When it comes to examples of federal government finances being squeezed through concessions to the rich, the upcoming stage three tax cuts are a hot topic. But a new report from The Australia Institute highlights another area that is draining federal coffers – superannuation concessions.
The proposed stage three tax cuts, introduced by the Morrison government, remain a thorn in the side of the Labor government, with most people in favour of scrapping them. And with good reason – the cuts are projected to cost the government $243 billion, with more than half of that flowing through to those earning more than $180,000 a year.
However, as Richard Denniss and David Richardson, authors of the Australia Institute report titled Self-Funded or State-Funded Retirees, point out, the cost of super tax breaks to the budget is onerous.
Their report reveals that $52.5 billion of the 2022-23 budget will be allocated for those tax breaks, not far behind the $55.3 billion budgeted for the Age Pension. The problem with this spending, say Messrs Denniss and Richardson, is the same as that of the stage three tax cuts – the super concessions benefit the rich.
The current rules, which deliver tax concessions for income redirected into super, require urgent reform, they say.
The aim of those super tax cuts was to encourage Australians to be self-reliant, at least partially, in retirement.
But unlike the income tax rules, which work on a sliding scale based on income, the tax on super contributions is a flat 15 per cent, regardless of whether you earn $40,000 or $400,000 or have $100,000 in super or $1 million.
As a result, many high-income Australians are using the strategy purely to reduce the tax they pay, rather than to ensure a comfortable retirement.
In a new YouTube podcast, Australia Institute senior economist Matt Grudnoff explains just how far this “rort” has been taken.
“There are more than 900 self-managed super funds with more than $50 million each, and there’s actually one self-managed fund with more than $400 million,” says Mr Grudnoff. “Clearly, that amount of money is not to fund a comfortable retirement.
“[Do] the Australian people want to hand out large tax concessions to these super funds to help them save even more?”
Finance minister Stephen Jones acknowledges that very example as concerning: “I celebrate success, but the concessional taxation of funds like these has a real cost to the budget which needs to be considered.”
And yet, although Mr Jones has flagged potential reforms, no concrete plans have yet emerged. “Talk is cheap,” says The Australia Institute report. “There have been decades of similar proposals.”
The issues were identified long ago. The Australia Institute “first demonstrated that the cost of providing tax concessions for superannuation were greater than the lifetime cost of paying the Age Pension back in 2007.”
Major reform is overdue, say Messrs Denniss and Richardson.
The ball is now in the court of the Albanese government. It remains to be seen if it is willing to make major reforms or merely acknowledge the issue without taking meaningful action.
What do you think about the super tax concessions? Do you support a reform? Why not share your thoughts in the comments section below?
Also read: Waiting for a response – super funds fail at complaint basics
Like most tax concessions the wealthier you are the more you benefit from them.
And that may be OK to a point but all these concessions need to have an upper limit above which they phase out.
Without that you reach situations where a small number of very wealthy individuals are receiving most of the benefit while the vast majority of people receive little or no benefit.
Define “Rich”. Or is it just anyone you perceive to have more than you? That seems to be the usual definition.
Taking advantage of the 15% tax rate by transferring the TBC excess of one’s SMSF (ie pension balance > $1.7M) into Accumulation phase, needs to be brought into line with the progressive tax rate applying to other Australian wage earners.