Tax revenue from superannuation funds revised lower

Tax revenue from super funds is coming in lower than expected as a result of weaker fund earnings and the preference of Australian investors for local shares that generate franking credits.

The budget says expected superannuation tax fund receipts have been revised down by $3.4bn for the 2024-25 financial year.

Tax revenue from super funds is coming in lower than expected as a result of weaker fund earnings and Australians’ preference for local shares that generate franking credits.

The budget says expected superannuation tax fund receipts have been revised down by $3.4bn for the 2024-25 financial year since the Mid Year Economic Forecast last December, and $12.6bn across the five years from 2023-24 to 2027-28.

Projections of tax revenue from super funds for the 2023-24 financial year have been revised down from $15.7bn in the MYEFO to only $11.7bn.

The Treasury said the revenue projections have been revised down in line with weaker fund earnings and higher than expected refunds.

It says “weakness in tax from fund earnings is expected to persist over the forward estimates… with an updated outlook for net foreign income, capital gains and foreign exchange gains and losses contributing to the downgrade”.

The comments are interesting given that super fund earnings have been recovering from the shock of the market collapse during Covid.

The Treasury estimates do not break down how much of the lower than expected revenues come from weaker than expected earnings by super funds, and how much has come from higher than expected refunds as a result of the impact of franking credits.

Despite the lower than expected figures, total expected tax collections from superannuation will still come in more than 10 per cent higher over the current financial year, reflecting a recovery in super fund earnings from the market falls of the past.

Total super fund tax revenue was down by 61 per cent in the 2022-23 financial year as a result of higher interest rates and soft investment performance.

The budget estimates for the 2023-24 financial year from super fund taxes of $11.7bn have come in even lower than the $12.1bn estimated by Deloitte in its latest budget monitor issued on May 1.

Deloitte attributes the lower than expected earnings as a being result of “the low tax rate on earnings compared with a strong preference for Australian shares (and franking credits) and a low effective rate of tax on capital gains”, which it says means the total tax take from superannuation “is struggling to keep pace with rapid growth in the sector”.

The lower than expected revenues come at a time when the superannuation sector is continuing to grow as a result of the increase in the superannuation guarantee, which is set to rise to 12 per cent by the middle of next year.

The unexpectedly strong labour market has also seen an increase in total contributions to the super fund sector this financial year.

The news of lower than expected revenues from the superannuation sector comes at a time when the government is pushing ahead with its plans to impose a 30 per cent tax rate on super funds with balances above $3m.

The higher tax rate would be levied on unrealised gains - a move which has drawn strong opposition from the self-managed superannuation fund sector and the farming sector, which has been concerned at the impact it could have on farmers who have their properties held in their super funds.

While it was announced in early 2023, the enabling legislation for the proposed tax changes was still in the House of Representatives this week, with the Greens calling for the higher tax rate to be imposed on funds of more than $2m instead of $3m.

The government has estimated that the proposed higher tax rate, which is set to come into force in July 2025, would bring in an extra $2bn in tax revenues in the 2025-26 financial year.