A leaked budget advertisement script that ‘mysteriously’ found its way into the hands of the media shows that big changes to how the Government plans to tax superannuation may be on the way.
The leaked script reveals the Coalition’s intentions to crack down on high-income super tax concessions, with the hope that it will raise four times the revenue of Labor’s policy.
Labor has promised to cut the income threshold from $300,000 to $250,000, affecting 110,000 Australian superannuants, but the Coalition, it would seem, plans to reduce the lower limit to $180,000 – a proposal that will see an extra 244,000 being taxed at a higher rate.
The change, expected to be revealed in the 3 May Budget, is estimated to net around $2 billion per year, compared with Labor’s $500,000.
The lower threshold is scheduled to commence in June 2017 once the Abbott Government’s Temporary Budget Repair Levy comes to an end which, in theory, should ease the transition for high-income earners.
Prior to 2012, all super contributions made by employers were taxed at a flat rate of 15 per cent which was seen as a huge concession for high-income earners, but unfair for those on a lower income. Only those earning $300,000 or more were taxed at the higher rate of 30 per cent.
Treasurer Scott Morrison may also refine the caps on how much employees can contribute to their super. Currently, most taxpayers can make tax-free contributions for up to $30,000 per year, or $35,000 for those over 50 years of age. With the new budget, those caps could be reduced to around $20,000 per year.
According to the leaked script held by Sky News, the advertisement states, “New and important changes are happening to Australia’s Tax and Super System. These will make the system fairer and continue driving economic growth. We need superannuation to be flexible enough to work for everyone – particularly those on a low income.” It is also reported by The Australian Financial Review that these advertisements are taxpayer funded.
When asked about this proposal, senior MPs disputed the figures but did not deny the plan. The Treasurer has also declined to comment until the Budget is revealed on 3 May.
The Government’s plans to increase taxes on the superannuation incomes of high earners is a step in the right direction, and entirely consistent with responses to the YourLifeChoices Budget 2016 survey but how it will make the system fairer for those on lower incomes remains to be seen.
Lowering the threshold to $180,000 is not such a bad idea, although anyone earning that amount per year is unlikely to require an Age Pension, so it will hardly relieve the financial pressure on, or demand for, the Age Pension anyway. In association with lowering the threshold, the Government may be better served by applying the same rate of tax to super contributions as those on wages.
Australia Institute senior economist Matt Grudnoff pretty much hits the nail on the head: “We know that the top 20 per cent of retirees are not claiming a pension,” he said. “Giving them a (tax) discount doesn’t help take the pressure off the pension in any way.”
If high earners are still taxed at a lower rate, it would seem it is not really helping anyone. They can still make contributions to their super that are taxed significantly less than they would be on their income tax rate. So increasing the concession to a 45 per cent tax rate may make more sense.
The current, and planned, tax concessions still allow for super to be used as a vehicle for estate planning and tax avoidance – something the Government staunchly claims it is trying to minimise.
Still, this would seem to be a step in the right direction. I wonder if it’s fair to speculate that this mysterious ‘leak’ was deliberate – intended to ‘feel out’ response to such a move, in order to better refine the plan?
But the part of this plan that needs to be reviewed is the lowering of the tax-free contribution cap from $30,000 PA for most taxpayers ($35,000 for those over 50) to $20,000 PA. Doesn’t this undermine the intended outcome of making the Age Pension more sustainable? If Australians, at the peak of their earning capacity, are thwarted from making significant contributions to their nest eggs, then won’t more people be reliant on the pension in the future?
Leaving the tax-free super contribution threshold untouched for Australians earning under, say, $120,000 per year, would seem a much wiser idea. Adjusting the caps for high earners would seem more reasonable, as they have the potential to save more over time anyway. Wouldn’t giving low earners, at the height of their capacity to earn, the opportunity to contribute more into their super then minimise their chances of having to be reliant on the Age Pension in the future?
What do you think of this leaked proposal? Do you think the leak was accidental or deliberate? Are these sound plans to protect the future of retirement incomes? Are they fair for all Australians? Do you think the Government is moving in the right direction? What would you suggest to make the system even fairer?