The “hysterical” criticism of Labor’s plan to trim tax breaks for people with $3m in retirement savings risks undermining needed reforms to make the superannuation system more equitable and sustainable, leading experts say.
The authors of two previous government reviews into super suggest the federal government’s proposal might not be perfect but it is “the right way to go”.
UnderLabor’s plan, about 80,000 Australians – the wealthiest 0.5% of savers – would pay an extra 15% on earnings of super balances over $3m.
Earnings on investments inside super are taxed at 15% in the accumulation phase and zero in the retirement phase.
The proposed legislation, whichthe Albanese government hopes will pass the Senatewith the assistance of the Greens, would raise $2bn in additional revenue once fully operational, according to Treasury estimates.
Despite impassioned objections to the reforms, the lead authors of two major reviews into Australia’s complex superannuation system have backed the Albanese government’s efforts to begin winding back generous concessions on earnings thatoverwhelmingly favour the wealthiest savers.
Mike Callaghan, who deliveredthe Retirement Income Reviewin 2020, said his report clearly identified the need to make the super system more equitable.
“We particularly said there is a need in terms of equity to address many of the concessions that favour high-income earners, and in particular the concessions on earnings,” Callaghan, who now serves as the chair of the Commonwealth Grants Commission, said.
There was also a need to make the super system more sustainable in the long term, he said.
The 2020 review projected that the cost of superannuation concessions would continue to climb over time, and that the driving factor was the tax breaks on super earnings.
While declining to comment specifically on Labor’s tax policy, Callaghan said “focusing on concessions on super earnings was the right way to go”.
And amid the heated debate, he said “don’t lose sight of the fact that trying to improve the equity of the system is important”.
Callaghan said while his report did not make recommendations, it noted in passing that extending the existing 15% earnings tax into the retirement phase “would certainly simplify the system, and it would have a very much bigger budget impact”.
There are two controversial elements to Labor’s new super tax.
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The first is that the additional levy will be applied to notional changes in the value of the super fund, meaning that those with large balances will need to pay a cash tax on their “unrealised” super gains.
The second is that the $3m is not indexed, leading to charges that over the coming decades it won’t just be the wealthiest 0.5% of Australians caught by the change.
Jeremy Cooper led a major review into the country’s superannuation system 15 years ago, delivering theSuper System Review reportin July 2010.
“Super concessions are really heavily tilted towards the wealthy,” the former Asic deputy chair said.
Cooper said Labor’s proposed tax changes were imperfect but still worthwhile, and some of the arguments against the change had been “embarrassing”.
Fears that not indexing the $3m threshold would catch an ever higher number of Australians in the policy’s net were overblown.
“The hysteria about what will happen in 30 years – have you ever seen a super rule that lasts 30 years? It’s been a bit embarrassing, frankly.
“The unrealised gains, that’s controversial and problematic. But if you didn’t do it that way, you probably wouldn’t raise very much tax.”
Critical front-page newspaper articles have warned that taxing unrealised gains could mean cash-poor but asset-rich farmers would have to sell their farms to raise money to pay the extra tax.
Cooper, however, said that operating businesses and owning farmland through super looked to be “entirely about tax minimisation”, rather than saving for retirement.
The introduction of the transfer balance cap, which began at $1.6m in 2017-18, went some way to remove the excesses of the system by restricting the amount of money that could be taken into the retirement phase where earnings are tax-free.
“That was a Coalition government that did that, and that didn’t get anywhere near the shrill complaints this is getting. And it was a much lower threshold than $3m,” Cooper said.
Bob Breunig, the director of the ANU’sTaxand Transfer Policy Institute, said that residential property and super wealth were “undertaxed”, and agreed that the super concessions were “really heavily tilted towards the wealthy”.
“Our tax and transfer system hasn’t adjusted for the fact that old people are wealthy and it needs to adapt to that,” Breunig said.
He gave short shrift to complaints in the media about farmers being forced to sell farms to pay for the extra tax: “Running businesses and property portfolios inside super, they shouldn’t be doing that, that’s not what it’s for.”
But Breunig, one of the country’s leading thinkers on tax policy, said he would prefer Labor’s bill not pass into law, in the hope of a better future reform to address the issues in the system.
“As a purist, I don’t like taxing unrealised gains. If it somehow generated a lot of revenue or made things simpler, I would be in favour of it. But there’s not much revenue, and it makes things more complicated,” he said.
Breunig said he favoured a simple limit on how much could be saved within the super system, for example $3m or $4m, and that savers with more than that should be forced to withdraw the excess amount, without penalty, into assets outside super.
Former AMP chief executive Andrew Mohl has argued in favour of such a cap.
Independent economist Chris Richardson has also said that “in a better world we’d have had a 15 percentage-point discount to marginal rates on tax on the way into super, as well as a higher rate of tax on earnings”.
“Given we’re not in that world, I think having the $3m super tax is better than not having it, even allowing for the two problems [of] no indexation and taxing unrealised gains,” Richardson said.