Labor changes plan to raise tax on multi-million-dollar superannuation

ABC NEWS (Australia)

The federal government has made some major concessions in order to get its superannuation tax reforms through parliament with the changes to include an extra super top-up for low-income earners. Housing and Economic Security Program Director at the Grattan Institute Brendan Coates says the policy may be a step backwards.

Transcript

00:00The government has been trying to scale back excessively generous tax rates to those with

00:07very large superbalances. That's where that original policy to have a higher earnings

00:11tax rate on balances above $3 million came from. What the government announced yesterday

00:15is they're going to index that $3 million threshold so it will apply to fewer people

00:20over time than it otherwise would have with the government's original policy. And they're

00:24also seeking to change exactly how they calculate that tax liability so it excludes unrealised

00:29capital gains which was the sticking point. Overall those two policies are going to raise

00:33less, changes are going to raise less revenue than they otherwise would have so it's going

00:36to claw back less of those really generous tax breaks going to older Australians who have

00:41got large balances in particular. They have tried to offset that by having a new higher

00:46threshold of $10 million where a 40% tax rate will apply to earnings which will make it pretty

00:51unattractive to keep money inside super. But on balance this package raises less revenue

00:56each year than what the previous policy did, even accounting for the listo, the fact that

01:01they're topping up expanding the low income super tax offset to boost the amount of super

01:06that low income earners get, basically making sure they don't pay a higher tax rate on their

01:11super contributions than they would have been paying on their earnings. But it raises less

01:17revenue, it does less to support budget repair and so it does less to fulfil the objective of

01:22unwinding those excessively generous tax breaks at the top. It can be confusing for many and

01:27we are going to step through this but I guess the most simple change is that the start date has been

01:32pushed back. Yeah, so the government is going to consult on how they actually come up with this

01:37alternative way of calculating what the tax liability is going to be. That pushes the start back

01:43back by one year. That in and of itself will cost the government revenue in excess of $2 billion in

01:48that one year. The reason they're doing that is because superannuation, when we're talking about

01:53the earnings on the fund, the dividends and the like, that is taxed at the fund level, not at the

01:58level of the individual, which makes it hard to apply an individual tax rate or higher tax rate to some

02:04members of that fund than others. And all the policy debate over the last few years has really been about how the

02:10government can actually determine that liability in a way that doesn't capture unrealised capital gains

02:16because the way they've planned to do it is to basically look at the balance at the start of

02:19the period, the balance at the end, take the difference as the increase in earnings. That

02:24captures unrealised gains. They're going to have to come up with a different approach. We don't know

02:27what that is yet and whatever it will be will probably have its own wrinkles or its own costs

02:33that we'll only see and be able to evaluate once the government says which way they're going to go.

02:37Yeah, so a lot to work through on that. Now, you mentioned a moment ago, this super top up for

02:42low income earners. You know, what determines that amount? What do they have to be earning under?

02:48And what exactly does it mean for them? Yeah, so superannuation for most people is taxed,

02:53whether it's contributions that compulsory contributions you must make that your employer

02:58makes on your behalf into your super fund, they are typically taxed at 15%. But low income earners,

03:03those earning less than $45,000 a year will, in future, be only taxed at a personal income tax

03:10rate of 14%. So they would be paying a higher rate of tax on their super contributions and on their

03:14earnings. To offset that, there has been a low income superannuation tax offset that basically

03:20refunds that tax that is historically applied to people with earnings of up to $37,000 a year.

03:26That is going to be extended to $45,000 a year. And the total size of the offset,

03:31the maximum value is going to go from $500 to $810 a year. In short, the reason the government is

03:37doing that is it basically means that anyone earning less than $45,000 a year, they get some

03:41tax break on the compulsory contributions that they are forced to make. They're not paying a higher tax

03:46rate on those super contributions than what they are on their wage and salary income that goes into their

03:50pocket each week. And now you already mentioned that second threshold of $10 million. If we go

03:56to that initial threshold of those with the earnings above $3 million in their super,

04:02of course, we know that $3 million today, for those in super, that's very few people,

04:06but $3 million today is very different to $3 million in 10 years, 20 years time.

04:10It's being indexed, so it should continue to affect a small proportion.

04:16That's right. So it affects about 80,000 people today. So we are only talking about a relatively

04:20small change that affects 0.5% of all super fund members in Australia. We never saw the need to

04:25index it because the threshold really should have been lower than $3 million in the first place.

04:29On our numbers, if it was left unindexed until 2040, so five federal elections time, it would be

04:36worth the equivalent of $2 million today, which is the point at which we thought it should be indexed.

04:41So, you know, the claims that have been made that this was somehow going to affect middle

04:45Australia or most Australians within a couple of decades time was incorrect, even by 2055. So,

04:52you know, in 10 plus federal elections time, we estimated it would have only affected one in 10

04:57Australians. And it was always going to be indexed at some point. The personal income tax scales are

05:02not indexed. So not indexing these thresholds is actually pretty normal. So the consequence of the

05:07government's decision is that they'll collect less revenue over time because it'll only affect that

05:12really small number of people. Those with balances between say $2 and $3 million that probably should

05:17have been picked up in the system over time will not be. And that ultimately means governments

05:22have to collect high taxes from elsewhere or Australians enjoy poorer levels of service or we

05:27have higher levels of government debt to compensate. What would you most like to see next on super tax

05:32reform? Look, there's about $10 billion a year of concessions in the system that really

05:37don't serve any genuine policy purpose. They're helping those that are never going to end up

05:42anywhere near the age pension are already going to are well on track to have a comfortable retirement.

05:46The big one is the fact that once you hit 60, the first $2 million that you have in your super fund,

05:52the earnings on that are tax free. It means that most Australians are checking out of

05:55the income tax system when they hit retirement. That's not really sustainable in a world of an aging

05:59population. So taxing those earnings in retirement, the same as we do when we're working.

06:04So your and my earnings on our super fund are taxed today, but when we hit retirement,

06:08they won't be. That would raise north of $6 billion a year. And then there are a series of

06:13changes you could make to how the tax breaks work for contributions that could raise easily another

06:18$4 billion a year. And that's, you know, I think what comes out of the conversation,

06:22the reaction I have to yesterday's announcement is this is probably the easiest super tax change to make

06:27and the government has taken a backward step. Everything else from here will be harder,

06:32but super tax reform is critical. It's the key that unlocks the door of broader tax reform in

06:36Australia, because if we're going to reduce income taxes, if we're going to reduce taxes on corporates,

06:41if we're going to try to fix the budget, then there's few better candidates than

06:44super tax breaks in Australia today.

06:46Brandon Coates from the Grattan Institute. Thanks for joining us.

06:49Brandon Coates from the Grattan Institute. Thank you.

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