The Grattan Institute has put forward a package of policies to address “excessively generous” tax breaks on superannuation which could save the budget at least $11.5 billion per year.
According to a new report released by the think tank ahead of the budget in May, super tax breaks currently cost $45 billion per year or approximately 2 per cent of GDP.
“With the federal budget deep in deficit and big spending pressures looming, curbing super tax breaks should be a priority,” the report said.
Grattan argued that super tax breaks heavily favour those who do not need them, as two-thirds of the value of these tax breaks only benefit the top 20 per cent of income earners.
The think tank also noted that much of the boost to balances from tax breaks never ends up being spent in retirement. One-third of all withdrawals from super are expected to be via bequests by 2060, up from one-fifth at present.
“Super has become a taxpayer-funded inheritance scheme,” commented Grattan Institute economic policy program director and report lead author Brendan Coates.
“Reining in super tax breaks is a responsible way to boost government revenues in a world where the government has committed to higher spending on defence, healthcare, aged care, and disability care.”
While the government has begun consulting on its plan to reduce tax concessions available to those with super balances above $3 million, Grattan has urged it to go even further.
Rather than a $3 million threshold, Grattan has instead suggested that earnings on balances above $2 million should be taxed at 30 per cent. This would be expected to deliver $3 billion in annual savings, compared to $2 billion under the government’s proposal.
“Australians with more than $2 million in super should not benefit from generous tax breaks on earnings that can easily exceed the age pension each year,” the think tank’s report said.
“Balances of more than $2 million make up a tiny fraction of all accounts but hold nearly as much money as the two-thirds of Australians with less than $100,000 in super.”
Grattan has proposed that all super earnings in retirement should be taxed at 15 per cent, or the same rate as earnings before retirement. This measure would affect an estimated 2 million retirees and would save the budget between $5.3 billion and $7.3 billion per year.
“Australia’s super system won’t be sustainable so long as most superannuation earnings remain tax-free in retirement. Nearly 90 per cent of the tax breaks on retirement earnings go to the top 20 per cent of retirees by wealth,” the report said.
The think tank said that division 293 tax rules, which apply to the pre-tax super contributions of high income earners, should be tightened, with the current tax rate increased from 30 per cent to 35 per cent and the threshold lowered from $250,000 to $220,000.
Approximately 213,000 taxpayers would be affected by the new threshold, Grattan said, while the higher tax rate would affect approximately 707,000 taxpayers.
Other proposals put forward by Grattan include reducing the pre-tax contributions cap from $27,500 to $20,000, saving $1.6 billion per year, and eliminating government co-contributions and pre-tax cap carry-forwards for an annual saving of $1.1 billion.
Alongside these potential cost-saving measures, the think tank also called for an expansion of the low income super tax offset (LISTO). Grattan recommended increasing the current threshold from $37,000 to $45,000 and the maximum offset from $500 to $800 at an annual cost of $530 million.
“The warning signs are everywhere: Australia’s current superannuation system is unfair and unsustainable,” Mr Coates concluded.
“The reforms we recommend would make the system fairer and the budget stronger.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.