‘A taxpayer-subsidised inheritance scheme:’ policy analysts slam super tax concessions

Grattan Institute analysts Brendan Coates and Joey Moloney have said that Australia's “generous” superannuation tax breaks disproportionately flow to older, wealthier Australians, leaving working Australians to shoulder the lion’s share of the tax burden.

The pair said Labor government’s proposal to lift the concessional superannuation earnings tax rate from 15 per cent to 30 per cent on balances above $3 million is a step in the right direction, but could go further.

“The tax breaks aren’t just inequitable; they are economically unsound. Generous tax breaks for super savers mean other taxes (such as income and company taxes) must be higher to make up the forgone revenue. That means the burden falls disproportionately on younger taxpayers,” Coates and Moloney argued for The Conversation.

Super tax breaks cost the budget nearly $50 billion in lost revenue every year, the Grattan Institute found. Two-thirds of that value flows to the top 20 per cent of income earners, who were already saving enough for retirement.

The analysts said that the proposed $3 million threshold was too high, adding that if the threshold remained fixed until 2055 – an unlikely prospect – it would still only affect the top 10 per cent of retiring Australians.

“Far from abandoning the proposed $3 million threshold, the government should go further and drop the threshold to $2 million, and only then index it to inflation, saving the budget a further $1 billion a year,” they argued.

Over its next term, the government will face hefty structural budget pressures driven by the NDIS, a new five-year hospital funding deal with the states, and the $368 billion AUKUS security pact, Commonwealth Bank economists have said.

Shane Oliver, chief economist at AMP, warned that ongoing budget pressures would need to be offset by savings.

“Structural spending pressures around the NDIS, health, aged care, defence and public debt interest are now taking the budget back into deficit when public debt is already high. They need to be checked and offset by savings.”

Whether these savings are destined to come from cutting public spending, raising income taxes, or paring back tax concessions for wealthy Australians is up to the government.

Australians have increasingly been using superannuation as a means to pass down an inheritance to their children, rather than its intended purpose of providing a dignified retirement, the Grattan analysts argued.

By 2060, Treasury has projected that one-third of all super withdrawals would be via bequests.

“Superannuation in Australia was intended to help fund retirements. Instead, it has become a taxpayer-subsidised inheritance scheme,” Coates and Moloney said.

The Association of Super Funds of Australia estimated that the annual income required for a comfortable retirement for homeowners was $73,077 for couples and $51,805 for singles, meaning couples would need super savings of $690,000 and singles $595,000 – well below the $3 million threshold.

Reducing the tax break for those with super balances above $3 million would only affect the wealthiest 0.5 per cent of super account holders – approximately 80,000 people – while saving the budget over $2 billion in its first full year, the Grattan Institute found.

To put things into perspective, ATO data has shown that the median super balance for 60-64 year old Australians was just above $200,000 for men, and $150,000 for women.

The Grattan analysts acknowledged that the Div 296 changes could cause cash flow issues for some SMSF members who held illiquid assets in their funds.

However, they said that all tax changes would require compromise, and the majority of wealthy super fund holders already held enough liquid assets to meet minimum drawdown requirements.

Furthermore, as taxation academic Miranda Stewart wrote for The Australian Financial Review, unrealised capital gains were still real additions to wealth in super funds. For example, a super death benefit would be calculated based on this balance.

Taxing unrealised gains was also not a novel concept in the Australian tax system, Stewart pointed out, with many of us accustomed to paying them through land tax and council rates.

What’s more, if a super balance made negative earnings in a given year, the additional tax would not apply. Stewart added that negative earnings could be carried forward as offsets to reduce tax in future years.

Given that the tax would only affect the wealthiest Australians, the Grattan analysts dismissed claims that the reduction in super tax concessions would disproportionately impact younger Australians as “simply nonsense.”

“Rather than being the biggest losers from the lack of indexation, younger Australians are the biggest beneficiaries,” they wrote.

“It means more older, wealthier Australians will shoulder some of the burden of budget repair and an ageing population. Otherwise, younger generations would bear this burden alone.”