You are on page 1of 21

Building super on a fair foundation: Reform of the taxation of superannuation contributions

ACOSS Paper

February 2012

CONTACT Australian Council of Social Service Locked Bag 4777, Strawberry Hills, NSW, 2012 T (02) 9310 6200 E info@acoss.org.au www.acoss.org.au

This paper was prepared by Peter Davidson, Senior Policy Officer at ACOSS, in consultation with ACOSS tax policy advisers. First published in 2012 by the Australian Council of Social Service

Locked Bag 4777 Strawberry Hills, NSW, 2012 Australia Email: info@acoss.org.au Website: www.acoss.org.au

ISSN: ISBN:

Australian Council of Social Service

This publication is copyright. Apart from fair dealing for the purpose of private study, research, criticism, or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Enquiries should be addressed to the Publications Officer, Australian Council of Social Service. Copies are available from the address above.

TABLEOFCONTENTS
1. Summary.........................................................................................................................................4 Problemswiththecurrentsystem .....................................................................................................4 . Governmentproposalstoreformtaxconcessions.............................................................................6 ACOSSproposals.................................................................................................................................7 2. Whythepresentsystemoftaxconcessionsforsuperannuationshouldbereformed .................8 . Inequityofthepresentsystem...........................................................................................................9 Otherproblemswiththepresentsystem.........................................................................................12 3. 4. 5. TheGovernmentsproposalsregardingsuperannuationtaxconcessions...................................14 AFTSReportsuperannuationproposals.......................................................................................16 ACOSSproposalsforsuperannuationreform...............................................................................18

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE3

1. Summary
Superannuationplaysavitalroleinoursystemofsupportforretirementincomes.Compulsory super,andvoluntarycontributions,enablepeopletoachieveamuchhigherstandardoflivingin retirementthantheycouldontheAgePensionalone.In30yearstimewhenthesuperannuation guaranteematures,mostretiredhouseholdswillliveonacombinationofpartAgePensionand superannuation. InadditiontosupportingretireesdirectlythroughtheAgePension,AustralianGovernmentssupport themindirectlythroughtaxbreaksforsuperannuation.Thecostoftaxbreaksforsuperannuationis roughlyequaltothatoftheagepension:$31billionin201011.1Thewayinwhichthesetaxbreaks aredistributedamongtaxpayersmatters.Ithasanimpactonretirementincomesandincome inequalityinfutureyears,andonthetodaysBudgetbottomline.

Problemswiththecurrentsystem
Regrettably,thepresenttaxtreatmentofsuperannuationisalegacyofanerawhensuperannuation wasaperkforpeopleonhighincomes.Iftheprogressivepersonalincometaxsystemwasreplaced tomorrowwithaflattax,therewouldbepublicoutcry.Clearly,thiswouldbenefithighincome earnersattheexpenseofpeopleonmuchlowerincomes.Yetthisisthewaysuperannuation contributionspaidbyemployersaretaxed:ataflatrateof15%. Thismeansthatataxpayeronthetopmarginalratesaves32centsintaxperdollarcontributedto superannuation,comparedtowhattheywouldnormallypayontheirwages.Bycontrast,alow incomeearnerbelowthetaxfreethresholdfacesataxpenaltyof15centsforeverydollar contributed.Notonlydohighincomeearnersreceivemoresuperannuationcontributions,theyalso receiveahighertaxbenefitforeverydollarcontributed.Manyhighincomeearnersusesalary sacrificearrangementstotakefulladvantageofthesegeneroustaxbreaks.Thetaxbreaksfor compulsorysuperannuationcontributionsmadebyemployersforpeopleondifferentwagelevels areshowninthegraphbelow. In2007,weestimatethat17%ofalltaxbreaksforsupercontributionsaccruedtothetop5%of taxpayers,justunderhalf(47%)accruedtothetop12%,whilethebottom88%sharedtheremaining half(52%)betweenthem.Thesystemalsoextendsintoretirementandfurtherentrenchesthe inequalitiesofincomebetweenmenandwomen.In2007,workingagewomenhadonaveragejust overhalftheretirementsavingsofmen2.

Treasury(2011)TaxExpenditureStatement201011;FAHCSIA(2011)AnnualReport201011 Broderick,E(2009),Accumulatingpoverty:Womensexperiencesofinequalityoverthelifecycle,fromKelly S,EnteringRetirement:theFinancialAspects.


2 1

PAGE4

AUSTRALIANCOUNCILOFSOCIALSERVICE

Graph1

Existing tax breaks for SG contributions (2011-12, % of contributions)


100% 80% 60% 40% 20% 0% -20% -40% $2,000 $20,000 $50,000 $100,000 Annual income $300,000 -15.0% 1.5% 20.5% 23.5% 31.5%

Note:SGreferstoSuperannuationGuaranteecontributionsof9%ofwages.Thegraphtakesaccountofthe LowIncomeTaxOffset,sothatanindividualearningupto$16,000doesnotnormallypayincometaxontheir wagesandanindividualon$50,000paysanadditional4%intaxastheLITOisclawedback.Italsotakes accountofthe1.5%MedicareLevy,fromwhichanemployeeon$2,000isexempted.

