A bunch of ‘bunchers’: The tax-time trick the rich love to use

Thousands of the nation’s highest-paid people are using accountants or trusts to avoid tax on their superannuation contributions, undermining the tax system and forcing ordinary wage and salary earners to bear more of the nation’s tax burden.

Research by economists Andrew Carter and Robert Breunig from the Australian National University shows there are up to 11 times as many people as there should be declaring an annual income of just under $250,000.

There are too many people declaring income just under $250,000 to avoid Division 293 tax.Credit: Louie Douvis

About 7000 more people are just below the $250,000 mark, the economists estimate, with most either using trusts, accountants or declaring themselves to be self-employed.

People who earn more than $250,000 – about 2 per cent of all taxpayers – are hit by the Division 293 retirement income contributions tax, an extra 15 per cent tax on concessional super contributions.

Breunig and Carter said people with the ability to organise their finances were “bunching” just below the critical change in the tax treatment of super at the expense of those who did not.

“The ability of some individuals to avoid the tax while others pay it undermines the tax system design principle of horizontal equity, given some groups are more able to bunch than others,” they found.

The original Division 293 income threshold was set at $300,000 by then-treasurer Wayne Swan in 2012.

As part of his reforms to superannuation, then-treasurer Scott Morrison reduced the threshold to $250,000 in a move that he forecast in the 2016-17 budget would raise an extra $2.5 billion in revenue over the next four years.

At the time, the government said the lower threshold would “improve sustainability and fairness” in the super system while allowing people to “accumulate significant amounts of tax-advantaged concessional superannuation”.

It was criticised by elements of the personal finance and superannuation sector as an unfair attack on higher-income earners.

But many of those people managed to find a way around the impost.

Breunig and Carter found that when the threshold was cut to $250,000, there was a spike in the number of people declaring an income just under that level.

Women, the self-employed, and those with trust income were all far more likely to have incomes under $250,000.

People with trust income were seven times more likely to have an income under $250,000 than if Division 293 did not exist, and self-employed people were 11 times more likely.

Before the changed threshold was introduced, there was no spike in people just under the $250,000 income level.

Professor Robert Breunig of ANU says people on high incomes using the tax system to avoid tax means other Australians pay more.Credit: Rhett Wyman

“Those who are able to adjust their income readily use that ability to target the Division 293 thresholds,” Breunig and Carter found.

“Those who continue to bunch at the old threshold are those who have lower ability to adjust their income or shift income across years (for example, salary and wage earners).”

When Division 293 was first introduced, the researchers found it took a few years before people started bunching their incomes below the $300,000 mark. When the shift to $250,000 took place, the move by thousands to declare income just below that point was much quicker.

Some critics of the tax system have claimed that high tax rates encourage people to work less hard, to avoid their income being hit by a higher threshold.

But Carter and Breunig found high-income earners managed their tax arrangements in response to thresholds, not by changing their working hours.

“We demonstrate that bunching is driven by tax planning, not by labour supply responses,” they found.

Bunching is relatively common across the personal income tax system, where thresholds change.

Research headed by Breunig earlier this year, based on 189 million tax records collected between 2000 and 2018, found people using family trusts or declaring themselves as self-employed were up to 50 times more likely to have an income just below a change in thresholds.

The stage 3 tax cuts that begin on July 1 will include changes to thresholds, including the first shift in the top rate of 45 cents that will apply to incomes above $190,000. Since 2008, the top rate has started at $180,000.

Breunig and Carter said that if the goal of Division 293 was to reduce the concessional treatment of superannuation concessions, it would make sense to reduce the gap between the $250,000 threshold and that of the top marginal tax rate.

“This would also move closer to a system where taxpayers, rather than paying a flat tax on superannuation contributions, pay their marginal tax rate less a flat discount,” they said.

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