Superannuation and tax

So the talk over the last couple of days has been about tax and super.  Labor have a funding problem, they have a number of expensive promises such as NDIS and the Gonsky Education reforms, and they don’t want to promise a deficit so as to pay for it.  That means they need to raise taxes or cut costs somewhere.  They’re unlikely to cut costs: most discretionary spending has been looked at a couple of times, and cutting staff won’t fit with the meme that’s being run about the Libs being evil for cutting staff.

So, the tax system is being reviewed, and ideas are trickling out.  The reality is that Australia’s tax and welfare system contains a lot for the middle and upper income brackets.  There are a lot of deductions, there are a lot of exclusions.  Against that must be measured the high headline tax rates – 50% tax is pretty high in anyone’s books.

So, in the case of superannuation, what is the logic?  On the one hand, people who save for their own retirement don’t draw on the government pension.  That is something that should be encouraged, and counting self funded retirees as a net negative to the country due to tax losses seems a bit unusual.  Conversely, some people are stacking up an awful lot of money in their retirement savings, and there is a question about whether there’s a limit at which the government says “no more concessional treatment,” particularly in a context where you have tradeoff between something like NDIS (a good thing for very vulnerable people), and tax rates on wealthy people.

Superannuation is taxed at three points.  When you first contribute to super you are allowed to contribute from your pre-tax income.  You pay 15% tax on the contribution, which for most people is much lower than their marginal tax rate. You are then taxed on the returns in your superannuation fund each year, again at 15%.  You are not taxed when you spend your superannuation savings.

The government have ruled out taxing withdrawals, presumably because this mostly impacts people who are already in retirement, and it seems unfair to change the rules on people who have made plans and now have no ability to change what they’re doing.  I’m not sure this is good logic – if they were changing the regime only for those with very large balances, there’s an argument that they’re rich anyway, so tough.  But politically that is unpalatable, it’s off the table.

It is also hard to change the tax on contributions.  There is already a clear limit on how much people can contribute in any one year, but that threshold is quite large because people have occasional lump sums – selling a business, redundancies, inheritance, a range of reasons.  So someone who is wealthy can put quite a lot into super every year and access a tax deduction.  In theory you could do this based on overall balance – so if you’re 30 and have a balance greater than $1M, or you’re 40 and a balance greater than $3M.  The problem is that this would be hard to administer, and it really smacks of nanny state.

That leaves taxes on the annual returns.  The suggestion appears to be that people with a super fund greater than a certain size would attract a higher tax on returns.  This would be a reasonable additional impost on super funds, particularly where people have more than one super fund (they’d presumably have to be taxed on the combined balance of their funds, which implies the funds telling each other balances, or some new taxation exchange at the ATO).  So whilst this is superficially attractive, I think in reality it will prove to be difficult.

The real problem here is that there isn’t a sensible discussion about what the tax rates should be on the wealthy.  As always, Australia has a system where the tax burden falls heavily on those with high salaried income, but not necessarily on those with high wealth, or those whose income comes through a company or other tax effective vehicle.  Labor are fiddling around the edges of this, but haven’t really grasped the nettle.

I’d also note that there are many areas of middle class welfare that could easily be attacked if the government was serious.  The new parent’s bonus from the last budget would be a classic – it is poorly targeted middle class welfare.


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