Thesystemisinefficientaswellasunfair: ItdoesnotsaveGovernmentsmoneybecausethecumulativevalueofthetaxbreaksforthe top20%ofincomeearnersovertheirlifetimesexceedsthecostofthefullrateofAge Pension3. Itisaninefficientwaytoencourageprivatesavingbecausehighincomeearnersaremore likelytosavefortheirretirementwithouttaxincentives(whetherthroughsuperannuation orinotherways).Taxconcessionsdirectedtowardsthoselesslikelytosaveinthefirst instancelowandmiddleincomeearnerswouldhaveagreaterimpactonprivatesaving4. Mosthighincomeearnersarelikelytosecureanadequateincomeinretirementwithor withouttaxconcessions5.

Thepresentupsidedownsystemoftaxsupportwherehighertaxbreaksaccruetohigherincome earnershasnosoundbasisinpublicpolicy.

Rothman(2009),AssessingtheEquityOfAustraliasRetirementIncomeSystem,17thColloquiumof SuperannuationResearchers,UniversityofNSW,July2009. 4 Antolinetal2004,Longtermbudgetaryimplicationsoftaxfavouredretirementplans,OECDEconomics Dept.WorkingPaperNo16;AFTSReport(2010). 5 CPA Australia 2007, Superannuation the right balance?
3

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE5

Thesystemiscomplex,withatleastfivedifferenttaxtreatmentsofsuperannuationcontributions, dependingwhethertheycomefromemployers,employees,selfemployedpeople,orspouses. Italsocreatesperverseincentivesforindividualsonhighincomestoavoidpersonalincometaxby divertingincomeintosuperannuation,withoutincreasingtheiroveralllevelofsaving.Agood exampleofthisaretaxminimisationschemeswherebywageearnersover55yearsofagesacrifice salaryintosuperannuationwhileatthesametimedrawinganequivalentaftertaxamountin superannuationbenefits.Similarly,selfemployedpeoplecantransferbusinessassetstoself managedsuperannuationfundstaxfreeandtherebyavoidCapitalGainsTaxonthesaleofthose assets. Thesetaxavoidanceopportunitieswouldbecurbedifthetaxtreatmentofcontributionswas reformedtoimproveitsfairness.

Governmentproposalstoreformtaxconcessions
Toimprovetheequityofthesystem,theGovernmentproposestointroducea15%rebatefor employersuperannuationcontributionsforlowincomeearners6.Thiswouldeliminatethecurrent taxpenaltyforindividualsbelowthetaxfreethreshold.Itwouldalsomeanthatmanyindividualson the15%taxratewouldreceiveataxbreakfortheiremployercontributionsforthefirsttime. However,thoseonthelowestincomeswouldhaveataxsubsidyof0%andthoseonthehighest incomeswouldstillhaveataxsubsidyof32%.Thischipsawayattheedgesofthesystems unfairnessbutleavestheflawedstructurestanding.Itshouldneverthelessbesupportedinthe absenceofbroaderreform. TheGovernmentalsoproposestotakeabigstepbackwardsbyincreasingtheconcessional contributionscapthemaximumlevelofannualcontributionsattractingtheflat15%taxrate from$25,000to$50,000forindividualsover50yearsofagewithlessthan$500,000in superannuationassets.Thisisunnecessary.Fewlowandmiddleincomeearnerswithoutsubstantial financialassetscanaffordtotransferover$25,000totheirsuperannuationaccountinasingleyear. TheTreasuryestimatesthatlessthan5%ofpeoplewithincomesbelow$100,000ayearmademore than$25,000inconcessionalcontributions,comparedtooverhalfofthoseonincomesabove $300,000peryear.Thispoorlytargetedincreaseintaxbreakstoindividualswhoarealready relativelywelloffwouldcostmorethan$500millionperyear.Wedonotsupportthisproposal.

TaxLawsAmendment(Stronger,Fairer,SimplerandOtherMeasures)Bill2011.

PAGE6

AUSTRALIANCOUNCILOFSOCIALSERVICE

TheincreaseintheSuperannuationGuaranteecontributionsfrom9%to12%proposedinthe SuperannuationGuarantee(Administration)AmendmentBill2011shouldboosttheretirement incomesoflowandmiddleincomeearners,butatthecostoflowerwageincreases.Whetherthis tradeoffisfinanciallyworthwhileforlowandmiddleincomeearnersdependscriticallyonthetax treatmentofemployercontributions.Inourview,aslongasaflat15%taxappliestoemployer contributionsthereisnotsufficientbenefitforpeopleonlowincomesdespitetheproposed15% Governmentcontribution.Anincreaseincompulsorycontributionsistheidealtimetoreformthe taxtreatmentofsuperannuationcontributionsgenerally.Financiallossesincurredasaresultof progressivetaxreformsbysuperannuationfundswhosemembersarepredominantlyhighincome earnerswouldbepartlyoffsetbyhighercompulsorycontributions. Increasesinthesuperannuationguaranteeshouldthereforebelinkedtofundamentalreformoftax concessions.Thesystemshouldgrowonafairfoundation.

