Australia’s superannuation regime is the envy of many developed countries around the globe as they collectively struggle to cope with how best to provide for an ageing population.
The generous taxation concessions afforded members of Australia’s superannuation and pension funds (particularly those closer to, or already in, retirement) are world-class and result in superannuation being a self-selecting alternative for retirement savings in Australia.
However, these same tax concessions have recently drawn staunch – and some would argue justifiable – criticism in certain quarters.
The bulk of the complaints argue that the tax concessions available under super most favour those who are least in need of the support of the public purse.
The objections are aimed at taxation benefits afforded in both the accumulation and pension phases of our superannuation system.
Addressing the latter first, since there is no cap on how much can be accumulated or retained in an account-based pension fund (ignoring the contribution caps and minimum pension obligations), the advantage of the ability to retain a pool of funds – the earnings of which are not subject to tax – obviously favours those with the greatest capacity to contribute.
However, given that there are caps on how much can be contributed each year, you would have thought that this already provided sufficient limitation on the capacity of the wealthy to take ‘unfair’ advantage of the super regime.
With respect to taxation benefits in the accumulation phase, the argument in favour of changing the current arrangements is that, because concessional contributions are deductible at the marginal tax rate of the ultimate contributor (ie. the member), they afford the greatest tax benefit to those in the highest tax bracket.
Here, this argument has a degree of merit, as those in the top tax bracket gain more advantage from a concessional contribution than those whose marginal tax rate is lower.
It is hard to make a legitimate case for superannuation tax concessions giving more benefit to higher income earners, yet that is precisely the case under the present system.
The solution to this conundrum is so patently obvious that it beggars belief that the system has not changed in the 35 years since tax deductions for super contributions were introduced by then federal treasurer, John Howard.
Instead of concessional contributions being tax deductible, they should be subject to a tax rebate.
This would immediately negate the disproportionate taxation advantage afforded to higher earners and make the tax benefit of a concessional contribution the same per dollar for every contributor, irrespective of their marginal tax rate.
Alternative proposals that have been mooted include the suggestion that superannuation guarantee contributions should no longer be treated as concessional.
Hopefully, this suggestion will only be afforded the scant consideration it deserves.
Given that workers are compelled to have a proportion of their ‘earnings’ compulsorily ‘garnished’ for their retirement, which could be more than four decades into the future, making them pay the same amount of tax on this money as they do on the income they actually get to use immediately would be an absolute travesty.
There is no argument that the public purse should not be subsidising the capacity of the wealthy to enhance their already privileged status.
That said, any measures aimed at curtailing the benefits afforded this sector of the community should not simultaneously either penalise those who are genuinely in need of the taxation concessions currently available under our superannuation system, nor negate the tax benefit afforded to what is, effectively, a legislative indenturing of a proportion of their earnings.
The consolation of a tax benefit is a fair trade-off for the lack of access to these funds and, as such, these benefits should be sacrosanct.
Wayne Leggett is the principal of Paramount Wealth Management.
