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Australia economy: Group likely to see tax hike first as debt blows hole in budget

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A tax concession designed to encourage Australians to save for retirement could be in the firing line as the government seeks solutions to its growing budget woes.

It’s been described by the government as “one of the most important conversations” the nation must have, but what exactly does that mean for the everyday Australian?

So what is it?

The super tax concessions were created as an incentive to encourage people to put money away instead of relying on the aged pension.

It meant if you were still working and earning under $250,000, anyone could make a contribution to their superannuation before tax at a rate of 15 per cent.

Retirees with more than $1.7m in super also have their excess funds taxed at a generous concessional tax rate of 15 per cent.

That rate is much lower than the 45 per cent marginal rate taxed on high income earners.

What’s the problem?

The major concern is that the system is now being used to build wealth, not save for retirement.

In a speech to the AFR Wealth and Super Summit, Financial Services Minister Stephen Jones revealed there were 32 self managed super funds with more than 100m in assets in them.

The biggest, he said, had grown to $400m.

The funds all enjoy lower taxes than if that money was held outside of super.

“If the objective of super is to provide a tax-preferred means for estate planning, you could say it is doing its job,” Mr Jones said.

“I celebrate success, but the concessional taxation of funds like these has a real cost to the budget which needs to be considered.”

In the 2020-2021 financial year, super tax concessions cost the federal government about $45 billion in lost revenue.

By comparison, the aged care pension cost the budget bottom line $53bn.

Mercer estimates the tax concession on a single $10m self-managed super fund could support 3.1 aged pensions.

Additionally, the Grattan Institute has argued the concessions are poorly targeted, with half of the tax benefits flowing to the wealthiest 20 per cent of households.

What can be done?

The superannuation industry appears to be comfortable with the discussions about capping tax breaks on balances of $5m.

There’s only an estimated 11,000 people who have balances above that amount, and the move would save the budget around $1bn a year.

But dropping the cap to $2m would affect 80,000 people and, according to the Grattan Institute, would save the budget $2.8bn a year.

However, Labor was not elected on a platform of reforming superannuation, which makes any potential changes a tricky subject to navigate.

Opposition finance spokesman Stuart Robert has labelled the debate the “ultimate definition of the politics of envy”.

“Unfortunately, Labor went to the election saying no changes to superannuation,” he said.

“The Treasurer said the super wars were done but here we find mere months later the Assistant Treasurer looking at every opportunity to whack anyone that’s done well.”

But Mr Jones has stressed any changes would not be made without consultation.

“Australians need to have their say,” he said.

Story Credit: news.com.au

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