ACOSSproposals
Weproposethatthepresenttaxconcessionsforsuperannuation,includingtheflat15%rateoftax foremployercontributions,andalsothecocontributionforemployeecontributions,bereplacedby asimplerandfairersystemwhere: Employercontributionsaretaxedinthehandsoftheemployerateachemployees marginaltaxrate,butthetaxwouldbedeductedfromtheemployerscontributionsto thefund,ratherthanfromwages7. Allpublicsubsidiesforsuperannuationcontributionswouldbereplacedbyanannual rebateonallcontributions(regardlessofsource),paidbytheATOtothenominated superannuationaccountattheendofeachfinancialyear. Inordertoassistthoseonthelowestincomestosaveforretirement,therebatecould betwotiered.Forexample,itcouldmatchcontributionsdollarfordollaruptoalow annualcontributionlevel(forexample0.5%ofaverageearningsoraround$350)and thenapplyatalowerrate(suchas20%)toadditionalcontributionsuptothe concessionalcontributionscap. Toensurethatthereformisrevenueneutral,theannualcaponconcessional contributionswouldneedtobesignificantlylowerthan$25,000,butitshouldbehigh enoughtoencourageindividualsonaverageearningstomakemodestvoluntary contributionstotheirsuperannuationinordertoattainanadequateretirementincome.

Inourviewitwouldbepossibletodesignthenewsystemsoastoensurethatatleastthebottom 80%ofsuperannuationfundmemberswithcurrentcontributionswerefinanciallybetteroffin retirement,atnocosttopublicrevenue.


ThisissimilarinprincipletotheHenryReportsproposals(AFTS2010),exceptthatwedonotsupportthe deductionofsuperannuationtaxesfromcurrentwagesandourproposalswouldberevenueneutral.
7

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE7

2. Whythepresentsystemoftaxconcessionsforsuperannuationshouldbe reformed
TheFederalGovernmentsupportstheincomesofretiredpeopleinthreeways:theagepension, compulsoryemployersuperannuationcontributionsthroughthesuperannuationguarantee,andtax breaksforsuperannuation. Thepensionprovidesaminimumincomefloor,thesuperannuationguaranteewillliftretirement incomesformanypeoplesubstantiallyabovepensionlevels,andthetaxbreakssupportboth compulsoryandvoluntarysavingforretirement. ACOSSconsidersthereisastrongcaseforeachofthesethreeelementsofpublicsupportfor retirementincomes,butthatthethirdcomponentsuperannuationtaxconcessionsarepoorly targetedandinefficient. Sincewelackanationalsocialinsurancescheme(aGovernmentmanagedsuperannuationsystem), AustraliareliesmoreontaxconcessionsforprivatesuperannuationsavingthananyotherOECD country.8Thecostoftaxbreaksforsuperannuationisroughlyequaltothatoftheagepension:$31 billionin201011,aboutthesameastheannualcostAgePensions.9 Taxconcessionsforbothcompulsoryandvoluntarysavingthroughsuperannuationarejustifiedto theextentthattheycompensateindividualsforforcedsavingthroughcompulsorysuperannuation andencouragevoluntarysavingtoachieveanadequateincomeinretirementandreducereliance ontheagepension.Thismeansthattheyshouldideallybetargetedtowardslowandmiddleincome earnerssincetheyarelesslikelytosaveforretirement,andmorelikelytorelyontheagepension,in theabsenceofcompulsionortaxincentives.Thishaslongbeenrecognisedbyexpertsinthisfield includingtheOECDandtheAFTSReviewPanel.10 However,despitetheextensionofsuperannuationtomostworkers,itstaxtreatmentharksbackto atimewhensuperannuationwasaperkforthewelloff. Themaintaxbreaksforsuperannuationaretheflat15%taxratethatappliestocontributionsmade byemployersonbehalfoftheirworkers,andtheflat15%taxratethatappliestotheannual earningsofsuperannuationfunds.Formosttaxpayers,butnotthosebelowthetaxfreethreshold, thisislowerthanthetaxratethatwouldotherwiseapplytotheirwagesorinterestincome.

TheOECDestimatesthatthesetaxconcessionscost3%ofGDPin2007,wellabovethenexthighestspender onretirementincometaxconcessions,Canadaat2.2%.OECDSocialexpendituredatabase. 9 Treasury(2011)TaxExpenditureStatement201011;FAHCSIA(2011)AnnualReport201011 10 Antoninetal2004,Longtermbudgetaryimplicationsoftaxfavouredretirementplans,OECDEconomics DepartmentWorkingPaperNo16,AFTSPanel(2009)ReporttotheTreasurer.


8

PAGE8

AUSTRALIANCOUNCILOFSOCIALSERVICE

Table1:Costofmajorsuperannuationtaxconcessions(201112)
15%taxonemployercontributions 15%taxonsuperfundearnings Deductionforcontributionsbyselfemployedindividuals Total(includingminorconcessions) Costofagepensionin201011 $15.8billion $13.6billion $1.0billion $30.5billion $32.0billion

SOURCE:Treasury(2011),TaxExpenditureStatement201011;FAHCSIA(2011),AnnualReport,

Inequityofthepresentsystem
Theflat15%taxrateonemployercontributionsunderminestheprogressivityoftheprogressive personaltaxratescale.Comparedwiththemarginaltaxrateanemployeepaysontheirwages,this meansthatearningscontributedtosuperannuationbytheiremployeraretaxed32centsperdollar lessinthecaseofahighincomeearner,but15centsperdollarmoreforanemployeebelowthetax freethreshold(currently$16,000takingaccountoftheLowIncomeTaxOffset).Thatis,employer superannuationcontributionsfortheselowincomeearnersarepenalisedbythetaxsystem.This makesitlessworthwhileforthemtosaveforretirementandmeansthatanincreaseincompulsory employercontributionscouldpotentiallydisadvantagethem. Thegraphbelowcomparesthetaxsavingsperdollarcontributedcompulsorilybyanemployer (underthesuperannuationguarantee)onbehalfofemployeesatdifferentwagelevels.Thisis calculatedasthedifferencebetweenthemarginalrateoftaxthatwouldnormallyapplytowages (takingaccountoftheMedicareLevyandLowIncomeTaxOffset)minus15%.

