A tax on retirees is being touted as the most likely way to pay back stimulus package debt in a post-COVID-19 environment.
The federal government has ruled out increasing the GST, and Mercer’s David Knox is one who says that higher taxes, including on Australians’ superannuation balances, is the most likely way forward.
Investment Magazine reports that three top superannuation specialists have warned that the federal government will dip into Australia’s $3 trillion retirement savings pool to help pay for the $130 billion stimulus packages set up to assist the economy weather the pandemic.
Mr Knox said retirement benefits that are not currently taxed would be under review.
“One of the advantages of taxing pensioners is that the government gets revenue from the demographic that has generated the most wealth but which doesn’t contribute to the income tax base,” he said.
“Taxing benefits would give government greater flexibility since both income tax and tax rates on benefits can be politically adjusted up and down when the need arises as we saw [with] flood tax, or a budget repair tax.”
Rice Warner executive director Michael Rice is another who is convinced the federal government will tax retirees “when the dust has settled”.
“The need to raise taxes over the next 10 years to pay for all the new debt will point Canberra towards the areas of super that are still heavily benevolently taxed,” he said.
Grattan Institute chief executive John Daley also said that higher taxes were a certainty.
“It might not be the very first thing Canberra does once the country comes out of COVID-19, but the debt repayment will be enormous,” he said.
Mr Daley told Investment Magazine that Canberra would look at super because the overall sector was taxed very lightly and about half of the tax concessions flowed to the wealthiest 20 per cent income earners.
Senior economist with The Australia Institute, Matt Grudnoff, has long argued that our retirement income system is failing, proven, he says, by our high rates of poverty in retirement.
He told YourLifeChoices: “Of the 36 OECD (developed) countries, Australia has the sixth highest rate of poverty in retirement. At the same time, the government pours substantial sums of money into increasing retirement incomes.”
When it comes to super tax concessions and excess franking credits, he said, we are handing out the most to those who already have the most.
“Super tax concessions are worth $41 billion per year. The richest 20 per cent of retirees, who are not on an Age Pension or part pension, get 60 per cent of super tax concessions. The bottom half, those most likely to need help in retirement, get just 11 per cent of super tax concessions.”
Money Magazine says that should Canberra move to tax retirement benefits, it would be a partial return to its original tax system.
“Like many other major markets, Australia had long upheld the general principle of exempting contribution from tax entirely (and the earnings they generate) but to tax in full the retirement benefits as they are paid out.
“This was overturned by the Bob Hawke government in 1988, which brought tax collection forward to the contribution stage. Then, in 2006, John Howard’s government scrapped the tax on benefits.”
Mr Knox said that if the government had adhered to the original system, the younger demographic would build more compound interest and retirees would be funding economic shocks. It increased the compounding, he said, leading to bigger balances and economically, made for a more equitable system.
The government’s Retirement Income Review, which is due to report in June, allows Canberra to improve the system by taxing those with the capacity to contribute, Mr Knox said.
Both Messrs Knox and Rice pinpointed self-managed super funds (SMSF) as an area for reappraisal. Mr Knox said the key was a super system that was consistent and fair. “When the top 100 SMSFs have $80 billion between them, you have to think seriously about taxing such big benefits,” Mr Rice said.
He also questioned the suitability of the $1.6 million transfer balance cap on tax-free pension accounts, advocating the introduction of a $5 million threshold above which people would be taxed at the top personal rate at 47 per cent.
Read the full Investment Magazine report here.
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