The Albanese government wants superannuation to be “equitable and sustainable”, leaving the door open to caps on balances or trimming tax concessions.
Now that Labor and the treasurer, Jim Chalmers, have started the “national conversation” around potential changes, we explain what the tax concessions on super are and why they are a growing cost to the budget.
How is super taxed while earning?
While workers are earning, their employer pays 10.5% of their income into their superannuation fund.
Both these mandatory and additional voluntary contributions (such as salary sacrificing) are generally taxed at 15%, which is significantly lower than most marginal tax rates, including the top rate of 45%.
Super contributions of up to $27,500 a year are taxed at 15% and above that at 30%.
The earnings on super savings themselves are generally taxed at 15% during the accumulation phase.
How is super taxed while drawing down?
In the retirement phase, people aged over 60 can access their super.
Those with a balance of less than $1.7m can generally access their super without paying any tax on the sums they withdraw.
Retirees with balances of more than $1.7m will generally be taxed at 15%.
What is the problem?
The average superannuation balance is $150,000, according to the prime minister, Anthony Albanese. For the most part, super tax concessions are not a problem – they are a deliberate design feature to encourage people to save more for retirement.
But some people are accumulating mega balances: 11,000 Australians are racking up more than $5m in superannuation and 32 self-managed super funds have more than $100m in assets. Chalmers has noted that fewer than 1% accounts have balances of $3m.
At the top end, superannuation is beginning to look less like a retirement savings scheme and more like accumulation of wealth that isn’t spent but passed to the next generation, worsening inequality.
How much do super tax concessions cost?
According to tax expenditure statements, superannuation tax concessions cost the budget $52.5bn a year at the moment, just shy of the $55.3bn spent on the pension.
Chalmers has revealed that by 2050 super tax concessions will cost the budget more than the pension.
What could the government do?
In January, the assistant treasurer, Stephen Jones, told the Australian Financial Review that after legislating an objective for super, Labor would examine superannuation tax concessions.
Under one proposal, championed by the Association of Superannuation Funds of Australia, super balances could be capped at $5m. That would mean high-income earners’ accounts in the accumulation phase could not benefit from tax concessions of 30% – which is the 45% personal tax rate less the 15% tax on fund earnings.
Another proposal would be to lower the rate at which the 30% rate of taxation kicks in from the current $250,000 income level and $27,500 super contributions.
Is this a broken promise?
During the election campaign Chalmers said Labor didn’t “have any proposals for tax increases beyond working with other countries to make multinational tax fairer” – labelling any claims to the contrary a “scare campaign”.
Asked about capping balances, Chalmers reportedly said: “We don’t have any policies like that, that you just mentioned, and we took to the last election a bunch of savings out of superannuation, which we won’t be taking to the next election.”
The Coalition cites these and similar statements to claim Labor has broken its promise.
On Wednesday Albanese told the National Press Club that Labor “said that we would not have any major changes in superannuation and that is certainly our intention”. Nevertheless, it will continue the review into super.
What is the proposed objective of super?
The consultation paper, released on Monday, proposes to define the objective as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
What has the response been?
The Coalition has rejected the element of “preserve savings”, by noting this would attempt to foreclose the possibility of using a portion of superannuation to buy a house. The Coalition proposed this at the 2019 election and Peter Dutton recommitted to it in his 2022 budget reply.
Some have also cited Chalmers’s observation that “if we fail to act on areas like affordable housing, climate, the care economy and digital [economy], we will face the prospect of an economy that won’t sustain the growth that we need” to argue that the reference to “sustainable” includes investment in the green economy and housing.
The government insists the objective would not affect the duty for super funds to act in the best interests of members.