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE9

Graph1

Existing tax breaks for SG contributions (2011-12, % of contributions)


100% 80% 60% 40% 20% 0% -20% -40% $2,000 $20,000 $50,000 $100,000 Annual income $300,000 -15.0% 1.5% 20.5% 23.5% 31.5%

Note:SGreferstoSuperannuationGuaranteecontributionsof9%ofwages.Thegraphtakesaccountofthe LowIncomeTaxOffset,sothatanindividualearningupto$16,000doesnotnormallypayincometaxontheir wagesandanindividualon$50,000paysanadditional4%intaxastheLITOisclawedback.Italsotakes accountofthe1.5%MedicareLevy,fromwhichanemployeeon$2,000isexempted.

Thedistributionaleffectofthepresenttaxtreatmentofemployercontributionsisthesameas replacingthecurrentprogressiveincometaxscalewithaflat15%tax.Whilethepensionistargeted towardslowandmiddleincomeearners,thetaxbreaksaretargetedtohighincomeearners.The graphbelowshowsthatofthe$15billionintaxbreaksonsuperannuationcontributionsin2008, almost20%wenttothetop2%ofincomeearners(thoseover$150,000)andalmost50%wentto thetop12%.Infact,thetop20%ofincomeearnersreceivemoreintaxconcessionsovertheir lifetimesthantheywouldhavereceivedifpaidthemaximumrateofagepension.11

Rothman(2009),AssessingtheEquityOfAustraliasRetirementIncomeSystem,17thColloquiumof SuperannuationResearchers,UniversityofNSW,July2009
11

PAGE10

AUSTRALIANCOUNCILOFSOCIALSERVICE

Graph2
100% 80% 60% 40% 20% 0% bottom tax rates (bottom 36%) 30% tax rate (middle 52%) 38% tax rate (10%) top tax rate (top 2%) 8% 44% 30% 17%

Distribution of annual tax breaks for all super contributions in 2007-08 (%)

Income tax bracket (and % of super fund members)

ACOSSestimatesbasedonGallagher(2011),TreasuryMeasurementofRetirementIncomeAdequacyand Tellis(2009),ProjectingtheDistributionsOfCertainSuperannuationTaxExpendituresOnContributions,17th ColloquiumofSuperannuationResearchers,UniversityofNSW,July2009;Rothman(2009),Assessingthe EquityOfAustraliasRetirementIncomeSystem,17thColloquiumofSuperannuationResearchers,University ofNSW,July2009.

Thisinequityespeciallydisadvantageswomen,manyofwhomareemployedparttimeonlow wages.Itcontributestotheirlowlevelsofretirementsavingsandhighlevelsofrelianceontheage pension. ThelatestABSdatafrom2007showedthatworkingagewomenhavejustoverhalftheretirement savingsthatmenhave.In2004,halfofallwomenagedbetween45and59had$8,000orlessin superannuation,whilemenhad$31,00012.Statisticsalsoshowthatmorewomen(38%)thanmen (26%)donothavesuperannuationandmorewomenthanmenhavedormantaccounts.

FigurequotedinspeechbyElizabethBroderick,SexDiscriminationCommissionerandCommissioner responsibleforAgeDiscrimination,AustralianHumanRightsCommission(15September2009):Accumulating poverty:Womensexperiencesofinequalityoverthelifecycle,from:SimonKelly,EnteringRetirement:the FinancialAspects(PaperpresentedattheCommunicatingtheGenderedImpactofEconomicPolicies:TheCase ofWomen'sRetirementIncomes,Perth,1213December2006)p12.


12

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE11

Whilethisismainlyinolderagegroups,thedifferenceswillincreaseasyoungerwomenworkers takeonunpaidfamilyresponsibilities,viaparttimeworkandfewerpossiblepromotions.This tensionshowsinthe2007data,withlonefemalesaged3544yearshaving89%ofmalebalances versuscoupledfemaleswithonly60%ofthemalemean,Thisraisesquestionsonwhatisthepublic obligationtocontributetoanadequateretirementincomeforthosewhosesocialcontributions reducetheirtimeinpaidwork. Thegenderdifferencespointtoongoingflawsinasystemthatreliesonpeoplebeingincontinuous paidworkuntilretirement.Womenslifetimeearningsaregenerallylessthanmensbecauseofthe timedemandsofhigherdomesticandcareresponsibilitiesandthegenerallylowerpayratesfor manyjobs,identifiedasprimarilyfemale.Thecurrenthourlywagegapisaround17%andhas remainedmoreorlessstaticovermanyyearsanddiscriminationisafactorasfoundinarecentFair WorkAustraliajudgementonthecommunityservicesindustry.Theyarealsomorelikelytobe casualworkersastheonlywaythattheycanachievefamilyneedflexibility,andfewercasualsare alsocovered. Thesegenderbiasesinthesuperannuationsystemareexacerbatedbytheinequitiesinthetax treatmentofcontributionsdescribedabove.Theycannotberesolvedbygivingmatureagewomen theopportunitytocatchupbyincreasingthecaponconcessionalcontributionsforthoseover50 yearsofage,astheGovernmentproposes,becauseonlyasmallminorityofrelativelywelloff matureagewomencanaffordtomakecontributionsinexcessof$25,000inasingleyear.The majorityofwomen,whoearnlessthanaveragewages,wouldbenefitfarmorefromaredistribution oftaxconcessionstowardsthoseonlowerincomes.Thisisbecauseeverydollarcontributedbytheir employersearlierintheircareerswouldresultinhigher(aftertax)depositsintotheir superannuationaccounts,thebenefitsofwhichwouldgrowovertimeasfundearningscompound.

