A war is currently raging in the media as different interest groups battle over the management of and access to the almost $2 trillion of current savings deposits that continue to grow strongly. Truth is often the first casualty of war, and this is reflected in some of the strategies being applied in the media battle.
A widely held belief has emerged that the cost of the current superannuation tax policy is $30 billion a year, the policies vastly favour the rich, and that with a stroke of the pen this cost can be removed to fix the national budget. While the Self-Managed Independent Superannuation Funds Association (SISFA) agrees some policies are excessive and favour higher-income groups disproportionately, the amounts reported as the cost are exaggerated. Treasury officials, however, believe the cost to be less than $10 billion a year, with the inflated cost estimates from the government resulting from an inappropriate benchmark.
Savings should be taxed at a lower rate than income for two key reasons. Firstly, the effective rate of tax on the real value of savings increases the longer an asset is held, so a lower tax rate is required to compensate. Secondly, superannuation is a form of deferred income. People should be taxed on superannuation at the rate applicable as if the income was spread over their entire life, not just their working life.
Superannuation requires a lower tax rate because it is a form of long-term savings. Taxes on savings income, including taxation of inflationary gains, discriminate against taxpayers who choose to defer consumption and save. The longer the person saves and reinvests, the greater the implicit tax on future consumption.
The ideal taxation of superannuation is a regime that encourages people to spread their lifetime earnings and consumption. Exempting contributions and earnings, but taxing benefits is now acknowledged internationally as the way to achieve this smoothing of savings and benefits payments.
The trouble in Australia is that after taxing contributions and earnings for more than 20 years, those who have paid that tax have a strong sense of personal ownership of the funds and consider it wrong to tax their money again when it is paid out as a benefit. The change would be a huge administrative challenge and a significant loss of revenue in the transition.
A sensible recommendation is to tax superannuation contributions at the member’s marginal tax rate, less 20 per cent. Most taxpayers have a marginal tax rate of 35 per cent, so a 20 per centreduction means most are still paying 15 per cent. People with higher taxable income will pay more and people with lower taxable income will pay less. It is an incentive to contribute that is also fairer across the range of taxable income levels in the community. The contributions should not be taxed within the superannuation fund.
SISFA believes the existing contribution caps should not be reduced. Proposals that dramatically reduce the contribution caps (for example, the Grattan Institute’s $11,000 suggestion) are inappropriate, and become less appealing to the public once the exaggerated claims of the cost of superannuation are removed from the debate.
Existing non-concessional contribution caps should remain, and the three-year bring-forward rule should be increased to five years as a practical way to compensate for the reality of irregular super contributions over a member’s lifetime. SISFA’s long-held policy of a lifetime concessional contribution cap should be set at an adequate amount to enable proper retirement funding. This would enable the removal of current concessional contribution restrictions for people over 65 who are not gainfully employed or 75 years old.
SISFA strongly recommends the immediate abolition of the 10 per cent rule for contributions to give all salary earners greater flexibility. Our members tell us many employees would love the option to contribute spare money at the end of the year without having to plan salary sacrifice arrangements earlier.
All earnings, income and capital could be taxed in superannuation funds at a low rate (5 per cent or 7.5 per cent). Applying a 5 per cent tax rate to superannuation funds in accumulation and pension phase will provide a strong incentive for people to save through superannuation.
It is SISFA’s view that to support a low tax on earnings and a pension/income stream not being taxed, the annual pension income be included in the recipient’s assessable income to determine the marginal tax rate applicable to their assessable income, excluding the pension.
Australians should be able to access their superannuation savings at 60. The preservation age should not be increased for those born after 30 June 1964. SISFA strongly supports a superannuation system with minimum regulation of how each Australian manages their savings in retirement.