New research that details who gains the most from tax concessions in super should be a key driver in tax reforms this year, says TOM GARCIA chief executive of AIST.
There can be no debate that super needs to be taxed concessionally. But at what point do we draw the line in the name of fairness for everybody? This is the central question for AIST and other stakeholders in the superannuation industry as we finalise our Round One responses to the Government’s Tax review, due later this month.
Given the public relations debacle that was last year’s Federal Budget, it is perhaps no surprise that the Government has recognised the need for the community to be engaged in the tax debate. While noting the strong policy grounds for super being taxed concessions, its Tax Discussion Paper puts a heavy emphasis on fairness and outlines a case to better target these concessions. The Paper acknowledges that different rates of tax on earnings in the pre- and post-retirement phases has given rise to “tax planning opportunities” that are more accessible to high income earners.
With the notable exception of a few right leaning policy think-tanks, most opinion leaders – including those in the super industry – agree that our super system is at a point where its tax treatment needs to be thoroughly examined as part of the overall tax system.
Recent research by AIST and Mercer has found that those in the top 10 per cent of wage earners receive more than $500,000 of government support through super tax concessions across a lifetime. This compares with around $400,000 received by the bottom 10 per cent decile, largely through the age pension and less than $300,000 in government support received by a middle income earner.
While it is certainly true that everybody’s definition of “fair” is different, it’s hard to argue that a very high income earner deserves hundreds of thousands of dollars more in Government support for their retirement than a low or even average wage earner. Indeed, many high income earners themselves have begun to publicly question the merit of a retirement income policy that delivers such outcomes. Meanwhile, the Government’s plan to scrap the Low Income Super Contribution rebate from 2017 will see the super contributions of millions of workers taxed at a higher rate than their take home pay.
Already there are quite a few ideas floating about as how to address this imbalance. This includes, of course, Labour’s recently announced super tax policy. This targets high income earners by reducing the income threshold at which the tax on a person’s super contributions increases from 15 per cent to 30 per cent while also introducing a 15 per cent tax on earnings in retirement above $75,000. Other ideas include a lifetime contributions cap that would limit the amount of tax concessions for very high earners or high net worth individuals.
AIST is currently testing all these proposals and more through our recently developed AIST-Mercer Super Tracker. This tool – which provides an overall rating for the super system based on 10 key measures – allows us to road test potential tax changes to assess their impact on sustainability, adequacy, gender bias and, most importantly, fairness. Pulling one tax lever, for example, may lead to unexpected distortions in adequacy outcomes.
Of course any changes made to super, must be considered in the context of overall government assistance to retirement and the rules affecting other areas of investment. It is no good talking about introducing a tax on super earnings in post-retirement, if this creates an uneven playing field favouring non-super investments or leaves the system open to arbitrage. We also need to consider that any changes made to the taxation of super should ideally reduce the complexity of the system. It’s not enough for a policy change to work on paper – it must also work for fund administrators and back-office systems.
The question of grandfathering is also very important. How does the fairness lens apply to older workers who may have busted their gut to make extra contributions to super only to find they could be adversely affected by a totally unexpected change? In the past, media coverage of the impact of small changes to the superannuation rules affecting high income earners has been overblown and overwhelmingly negative. This not only erodes confidence in superannuation, but it can also send the wrong message and panic people unnecessarily.
Any proposed changes must be communicated effectively to the public. Arguably, this will be an even greater challenge for the Government – and the super industry – than coming up with any new policies.