Otherproblemswiththepresentsystem
Thesystemiscomplex,withatleastfivedifferenttaxtreatmentsofsuperannuationcontributions, dependingwhethertheycomefromemployers,employees,selfemployedpeople,orspouses. Italsocreatesperverseincentivesforindividualsonhighincomestoavoidpersonalincometaxby divertingincomeintosuperannuation,withoutincreasingtheiroveralllevelofsaving. Agoodexampleoftheseperverseincentivesisthetaxminimisationschemeswherebywageearners over55yearsofagesacrificesalaryintosuperannuationwhileatthesametimedrawingan equivalentaftertaxamountfromtheirfundinsuperannuationbenefits.Awageearneron$100,000 whosacrificeshalftheirsalarytosuperannuation,andisthenpaidasuperannuationpensionto replacetheirlostearnings,savesaround$11,000intaxwithoutincreasingtheiroveralllevelof retirementsavings,asshowninthetablebelowdrawnfromtheAFTSRetirementIncomes DiscussionPaper.13
13

AFTS2008,Retirementincomeconsultationpaper,TheTreasury.

PAGE12

AUSTRALIANCOUNCILOFSOCIALSERVICE

Table2:Taxsavings sfromtransitiontoretire ementstrategy(200809 9)

Source:AFTS2 2009,Retiremen ntIncomesDisc cussionPaper

Thesest trategiesexp ploittheconc cessionaltax xtreatmento ofsuperannu uation(inclu udingthetaxbreaks oncontr ributionsand dthenontaxationofsup perannuationbenefits)comparedwiithlabourinc come andothe erinvestmen nts.However,thechurn nundermine esthebasicp purposeofth hetaxconce essions toboost tsavingforr retirement.T Treasuryrese earchestima atesthattheamountsch hurnedthrou ugh superannuationprobablyexceed d$10billion eachyear.T Thishasveryseriousimp plicationsforfuture 14 evenues. publicre Similarly y,selfemployedpeoplec cantransfer businessass setstoselfm managedsup perannuation nfunds taxfreeandthereby yavoidCapit talGainsTaxonthesaleofthoseasse ets. Theseta axavoidance eopportuniti ieswouldbe ecurbedifth hetaxtreatm mentofcontr ributionswas reforme edtoimprove eitsfairness s.TheHenry Reportprop posedthatco ontributions shouldonlyattract taxconc cessionstoth heextenttha attheyexcee edanybene efitspaidout themembe erssuperann nuation account inagivenye earthatis,theconcess sionsshouldonlyapplytonetincreas sesin ing,nottoin ncomethatis smerelychu urnedthroughsuperann nuationacco ounts. superannuationsavi portthatrec commendatio on. Wesupp

14

Rothm man2008,opc cit.

AUSTRAL LIANC OUNCIL OFS OCIALSERVICE E

PAG 13 GE

3. TheGovernmentsproposalsregardingsuperannuationtaxconcessions
TheGovernmentsproposaltointroducea15%GovernmentContribution,cappedat$500per year,tosupplementemployercontributionsforindividualemployeesearninglessthan$37,000is intendedtooffsetthe15%taxpenaltyforsuperannuationguaranteecontributionsonbehalfoflow incomeemployeesinthebottomtwotaxbrackets.Asgraph3shows,theGovernmentContribution would: Increasethetaxconcessionperdollarcontributedfrom15%tozero. However,itwouldstillleavethemwithnonettaxsupportforcontributionsfromtheir employer. Increasethetaxconcessionforsuperannuationguaranteecontributionsforthoseinthe 15%taxbracket(thoseearningfrom$16,000to$37,000)from1.5%to15%. However,itwouldnotaffectthetaxbreaksforaverageandhigherincomeearners,so thatanindividualinthetoptaxbracketwouldstillreceiveatleasttwicethetaxbreak perdollarcontributedasalowincomeearner. Graph3

100% 80% 60% 40% 20% 0% -20% -40%

Effect of Government Contribution on tax breaks for contributions (2011-12, % of contributions)

16.5% 1.5% -15.0% $2,000

20.5%

23.5%

31.5%

$50,000 $100,000 Annual income Existing system Govt contribution

$20,000

$300,000

Note: Compares tax concessions for employer contributions before and after introduction of the Government Contribution.

TheGovernmentContributionwouldthereforesignificantlyimprovetheequityofthesystemforlow incomeearners,butwouldstillleavethosebelowthetaxfreethresholdwithnonettaxconcession foremployercontributions.Further,itwouldnotreducetheexcessivetaxconcessionsforthosein thetoptwotaxbrackets.

