David Uren, 26 October 2015

Budget savings of $6 billion a year would be generated by a proposal for taxing superannuation contributions similar to the Henry tax review’s recommendations, with everyone getting the same tax benefit, regardless of income.

The Turnbull government is open to reducing the benefits of superannuation for high-­income earners as part of its tax white paper review and an analysis by accounting firm Deloitte shows it could provide funds to be used for broader tax reform objectives.

The Murray financial system inquiry found that half the concessions from superannuation were enjoyed by the highest income-earning 20 per cent of the population, while the lowest earning 20 per cent received just 0.5 per cent of the benefits.

Assistant Treasurer Kelly O’Dwyer said yesterday all ­options on superannuation were being considered, adding that tax, welfare and superannuation reforms were being considered as a package.

However, the tax white paper team under Scott Morrison is ­attracted to ideas that improve the equity in superannuation without affecting people’s expectations for their retirement ­incomes.

Instead of the current system that taxes all super contributions at 15 per cent, Deloitte has modelled a scheme that gives everyone a 15 per cent reduction on their marginal income tax rate for their super contributions.

“This is good policy and raises a big bucket of money. It does not hurt the economy or impose any efficiency cost, but gives the government the dollars in the back pocket to do a deal on tax reform,” Deloitte partner Chris Richardson said.

At present, superannuation contributions are taxed at a flat 15 cents in the dollar, with the tax collected by the superannuation fund. This delivers a huge gain of 30 cents in the dollar for someone who is earning more than $180,000 and paying a marginal tax rate of 45 per cent.

By contrast, someone earning less than the tax-free threshold of $18,200 is losing money by putting it into superannuation.

Giving everyone the same 15 per cent reduction in their marginal tax rate would make superannuation much less generous to the highest income earners and generate significant budget savings. People earning below the tax-free threshold would get a rebate to ensure they got the same ­benefit.

Mr Richardson said the budget savings would be preserved, even if the current annual caps on the amount any individual could invest were removed, with only a generous lifetime limit on the amount that can go into superannuation left in place.

The advantage of changing the treatment of superannuation contributions is that it does not have any retrospective element and does not need to be “grand­fathered” to exempt superannuation savings that have already been made.

Although many analysts, including the Murray financial system inquiry, have criticised the tax-free status of superannuation for people aged 60 and over, the Treasurer has flagged that he is reluctant to change tax arrangements on money that has already been locked away in super funds.

Labor has suggested reintroducing tax for people aged over 60 years on superannuation earnings above $75,000.

The Henry tax review suggested taxing superannuation contributions at a person’s marginal tax rate and then providing a rebate so that the first $25,000 was taxed at no more than 15 per cent. It also called for tax on super earnings to be halved to 7.5 per cent and extended to earnings in the retirement phase, but this would add significantly to the complexity of the reform.

Deloitte said there had been exaggerated claims the cost of superannuation concessions was rising to rival the Age Pension. It said a more realistic estimate put the budget cost at about $11bn a year. However, it said making the scheme more efficient would raise funds that could be used for other, more beneficial tax reform purposes. The firm also argues that capital gains tax concessions should be reviewed, saying the present ­­50 ­per cent discount was too generous. It said capital gains tax concessions, rather than negative gearing, were the main cause of distortions in the housing market.

Ms O’Dwyer has defended negative gearing concessions, saying it was used by many people on modest incomes. Deloitte’s estimate shows that only 12 per cent of claims for tax deductions of interest against rental income come from people earning more than $180,000, whereas high income earners account for 53 per cent of all capital gains. Deloitte has recommended paring the discount on capital gains back to 33 per cent. This could save about $2bn.

Extracted in full from The Australian.