacity to fund their own retirement,” he says.

Twentyman says the removal of tax breaks on voluntary contributions would mean the removal of one of three pillars of the super system as a whole, which also includes compulsory payments and the age pension.

“If you’re knocking one pillar out, because you say the voluntary pillar is too generous to high income earners, you’re left with two pillars,” he says.

“The compulsory pillar is not enough to hold up the age pension, so in my mind, everyone ends up on age pension.”