PAGE14

AUSTRALIANCOUNCILOFSOCIALSERVICE

Inordertoequalisethetaxconcessionsforemployercontributionsforindividualsindifferenttax brackets(sothateverydollarcontributedbyemployersuptotheconcessionalcapsattractsroughly thesametaxbreak),theGovernmentwouldhavetodomuchmorethanintroducea15% GovernmentContributionforthoseinthezeroand15%taxbrackets.Itwouldhaveto: DoubletheproposedGovernmentContributionfrom15%to30%forthosebelowthe taxfreethreshold; Increasethe15%contributionstaxbyapproximately7.5%forthoseinthe37%tax bracketandby15%forthoseinthetop(45%)taxbracket.

Weoutlineamuchsimplerwaytoachievethesameobjectivebelow. TheGovernmentalsoproposestoincreasetheannualcaponconcessionalcontributions(those attractingataxbreak)from$25,000to$50,000forpeopleover50yearswhohavelessthan $500,000insuperannuationassets.Thisisapartialreversalofadecisionannouncedinthe2009 Budgettoimprovethefairnessofsuperannuationbycappingtaxconcessionsforthoseonhigher incomes. AstheAFTSStrategicIssuesPaperonRetirementIncomesnoted,veryfewlowormiddleincome earnerscontributeover$25,000tosuperannuationinasingleyear: Lessthan5%ofthoseearninglessthan$100,000contributedmorethanthisin200910. Ontheotherhand,morethanhalfofthoseon$300,000andabovecontributedmorethan $25,000ayear.

Unlesstheyhavelessthan$500,000insuperannuationassets,thismeasurewillheavilyfavourhigh incomeearners.Wenotethatthislevelofsuperannuationassetsiswellabovethemedian. Itislikelythatmanyofthoseonmiddleincomeswhocontribute(orreceiveinemployer contributions)morethan$25,000inasingleyeararenotincreasingtheirsavingsbydoingso.Since thisisalmosthalfofanaveragefulltimewage,fewmiddleincomeearnerscouldaffordtomakesuch ahighlevelofcontributionsunlesstheyaretransferringexistingfinancialassetsinto superannuation,churningtheirwagesthroughsuperannuationaccountsthroughtransitionto retirementarrangements,orthecontributionisgiftedbyafamilymember.Inthesecases,itisvery doubtfulthattheproposedextensionoftaxconcessionswouldboostprivatesavinglevels. Itisalsodoubtfulthatanincreaseintaxconcessionsforthosecontributingmorethan$25,000ina singleyearwouldtargetthosemostinneedofmorepublicsupportfortheirretirementsaving. Thosewhocanaffordtocontributesuchamountsare,generallyspeaking,morelikelythanthe averagepersontoenjoyacomfortableincomeinretirementasthefinancialandotherassets availabletotheirfamilyarelikelytobewellaboveaverage.Thelowincomeearnerwhomovesinto ahighpayingjoblateintheirworkinglifeandthendramaticallyincreasestheirsuperannuation contributionstocompensateforinadequateretirementsavingsistheexceptionratherthantherule.

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE15

Thecosttorevenueoftheproposedincreaseinthecontributionscapto$50,000isestimatedtobe $545millionin201213,whichistwothirdsoftheprojectedrevenuesavingfromtheoriginal2009 Budgetproposaltoreduceitto$25,000(whichsuggeststhatlimitingtheconcessiontothosewith lessthan$500,000insuperannuationreducesthecostofthismeasurebyonlyonethird).Thisisa verypoorlytargetedwaytoassistpeopletoimprovetheirretirementsavingsandthemoneywould bebetterspentsupportingtheretirementsavingsoflowincomeearners,forexamplebydoubling theproposedGovernmentContributionforthosebelowthetaxfreethreshold.

4. TheHenryReportssuperannuationproposals
Iftaxationsubsidiesweremorefairlydistributedifeachdollarofcontributionsattractedthesame rebateoftaxuptoanannuallimitthesavingsobtainedbyreducingtaxbreaksforhighincome earnerscouldbeusedtosubstantiallyincreaseaftertaxcontributionsforthoseonlowandmiddle incomes.Areformofthiskind,asproposedintheAFTSReport,couldraiseannualaftertax contributionsforworkersinthezeroand15%taxmarginaltaxbracketsbyatleast3%oftheir wages.Thatis,itcoulddoubletheincreaseinaftertaxcontributionsandretirementsavings resultingfromtheproposedincreaseinthesuperannuationguarantee. TheAFTSReportproposedthatemployercontributionsbetaxedateachemployeesmarginaltax rate(whichisknowntotheemployer)andthatexistingtaxbreaksforsuperannuationcontributions bereplacedbyanannualcappedrebate.AnindicativerebatemodelledintheAFTSReportwas20% ofallcontributionsuptothe(then)concessionalcontributionscapof$25,000peryear.Compared withtheexistingtaxconcessionsshowningraph1,thiswouldsubstantiallyincreasetheconcession perdollarcontributedforthoseinthezeroand15%taxbrackets,roughlymaintaintheexistingtax concessionsformiddleincomeearners,andsubstantiallyreducethemforthoseinthetoptwotax brackets. Anotherkeybenefitofthisreformisthatbytaxingemployercontributionsatmarginalrates,itis possibletoequalisethetaxconcessionsforallcontributions,whethertheycomefromemployers, employeesorselfemployedpeople.Thisisbecauseallcontributionswouldbemadefromaftertax incomeandthetaxoncontributionswouldbeoffsetbyauniformrebate.Thiswouldgreatlysimplify thesystembyreplacingatleastfivedifferenttaxtreatmentsofcontributions(includingthe employeecocontribution)withasingletaxconcession.Importantly,itwouldencouragesavingby lowandmiddleincomeearnersbymakingtheannualtaxconcessionfortheircontributionsmore visibleandtransparent.

