The Australian Federal government recently moved to make a “modest” change to the nation’s superannuation system which, it says, will save A$2bn (€1.2bn) a year for its over-stretched budget.
For what is seen as a small relief to the Federal budget, the government has walked into what some have dubbed class warfare.
Its decision was met with cries of ‘socialism’ and accusations of attacks on the wealthy.
From 2025, the government has proposed to double the rate of concessional tax, from 15% to 30%, on superannuation earnings for accounts with more than A$3m.
Canberra says the change affects 0.5% of superannuation accounts. The concessional tax break will continue to apply for the remaining 99.5% .
The proposed change will affect about 80,000 Australians.
But this proposal is already in dispute by groups such as the Financial Services Council (FSC), which looks after retail and industry super funds and other financial services firms.
The issue is that the cap is not indexed. Blake Briggs, CEO of FSC, tells IPE that FSC analysis of Australian Tax Office data forecasts that 500,000 Australian taxpayers, including 204,000 currently under 30 years old, will breach the cap in their lifetime and face a 30% earnings tax.
“Caps in the superannuation system are designed to be indexed to preserve fairness across generations, so that each generation gets the same outcomes and benefits from the superannuation system,” Briggs says.
But the government’s proposal to leave the threshold at A$3m is unfair to younger generations, as inflation will eat away at the value of the cap in real dollar terms.
Peter Burgess, CEO of the SMSF Association, which represents financial planners and accountants, says: “It has been projected that, if we assume modest inflation, A$3m today will be worth less than A$1m in 30 years.”
Burgess says feedback from SMSF members suggests the proposal could cause some to opt out.
Further, he says, if the government wants younger individuals to make voluntary contributions to superannuation funds, “we need to stop moving the goal posts”.
Equality goals
The government sees this as the first step towards an “equitable and sustainable” super system.
In Australia today, there is a single superannuation account with a balance of A$530m, while 32 accounts have more than A$100m each, and thousands have more than A$3m.
In contrast, the average superannuation fund balance in Australia today is A$145,388, according to the Australian Taxation Office.
Matt Grudnoff, chief economist at the Australia Institute, a think-tank, says superannuation concessions cost the government around A$50bn a year – just shy of the A$53bn budgeted for first-pillar pensions.
“Half of the super tax concessions go to the country’s top 20% income earners,” Grudnoff says.
The Federal Treasury’s tax expenditure statement shows that for 2022-23, super concessions will cost A$52.6bn, compared with A$35.5bn for the National Disability Insurance Scheme (NDIS).
Grudnoff says the institute’s research has shown that the cost of the concessions has risen from less than 1.5% of GDP at the start of the century to more than 2%, while the cost of first-pillar pensions has been consistent at around 2.2% of GDP.
As the institute’s CEO Richard Denniss sees it, Australia has two classes of state-funded retirees, both costing the taxpayer roughly the same: those living on the first-pillar pension; and a small group of wealthy account holders with lavish tax loopholes.
“The current system is not taking pressure off the budget to provide a dignified retirement for all Australians, but it certainly is providing a lucrative tax-avoidance facility for multimillionaires,” says Denniss.
Associations support a cap
This inequity is an embarrassment to the industry. It is a source of contention in sections of the community who question the merit of a system that allows some people to turn it into a tax avoidance or minimisation scheme.
The Productivity Commission, a federal government agency, finds that 50% of the wealth that current retirees would pass on in their wills would go to just 10% of bequests. By 2060 a third of all withdrawals from super funds will be via bequests.
“Caps in the superannuation system are designed to be indexed to preserve fairness across generations”
Blake Briggs
Industry bodies, such as the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST), have long urged Canberra to limit tax concessions on super earnings on large balances.
Similarly, AustralianSuper, HESTA, Aware Super and the smaller fund CareSuper all support a cap on balances of more than A$3m.
In welcoming the announcement, AIST CEO Eva Scheerlinck says it is another important stage in addressing the inequity of tax concessions in superannuation.
She says: “It’s appropriate that people with very high balances like this, which are more than what is needed to fund a comfortable retirement, will pay more tax.
“It is worth nothing that the proposal of 30% tax on earnings is still lower than the highest marginal tax rate, so there is still a tax benefit from the money remaining in super.”
Australia’s top marginal income tax rate is 45%.
In an analysis of super tax concessions, commissioned by AIST, Mercer found the concessions accruing to a person with A$10m in superannuation funds would fund 3.1 full first-pillar pensions.
Political cross-currents
There is, however, an unexpected sting in the government proposal – taxing unrealised gains.
Burgess at the SMSF Association understands why the government has chosen to include unrealised gains in calculating taxable incomes. It is because this is the simplest approach. “But the simplest is not the fairest solution,” he says.
Burgess believes the cap may cause liquidity problems for some funds and potentially double taxation. When assets are sold, they attract capital gains tax as well as having to pay tax on a paper gain each year.
Most of the large accounts are held in so-called self-managed super funds, and used by farmers, small businesses, and others, including professionals. Grudnoff says: “I think the benefit of taxing unrealised gains is to stop the abuse of the super system.”
Burgess also says the issue of unrealised gains will be raised during formal consultations between the government and the industry before the legislation is passed.
Another brewing contention is that government is seeking to tie superannuation funds more strongly to fiscal policy to help finance the mammoth spending demands it faces. It is also seeking to align superannuation investments with its social and economic policy goals.
Paul Kelly, a political commentator, believes the government will ultimately create a situation that collides with the responsibility of fund trustees to make decisions solely in the interest of members.
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