Taxation in superannuation and the placement of tax concessions have recently been hot topics of debate. With assets in superannuation now sitting around $2 trillion, and having access to significant tax concessions, the discussion is warranted and a debate certainly needs to be had. However, we shouldn’t jump to the conclusion tax concessions in super are bad or that they are all necessarily misplaced or misdirected. Simply the discussion needs to be had and a proper analysis undertaken.
Why do we have tax concessions?
Tax concessions, whether in super or in other areas, are offered primarily to drive consumer behaviour. That is, they provide the incentives to taxpayers to behave in a certain way, whether that be to contribute more to super or to withdraw their retirement savings as an income stream rather than a lump sum. Other than the compulsory aspects of our super system people can generally choose whether or not they take up available concessions.
Setting the objectives
If tax concessions are designed to drive behaviour, we need to have a good understanding of what the desirable behaviours actually are. Fundamentally we need to be clear about what we are trying to achieve with our retirement incomes system in order to design a tax system with appropriate incentives (or disincentives) to drive behaviour to reach those objectives.If we can’t clearly define what the outcome needs to be, how can we know whether the placement of tax concessions are in order and at what level tax rates needs to be? This has to be the first priority in working through taxation issues in superannuation.
There may well be winners and losers in the placement of tax concessions. Some of these will fly in the face of what may be perceived as equitable. Equity will certainly need to be considered as part of the overall debate, however, an acceptance is needed that there may not be alignment with where tax concessions are placed to achieve long-term objectives. We also need to ensure equity is considered across a broader spectrum of areas – that is, if someone misses out on tax concessions in super, they may well pick up benefits through the age pension.
The 2015 debate
It is rather unfortunate the debate on taxation in super is frequently occupied by stories of little or no substance. The notion of ‘uber’ super balances accessing significant tax concessions is a prime example. While these may exist, they are very few and are unlikely to ever occur again due to the limitations of amounts that can now be contributed to super.
There has also been talk of placement of tax concessions, that in the interests of fairness they need to be given to lower income earners and removed from middle and higher income earners. The problem here is many lower income earners may not necessarily be in a position to avail themselves of the tax concessions, while those with more disposable income are able to be incentivised to save in super and are more likely to be the ones to be self-sufficient in retirement.
Things to consider
Lower income earners may be better helped firstly by ensuring they are not disadvantaged by being forced to forgo income, on which they would pay no or little income tax, and to have that income placed in a superannuation fund that is then taxed at 15 per cent. This is what happens without a low-income superannuation contributions scheme, which is due to be removed for contributions from 1 July 2017.
Tax in SMSFs
The myth that SMSFs have access to special tax concessions needs to be busted once and for all. Better management of concessions available to all super funds is what SMSFs can achieve. This is not a bad outcome and, to the extent Australians are better engaged in maximising their retirement savings, should be actively encouraged.
Use of tax concessions is not a bad thing and the assertion people are abusing the system by maximising the opportunities available to them within these laws needs to stop. What we need to do is be very clear about what we want from our retirement incomes system in the long term and ensure the tax concessions are offered to drive behaviour that will achieve the desired outcomes.