PAGE16

AUSTRALIANCOUNCILOFSOCIALSERVICE

Afurtheradvantageofthisapproachisthat,unlikepreviousattemptstoimprovetheequityofthe systembytaxingexcessivesuperannuationbenefitsatahigherrate,thenewtaxtreatmentwould onlyapplytonewsaving.Theabsenceofanyelementofretrospectivitymeansthatcomplexand inequitablegrandfatheringarrangementswouldnotbeneeded.Thechangeswouldonlyapplyto newcontributionsmadefromthedateofeffectofthereform. TheReportalsoadvocatedanimportantmeasuretopreventpeopleover55yearsofagefrom takingadvantageoftaxconcessionsonsuperannuationcontributionstoreducethetaxontheir earningswithoutactuallysavingmorefortheirretirement.Thisincreasinglycommontaxavoidance strategyinvolvesthechurningofincomethroughsuperannuationaccountsthroughsalarysacrifice arrangementsandthesimultaneouspaymentofbenefitstomaintaincurrentdisposableincome. Thisstrategyisoftenassociatedwithtransitiontoretirementproductsfortheover55s.Itwasalso facilitatedbytheremovaloftaxesonbenefitsfortheover60sin2007.Tocurbthistaxavoidance strategy,theReportrecommendedthattaxbreaksforsuperannuationcontributionsshouldonly applytotheextentthatcontributionsmadeexceedbenefitspaidinanygivenyear(thatis,thefund memberisusingthesuperannuationsystemtosaveforretirement,aspublicpolicyintends). ThemainweaknessoftheAFTSproposalsisthattheproposedcontributionstaxwouldbededucted fromemployeeswagesaformofforcedsavinginallcaseswherethecontributionstax(at marginaltaxrates)exceedsthevalueoftheproposedrebate.Thiswouldreducethecurrent disposableincomesofmanyfamiliesandisunlikelytoattractpublicsupport.Inanyevent,thisform offorcedsavingwouldnotbenecessaryifthesuperannuationguaranteeisincreasedasproposed bytheGovernment.Weprefertheoptionofincreasingthesuperannuationguarantee,providedthe taxconcessionsarereformedatthesametime. AfurtherproblemwiththeoptionmodelledintheAFTSreportisthatthereplacementoftheflat 15%taxonemployercontributionsandothertaxbreaksforcontributionswitha20%rebateon contributionsuptothecurrentconcessionalcap($25,000)wouldnotberevenueneutral. SubsequentlyreleasedTreasurymodellingsuggeststhatthisoptionwouldcostaround$4billionper year.Themainreasonforthisistheretentionofthe$25,000contributionscap.

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE17

5. ACOSSproposalsforsuperannuationreform
Weproposethat,inconjunctionwiththeproposedincreaseintheSuperannuationGuarantee,the taxconcessionsforsuperannuationcontributionsbereformedalongthelinesadvocatedbytheAFTS Report,butwithafewsignificantdifferences: Employercontributionswouldbetaxedinthehandsoftheemployerateachemployees marginaltaxrate(asisthecasewithwages),exceptthatthetaxwouldbededucted fromtheemployerscontributionstothefund,notfromwages.Inthisway,the contributionstaxwouldreducesuperannuationsavingsratherthancurrentincome(asis thecasenowwiththe15%contributionstax). Allpublicsubsidiesforsuperannuationcontributions(includingthedeductionforself employedpeople,thespousecontributionsrebateandtheGovernmentCo contribution)wouldthenbereplacedbyanannualrebateonallcontributions (regardlessofsource)whichwouldbepaidbytheATOtothenominated superannuationaccount(anendofyeartaxadjustmentcouldalsobemadeatthistime, asisthecasewiththetaxationofwages). Inordertoassistthoseonthelowestincomestosaveforretirementandtominimise thenumberoflosersamongthosewhousetheGovernmentCocontribution,the rebatecouldbetwotiered.Forexample,therebatecouldmatchcontributionsdollarfor dollaruptoalowannuallevel(forexample0.5%ofaverageearningsoraround$350) andbefixedatalowerlevelsuchas20%foradditionalcontributionsuptoahigher annualcap(forexample12%ofaverageearningsoraround$8,000). Therebateandtheconcessionalcapswouldbedesignedsothatthereformisrevenue neutral,lowandmiddleincomeearnersarebetteroff,andindividualsonaverage fulltimeearningsorlesshaveanincentivetosaveatleast3%oftheirwagesinaddition tosuperannuationguaranteecontributions(notingthattheGovernmentproposesto increasethisfrom9%to12%ofearnings). Whereafundmembercontributestoanddrawsdownfromtheirsuperannuation accountatthedameyear,taxconcessionsshouldonlyapplytotheirnetsaving,thatis, contributionsminusbenefitspaidinthatyear.

