With the tax white paper slowly winding its way through the maze of government processes, I was reminded recently of that famous quotation: “Those who cannot remember the past are condemned to repeat it.” What, you may well ask, is the connection between a 1905 quote from Spanish-born and American-educated philosopher, poet and novelist George Santayana and the government’s tax white paper in 2015? Let me explain.
In 1984, the Hawke government initiated a tax white paper. By the time the process ended in the second half of 1985, there were new taxes on fringe benefits and capital gains, the wholesale sales tax was streamlined, and personal income tax rates were cut. True, a consumption tax was ruled out, but nonetheless it was a major overhaul of our tax system.
Surely, the history lesson is that when governments embark on these wide-ranging policy exercises, then a responsible organisation with a significant stake in the outcome is duty bound to frame its recommendations to the inquiry having regard to the long-term viability of the system. Certainly this was the view of the SMSF Association when developing its response to the current tax white paper. It is our considered opinion the status quo with regard to tax as it relates to super would be the optimal outcome, but to presume this would be case would be to ignore history.
The starting point in the SMSF Association submission is what we believe super’s core objective to be: providing income in retirement to substitute or supplement the age pension. In addition to achieving this important goal, an equitable and sustainable super system that is accepted by policymakers and the public alike is needed to underpin the system’s stability. Bearing this in mind, some adjustments to the current tax settings may be needed to ensure the system is equitable and sustainable in the long term.
Let me be clear on this. Our submission did not support increasing tax on contributions or on super earnings in either the accumulation or retirement phase to improve equity outcomes. This is because providing appropriate incentives to contribute to super and retain funds in super is needed to ensure people save for retirement and have adequate retirement savings. We believe increasing tax on contributions or earnings will undermine the ability for people to save and accrue adequate retirement savings, placing more pressure on the age pension.
But history suggests you need a plan B. As an alternative, it may be appropriate to implement a light tax on super benefits that exceed a very generous tax-free threshold. (A lengthy transition period would be critical.) This approach would claw back tax preferences that are ‘excessive’ to achieving the key objective of super while still allowing people to build adequate retirement savings without additional taxes on contributions and earnings. It would also allow people to determine how they achieve a dignified retirement as any tax would be paid in their personal capacity. Certainly it is more preferable than a more complex tax on earnings or high account balances inside super.
Such a proposal would not be a disincentive to saving through super, especially where an appropriate tax-free threshold is set. It would also discourage withdrawals of lump sums from super, ensuring retirement savings are drawn down in a sustainable manner. Lightly taxing retirement benefits that exceed a very generous tax-free threshold may also allow for more complex equity measures, such as division 293 tax, to be removed from the super system.
All recommendations to the tax white paper were made within the framework of three overarching policy objectives. First, that super tax policy should not be used as an instrument to raise government revenue to address budget deficits over the short to medium term. Second, while recognising the inconsistent tax treatment of savings in our tax system, any changes to how savings are taxed need to carefully consider the existing policy rationale for the relevant tax treatment. Third, any changes to the taxation of super should not be viewed in a siloed manner, but with a view as to how they would interact with the broader retirement income system.
There are no easy policy solutions with tax, inevitable when you consider how it directly affects everyone. But what we do know is governments of all political persuasions keep changing the laws relating to tax, and organisations that have a constituency directly involved in these outcomes have a duty to respond accordingly and recommend responsible measures balancing members’ interest with the system’s long-term viability.