Call to cut generous tax breaks for rich super savers

BILLIONS of dollars of superannuation tax breaks are being given to the Australians who need them the least says an independent think tank.

BILLIONS of dollars of superannuation tax breaks are being given to the Australians who need them the least.

A new report by independent think tank Grattan Institute says the current super system is “expensive and unfair” because most of its $30 billion in tax concessions this financial year will go to people on high incomes.

It recommends dramatic changes that slash the cap on tax-deductible super contributions from $30,000 to $11,000, a lifetime cap on other super contributions of $250,000, and a flat 15 per cent tax on earnings in retirement, which are currently tax-free.

Grattan Institute CEO John Daley said these moves were targeted to ensure that high income earners did not get more tax breaks than anyone else.

“For the vast majority of retirees this will mean no change, but for a relatively small proportion — overwhelmingly those on higher incomes — this will mean they start to pay a bit more tax,” he said.

“People on higher incomes don’t need the super system to encourage them to save. They are going to save anyway.”

The report says super tax breaks are growing faster than the economy and tax collections, and are expected to reach almost $40 billion by 2018 as a population bulge of people aged 55-60 switches to a zero-tax environment over the next five years.

“Two thirds of superannuation earnings tax concessions for those aged over 60 go to the 20 per cent whose annual incomes are above $87,000,” it says.

Older households have captured most of the growth in Australia’s wealth over the past decade, the report says.

“Despite the global financial crisis, households aged between 65 and 74 years today are $400,000 (or 27 per cent) wealthier in real terms than households of that age 10 years ago. Meanwhile, the wealth of households aged 25 to 34 years fell by $2000 (or 4 per cent).”

Mr Daley said the Turnbull Government had “explicitly put superannuation on the table”. He said everyone at the recent National Reform Summit agreed that super tax breaks should be pulled back.

Many of the most generous tax breaks started in the final Federal Budgets of the Howard Government.

Australian Institute of Superannuation Trustees chief executive officer Tom Garcia says changes will be needed to improve the fairness of super. Picture: Mark Stewart

“Because the superannuation system is so complicated, people at the time and indeed now didn’t realise how much was being given away to rich old men,” Mr Daley said.

Australian Institute of Superannuation Trustees CEO Tom Garcia said it was not fair or sustainable that high income earners who were saving for retirement effectively received more government assistance than people receiving the age pension.

“Changes will be required to improve the fairness of super but there needs to be a lot more debate before we settle on the best way to do this,” he said.

“We need to get the balance right between improving fairness and cutting back on overly generous tax concessions while still providing incentives for working Australians to save for their retirement.”

Mr Garcia said tax reform would produce winners and losers. “It will require political leaders who are not only committed to fairness in super but who also have the ability to sell the need for change to the public,” he said.

KEY RECOMMENDATIONS

1. Limit concessional super contributions — such as salary sacrifice — to $11,000 per year, which would improve the Federal Budget balance by $3.9 billion a year. “Eighty per cent of contributions above this level come from the 20 per cent of taxpayers with the highest incomes,” the report says.

2. Super contributions from after-tax income, known as non-concessional contributions, should be limited to $250,000 over a lifetime. “Of the $30 billion in post-tax contributions each year, around half are made by just 200,000 people who already have at least $500,000 in super.”

3. Super earnings in retirement, which are currently not taxed, should be taxed at 15 per cent. “More than half the benefit of tax-free earnings in retirement goes to the wealthiest 20 per cent of retirees.” A flat tax on super earnings would improve budget balances by $2.7 billion today and much more in future, the report says.