PAGE18

AUSTRALIANCOUNCILOFSOCIALSERVICE

Thetablebelowcomparestheexistingsystemwithourproposedreforms. Table3:ExistingtaxtreatmentofsuperannuationcontributionsandACOSSproposal
Sourceof contribution Employer Currenttaxtreatment ACOSSproposal

Notaxonthatpartofearnings contributedtosuper(superguarantee orsalarysacrifice)iscollectedbythe employer.

Allcontributionspaidfromaftertax earnings(employersdeducttaxfrom theircontributionstothesuperfund).

Employee

Selfemployed

Spouse

Flattaxof15%ontransfertosuperfund Atwotiercocontributionortaxoffset forallcontributionsuptoaflatannual ofthefirst$25,000p.a. cap,paidintothefundatendofeach year. NewGovt.proposals: Therebateandthecaptobedesigned 15%Governmentcontributionfor sothatthereformisrevenueneutral, employercontributions(cappedat lowandmiddleincomeearnersare $500p.a.)foranemployeeonupto betteroff,andatypicalemployeeon $37,000p.a. Increasecontributionscapto$50,000if averagefulltimeearningshasan incentivetosupplement 50yearsoroverandsuperassetsare superannuationguaranteecontributions below$500,000. withamodestlevelofvoluntary contributions,toachieveanadequate Earningstaxedatmarginalrates. minimumlivingstandardinretirement. Forexample,100%forthefirst0.5%of Cappedcocontributionforpersonal contributionsbylow&middleincome AWE(approx.$350),plus20%for additionalcontributionsuptoanannual earners capof12%ofAWE(approx.$8,000). Earningstaxedatmarginalrates. Thecapcould,forexample,be increasedfrom12%ofAWEto15%of Taxdeductionforpersonal AWEiftheSuperannuationGuarantee contributionsuptothecontributions increasesfrom912% cap Wherefundmemberscontributeand Earningstaxedatmarginalrates. drawndownbenefitsinthesameyear, therebateappliestocontributions mademinusbenefitspaid,upthecap. Cappedannualtaxoffsetfor contributionsonbehalfofaspouse

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE19

Theproposedreformswouldsimplifyandequalisetaxconcessionsperdollarcontributedforlow middleandhighincomeearners,uptotheannualcontributionscap.15Theywouldshiftthe incidenceoftheconcessionsfromhighincomeearnerstolowandmiddleincomeearnersandthus boostretirementincomesforlowandmiddleincomeearnerswithoutanycosttotheBudget.They areverysimilarinboththeirdesignandquantumtoproposalsadvancedbytheIndustrySuper Network.16 Existingtaxconcessionsforsuperannuationguaranteecontributionsandtheindicativerebate describedabovearecomparedingraph4. Graph4

Existing tax breaks for SG contributions and ACOSS reform option (2011-12, % of contributions)
100% 80% 60% 40% 20% 0% -20% -40% $2,000 $20,000 $50,000 Annual income
Existing system

$100,000

$300,000

ACOSS reform option

Ifatwotierrebatewereintroducedtherewouldbeaslightbiasinfavourofcontributionsmadebylow incomeearners. 16 IndustrySuperNetwork(2009),SupplementarysubmissiononretirementincomestotheAFTSreview.


15

PAGE20

AUSTRALIANCOUNCILOFSOCIALSERVICE

Graph4(continued)

Existing tax breaks for SG contributions and ACOSS reform option (2011-12, $p.a.)
$10,000 $8,000 $6,000 $4,000 $2,000 $0 -$2,000 $2,000 $20,000 $50,000 Annual income
Existing system ACOSS reform option

$100,000

$300,000

Source:ACOSScalculationsbasedonsuperannuationguaranteecontributionsonly.

Theimpactoftheproposedreformontaxconcessionsforvoluntarycontributionswoulddependon thelevelofsuchcontributionsandtheincomeoftheindividual. Weacknowledgethatwithinthebroadreformframeworkofreplacingexistingtaxconcessions withacappedrebate,ourobjectivescouldbeachievedinanumberofdifferentways.Forexample, thecontributionstaxcouldbecalculatedastheindividualsmarginaltaxrateminusapercentageas advocatedbytheAustralianCouncilofTradeUnions. Itisimportanttonotethatthedistributionalimpactoftheproposal(includingtheincomethreshold belowwhichthevastmajorityoftaxpayersgain)canbevariedbychangingthevalueoftherebate andthecontributionscap.Withinarevenueneutralreform,thereisatradeoffbetweenahigher rebate(whichincreasestheretirementincomegainsforthoselowandmiddleincomeearnerswho benefitfromthereform)andahighercontributionscap(whichincreasesthenumberofmiddleto highincomeearnerswhogain).Inourindicativerebatemodel,superannuationsavingswouldbe substantiallyboostedforthevastmajorityofindividualsinthezeroand15%taxbrackets,andthe vastmajorityofindividualsearninglessthanaround$100,000wouldgain. Therebatecouldhoweverbeadjustedtoachievedifferentdistributionaloutcomes.Theexistingtax breaksaresoskewedinfavourofhighincomeearnersthatitwouldbepossibletodesigntherebate soastoensurethatatleastthebottom80%ofsuperannuationfundmemberswithcurrent contributionswerefinanciallybetteroffinretirement,atnocosttopublicrevenue.

AUSTRALIANCOUNCILOFSOCIALSERVICE

PAGE21

You might also like