JavaScript disabled. Please enable JavaScript to use My News, My Clippings, My Comments and user settings.

If you have trouble accessing our login form below, you can go to our login page.

If you have trouble accessing our login form below, you can go to our login page.

Labor finally sights the super monster

Date

The budget will tackle the anomalies that favour big earners, writes Peter Martin.

It would be cheaper to extend the full pension to everyone and drop super concessions.

It would be cheaper to extend the full pension to everyone and drop super concessions.

The select few Australians earning more than $290,000 per annum - a mere 1 per cent of the workforce - rake in an astounding $2 billion in superannuation tax concessions between them, according to Treasury calculations being used to guide the government as it hunts for savings before the budget.

Although there are are just 130,000 such earners, they gain 6 per cent of all the government superannuation tax concessions. The high earners include executives on multimillion-dollar contracts who get a disproportionately large share of the $2 billion pool.

Asked twice at a press conference on Thursday whether Labor's present system of superannuation tax concessions was "fair", the Financial Services Minister, Bill Shorten, declined to answer. Asked twice whether the super concessions - that now total $32 billion - were sustainable, he again declined to answer and said he could not speak about what might be in the budget.

In 2009-10, the most recent year for which the Treasury has done a full simulation, the top 1 per cent of earners received an average benefit of $19,200 each. By contrast, an earner in the middle of the pack received $800.

Government support for retirement is somewhat more even than the simulation suggests. The mid-range worker also gets a part-pension. Even so, the Treasury simulation suggests the tax concessions offered to the highest earners are worth twice as much as the combination of concessions and pension payments offered to those in the middle.

If the purpose of super is to take "pressure off the pension" as repeatedly claimed by Labor, its tax breaks do it in the daftest possible way. The biggest tax breaks go to the relative handful of people who would not get the pension in any event (about 5 per cent of seniors).

So expensive are the tax breaks, and so fast are they growing, it would be cheaper to extend the full age pension to all Australians and abandon super tax concessions altogether.

Labor created the system it is now belatedly trying to improve. In an odd turn of events, the Coalition is pledging to maintain it, promising "stability and certainty" should it be elected in September. Tony Abbott says he "won't move the goalposts".

But without action, the costs are set to explode. The $32 billion in superannuation tax concessions is on track to grow to $45 billion by the end of Abbott's first term in office. As a point of comparison, defence spending is $22 billion, on track to climb to $25 billion.

Labor introduced compulsory super in 1985 and increased compulsory contributions from 1992 with next to no discussion about how the concessions would be paid for.

The decision to boost contributions once more (taken against the advice of the Henry tax review) was presented as if it was to be paid for by the proposed resource super profit tax, since replaced by the Minerals Resource Rent Tax, which is raising a mere trickle of the billions expected.

The best known of the costs is the ultra-low 15 per cent tax rate applied to salary paid into super up to a generous cap. Its a big advantage if you're earning in excess of $180,000 and otherwise paying the top marginal rate of 45 per cent. It's a substantial advantage if you're on a middle income and otherwise paying a marginal rate of 32.5 per cent. But it's no advantage at all if you are below the tax-free threshold and otherwise paying no tax.

Until July last year, the 15 per cent tax rate was a penalty for low-income earners who would otherwise be paying no tax. In an overdue move, the government cut their rate of tax on super contributions to zero, meaning they are now at least made no worse off by the super contributions. (Using apparently inconsistent logic, Abbott says he will reverse the measure because it is funded by the mining tax.)

The Treasurer, Wayne Swan, has also belatedly boosted the super contributions tax rate for very high earners - those earning more than $300,000. They will pay a still-concessional 30 per cent.

The biggest inequity and fastest growing cost associated with super is less well known. It's the flat 15 per cent tax on fund earnings. It applies irrespective of how low or high the member's tax rate is, and its benefits are so skewed that the latest Treasury simulation (for 2009-10) shows 11 per cent of the benefits going to the top 1 per cent of earners.

Critics of the Treasury's methodology say it exaggerates the benefit going to high-end earners because they would find other ways to minimise tax if they could not use super. But they have certainly been rushing into super. It is increasingly common for high-income earners to direct 20 per cent to 30 per cent of their salary to super (well above the 9 per cent requirement) even if they have to pay full tax on the way in.

The Howard government's 2006 decision to abolish tax on the way out for those above 60 led to an explosion in so-called do-it-yourself funds, where small business owners and others put into super exactly what they wanted knowing the returns would be taxed at only 15 per cent.

Practically non-existent 15 years ago, self-managed funds now account for $439 billion. By contrast, industry funds account for $267 billion and retail funds $371 billion.

There's an expensive gorilla in the room and its getting bigger. Labor now recognises this and will act in the budget. Given time in government, the Coalition will recognise it too.

Related Coverage

Featured advertisers

Special offers

Credit card, savings and loan rates by Mozo