Three top superannuation specialists have warned that the federal government will dip into Australia’s $3 trillion retirement savings pool to help pay for the $130 billion stimulus package aimed at shielding the economy from the outbreak of the coronavirus.

The government has said that a combination of cutting company taxes and increasing the GST were not options, leading Mercer’s David Knox to believe that higher taxes, including on superannuation, were now on the cards in a post-COVID-19 environment. 

Knox said if the Canberra was thinking about a tax grab, it could turn to retirement benefits that are not currently taxed.

“One of the advantages of taxing pensioners is that the government gets revenue from the demographic that has generated the most wealth but which doesn’t contribute to the income tax base,” he said.

“Taxing benefits would give government greater flexibility since both income tax and tax rates on benefits can be politically adjusted up and down when the need arises as we saw flood tax, or a budget repair tax.”

Rice Warner executive director Michael Rice is also convinced Canberra will slap a tax on retirees “when the dust has settled.” 

“The need to raise taxes over the next ten years to pay for all the new debt will point Canberra towards the areas of super that are still heavily benevolently taxed,” he said.

The Grattan Institute’s John Daley also said that higher taxes were a certainty. 

“It might not be the very first thing Canberra does once the country comes out of COVID-19, but the debt repayment will be enormous,” he said.

Daley added that the reason Canberra would look at super was that the overall sector was taxed very lightly and about half of the tax concessions flow to the wealthiest 20 per cent income earners. 

Back to the future?

Should Canberra move to tax retirement benefits, it would be a partial return to its original tax system. Like many other major markets, Australia had long upheld the general principle of exempting contribution from tax entirely (and the earnings they generate) but to tax in full the retirement benefits as they are paid out. 

This was overturned by the Bob Hawke government in 1988 which brought tax collection forward to the contribution stage. Then, in 2006, John Howard’s government scrapped the tax on benefits. 

“If we had adhered to the original system, the younger demographic would build more compound interest and retirees would be funding economic shocks,” Knox added. “It increases the compounding – leading to bigger balances.”

Economically, he continued,  it would make for a more equitable system – by taxing during retirement, people with more benefits pay more tax. 

“You should tax a benefit when it is received, “No one should pay tax now for a benefit they don’t get for 20 years.” 

In Knox’s view, the Retirement Income Review, which reports in June, allows Canberra to improve the system by taxing those with the capacity to contribute.

For instance, he said stashing $40 million in self-managed super fund (SMSF) pensions by exploiting concessions was “a bad look”.

“There is scope for more equity in the system,” he said

Daley said that if Australia was starting with a blank piece of paper, it would be terrific to step back in line with the more tax-efficient economies and tax benefits.

“But we can’t,” he said. “Firstly, the government would lose revenue in the short term and any transition is complicated because of tax already paid by retirees.”

The Grattan Institute chief executive said the political motive to collect now rather than in 50-year’s time was the reality, although in an ideal world the government would be patient and allow people to build higher balances. 

“The irony is we don’t tax earnings when you are over the age of 65 and in pension phase even when you are on a very high income, you pay extremely low tax,” he added.

Rice said he was not that fussed about whether government taxes contributions or benefits as long as the super system was consistent and fair.

However, he conceded that taxing contributions at 15 per cent was a problem because once you strip out fees and premiums much of the superannuation guarantee disappeared even before people had the chance to save.

His view jibes with Daley and Knox.

“The tax is quite low for a high-income earner but high for someone on $40,000 a year,” Rice said. “Conversely, taxing the benefit means people can pay the appropriate marginal rate.”

Rice has long argued that the wealthy shouldn’t be taxed concessionally and has added to calls to get rid of the tax breaks on SMSFs.

He objects to some individuals stashing $40 million in an SMSF who then pay just 15 per cent tax. “When the top 100 SMSFs have $80 billion between them, you have to think seriously about taxing such big benefits,” he said.

He has also questioned the suitability of the $1.6 million transfer balance cap on tax-free pension accounts, advocating the introduction of a $5 million threshold above which people would be taxed at the top personal rate at 47 per cent.

“If that is too onerous people might pull money out of their funds,” he said. “But it doesn’t matter as you would still be moving money away from a tax-privileged environment.”

Elizabeth Fry is the editor of Investment Magazine's digital platform. Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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