Our athletes weren’t the only group to win gold on home soil in 2000. In the year of the Sydney Olympics, baby boomers snared world-beating tax breaks. Indeed, they’ve been so potent the share of seniors who pay income tax has collapsed since, falling to about 15 per cent from 27 per cent in 1995.
As the postwar generation eyed retirement, the Howard government introduced the first of two rounds of extraordinary tax concessions that overwhelmingly favoured seniors, blowing massive holes in the budget.
It wasn’t just, in a world first, enacting unlimited refundability of franking credits; the government in 2000 also snuck in the seniors and pensioners tax offset (SAPTO). This little-known reform furnished over-65s with a $32,000 tax-free threshold, higher than in any other OECD country, and about 70 per cent higher than what younger Australians face.
L’oreal shampoo’s legendary slogan — “because you're worth it” — appears to have worked a little too well Down Under: the May 2000 budget speech gave no rationale for either policy.
“If you’re single, you can earn up to $32,280 in the 2019 financial year in non-super income without paying a cent of tax … if you’re a couple, you can potentially earn $57,950 before income tax is payable,” says online resource Superguide.com.au. “The tax consequences of the superannuation rules are fantastic for those senior Australians eligible for SAPTO,” it adds, candidly.
The piece de resistance came in 2006 when Peter Costello removed complicated taxes on withdrawal of savings from super funds in retirement. That made sense; they were a dog’s breakfast. But in a coup for boomers, he also exempted earnings of super funds in “pension phase” — even from the modest 15 per cent flat income tax that all other super funds pay.
The combination has been awesome: there aren’t many countries where a couple can have a $3 million home, $3.2m in financial assets (in super), a further $1.1m outside of super, yet pay zero income tax and face a marginal income tax rate of 15 per cent.
That’s right. For all the bleating about onerous $1.6m caps, any surplus can be tipped into an “accumulation phase” super account, where earnings are taxed at 15 per cent as they are for everyone else.
Our $7.3m couple, “low-income earners” according to the tax system, won’t have to pay the Medicare levy either, although they will receive a higher private health insurance rebate. “A senior only pays the full 2 per cent Medicare levy if his or her taxable income is more than $42,172, whereas a working Australian pays in full after earning $26,668,” concludes the Grattan Institute in a 2016 analysis. “Aside from households aged under 25 (who now earn less because they are more likely to participate in higher education), senior Australians are the only age group to pay less personal income tax today than they did 20 years ago,” it adds.
How can we afford these concessions, $1 billion a year in forgone revenue? Well, take a bow everyone else. A parent on $190,000 supporting a spouse and three kids is paying 47c in the dollar marginal rate including the full Medicare levy. They have to leave the house to earn their income.
If these “high-income earners” are the children of our $7.3m “low-income earners”, they’ll be fine, eventually. If they aren’t, accumulating $1.6m is going to be a real struggle, even for families in the top tax bracket, given concessional contribution caps for super have been slashed to $25,000 a year.
Call me a revolutionary but paring back these gold medal tax concessions and using the revenue to cut marginal tax rates for all would be fairer, better for economic growth and would allow us to blast away the increasingly absurd complexity throughout the tax system. Every dollar paid out as a refund to, or not raised from, a well-off senior is a dollar of tax that must be raised from others. You don’t need to be philosopher Jeremy Bentham to see the younger family could do with the tax break more.
It’s a toss-up which of these reforms was worse. Making franking credits refundable at least has the whiff of tax purity about it, taking Labor’s 1987 tax reforms to their logical conclusion.
The higher tax-free threshold, though, was blatant pork barrelling. Australia’s tax-free threshold is too high, requiring higher marginal rates that sap incentive to work. Canada, the US and New Zealand all sensibly tax from the first dollar of income.
The worst, I think, was exempting superannuation in the pension phase from all income taxation, which does nothing to incentivise work because the recipients are already retired. Actuarial firm Rice Warner projects super assets in pension phase to rise from $825bn last year to $1.33 trillion by 2033.
A common single rate of earnings tax for super funds makes much more sense, not least because it removes the need for super funds to maintain two sets of accounts (one for accumulation assets, the other for pension-phase assets). Retirees would barely notice a 10 per cent rate, whereas workers are increasingly noticing 39 per cent and 47 per cent (49 per cent if Labor wins the election).
Opposition to Labor’s proposal to end refundability of franking credits would be less furious if more people had tax liabilities in the first place, against which they could apply franking credits. The SAPTO and exemption of superannuation funds from any income tax has created a huge and growing class of people who pay no tax, potentially for up to 30 years.
A tax system that doesn’t sufficiently put the burden of tax on those most able to pay will lose public confidence. We have shifted the burden too far on to younger workers and families, who might not even make it to retirement. There’s a 7.5 per cent chance a 25-year-old doesn’t even make 65, when people can check out of taxation for the rest of their lives.
Miners change tune on climate change
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Easy to point the finger
Demanding we abandon coal for climate is akin to asking NZ to give up love affair with sheep.