Superannuation Changes Fail Fairness Test

The government’s announced reforms to the tax concession further undermines the potential of superannuation to significantly contribute to either the assets available to workers when they retire or the fiscal sustainability of the Budget as the population ages. Currently, the super tax concessions reduce tax revenue by 2 percent of GDP ($24 billion) per year, but superannuation is only projected to reduce public spending on the aged pension by 0.2 percent of GDP in 2050.

The government’s proposals fall far short of the recommendations made by the Henry Review. It explicitly ruled out raising the Superannuation Guarantee to 12 percent. Moreover, both the Rudd government’s proposed reforms and the Henry Review’s recommendations fell well short of proposals that were submitted to it over the course of its deliberations, including a proposal in the CPD report (Spies-Butcher and Stebbing 2009) and similar proposals made by the Australia Institute and the Industry Super Funds.

In its response to the Henry Tax Review, the Rudd government has maintained many existing inequities in the tax treatment of superannuation, rather than undertake more ambitious and courageous reform. The Government proposals provide the most expensive tax benefits to the highest income earners.

Table 1.How the Proposals for Reform Redistribute the Tax Discounts for Super

Income ($) Current 15% Concessional Tax ($) Govt Announcement ($) Henry Tax Review ($) CPD’s Tapered 20% Rebate
35,000 0 500 630 630
60,000 810 1,080 1,080 1,080
100,000 2,070 2,760 1,800 0
250,000 6,750 9,000 4,500 0
500,000 13,500 18,000 9,000 0

The Current Tax Treatment of Super Contributions

The Superannuation Guarantee (SG) currently requires that 9 percent of an employee’s income be invested in super and it is taxed at the concessional rate of 15 percent (i.e. super contributions are taxed at 15 percent). Table 1 outlines the structure of tax concession (TC) that applies to the SG contributions made by employers on behalf of their employees, by income level.

Table 2.

Current Tax Treatment of Super Contributions, 2009-10

Income ($) Marginal Tax Rate SG ($) Tax Discount (%) TC on SG ($)
35,000 15 3,150 0 0
60,000 30 5,400 15 810
100,000 38 9,000 23 2,070
250,000 45 22,500 30 6,750
500,000 45 45,000 30 13,500

The table shows that whilst tax payers earning $35,000 per annum receive no benefit from the tax concessions, those earning $250,000 receive $6,750 per annum of government assistance. The current benefits individuals receive increases in both monetary and proportional terms with income.

The Rudd Government’s Proposals for Super

The government proposes to increase the Superannuation Guarantee (SG) to 12 percent of income and introduce a new 15 percent rebate for the super contributions of those earning less than $37 000 per annum. The rebate is capped at $500. Table 2 displays how these proposals impact the distributive effects of the tax concession for super contributions.

Table 3.

Government’s Proposed Tax Treatment of Super Contributions, 12 percent SG

Income ($) SG ($) Tax Discount (%) TC on SG ($)
35,000 4,200 15 500
60,000 7,200 15 1,080
100,000 12,000 23 2,760
250,000 30,000 30 9,000
500,000 60,000 30 18,000

This table reveals that the government’s proposals maintain the regressive structure of the tax concession for super contributions. While those earning $250 000 gain $9 000 in tax concessions under this proposal, those earning $35 000 receive only $500. The introduction of a rebate for those earning under $37,000, while leaving in place an inequitable system is a step in the right direction. However, the $500 is not indexed, so even this modest improvement for fairness falls over time.

The most concerning element of the proposed reforms is the effect of an increase in the super guarantee to 12 percent. As Table 3 shows, this results in a significant increase in the tax support for high-income earners, rising from $13,500 to $18,000 for those on $500,000 pa. This is well in excess of the support being offered to low income earners. There is little evidence that an increase in the SG is an effective means of assisting low-income earners in retirement. Unless the tax concessions are restructured, any increase in the SG is grossly inequitable.

The Henry Tax Review’s Recommendations

The Henry Tax Review recommended that the Rudd government replace the existing set of tax concessions on super contributions with a flat rate rebate, perhaps set at 20 percent, up to a cap (Henry 2010: 35). It explicitly suggested that the government leave the rate of the SG at 9 percent and not increase it to 12 percent. Table 3 shows the likely distributive effects of these recommendations.

Table 4.

Henry Review’s Proposed Tax Treatment of Super Contributions, 9 percent SG

Income ($) SG ($) Tax Discount (%) TC on SG ($)
35,000 3,150 20 630
60,000 5,400 20 1,080
100,000 9,000 20 1,800
250,000 22,500 20 4,500
500,000 45,000 20 9,000

The reforms proposed by the Henry Review are clearly fairer than those announced by the government. Although those earning over $100 000 are granted significantly higher tax concessions in monetary terms than lower income earners, the flat rate structure of the proposed rebate means that tax payers receive the same rate of benefit. Low-income earners, however, still receive comparatively low concessions. Workers on an income of $35 000 per annum receive a tax concession over fourteen times smaller than that received by an individual with an income of $500 000.

The CPD Proposals

In our report for the CPD, we suggested that the current concessional rate of tax for super contributions be replaced with a 20 percent flat rate rebate that has a taper that kicks in once tax payers earn $80 000 until it is phased out altogether at $100 000. Table 4 reveals the likely distributional effects of this proposal.

Table 5.

CPD’s Proposed Tax Treatment of Super Contributions, 9 percent SG

Income ($) SG ($) Tax Discount (%) TC on SG ($)
35,000 3,150 20 630
60,000 4,000 20 1,080
100,000 9,000 0 0
250,000 22,500 0 0
500,000 45,000 0 0

The flat rate rebate proposed by the CPD is the most equitable of the concessionary treatments of super contributions considered here. Table 4 shows that low-income earners receive more from this proposed benefit structure than high-income earners, whilst those on around average earnings ($60 000) benefitting the most in both monetary and proportional terms. Low-income earners receive more from this model than either the current tax treatment of super contributions or the rebate proposed by the government. Under this proposal, higher income earners with salaries over $100 000 receive no tax concession.

Blog Comments

I have posted on your Flat tax article August 2010 my suggestion treating Deductions in a different way. In essence using the marginal tax rates to calculate gross tax, then using a separate calulation to determine a graduated benefit for expenses, an expense transfer, that works in parellel with the graduated tax, rather than diametrically opposed to it as we have today.
It has some similarity with your flat rate and concessional component between 60K and 80K described here.
I not opposed to your approach. But I do think when it comes to providing tax benefit for savings then it ought to also take into account the existing super holding value. Hence why not have the concessional rates for the annual amount saved based on both the gross income and the super a/c balance.
I don’t think it is good policy to give someone a huge tax saving/rebate for saving into Super, if they already have a large Super a/c; that is just a tax avoidance measure, and serves no national purpose. On the other hand even if an earner, and this particularly applies to women, has a low super balance, then you would want both high and low earners to save, even so with the greater benefit going to the lower earner.
Many make large payments into low balance Super a/c from redundancy payouts, in such cases, if they don’t get work easily, hence have a low income year, why ought they pay any Super entry tax?
Once again, I think it pays to separate some calulations to be applied up front, like gross income, rather than creating something like taxable income, which I think is quite messy, hiding a myriad of things. Obviously whatever approach the maths is all fairly trivial arithmatic, easily done by computer, but a more transparent process is important.

A third component to add to Gross income and Super a/c balance, might be ‘age’. To enable those who are close to retirement age, the time to save is during their limited saving window.

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