How Treasury mucked up its super sums

A dangerous arithmetic error in Treasury's superannuation calculations has produced mathematical nonsense and a large overstatement of the cost of superannuation to government revenues.

It looks like someone in Treasury has mucked up the sums that show Australians are giving a $30 billion annual subsidy to superannuation.

Accordingly, the whole basis of the government's plan to have another swipe at superannuation is undermined.

I have a high opinion of the basic skills of Treasury but this represents its third major blunder in less than half a decade.

The former head of Treasury Ken Henry proposed a mining tax that would have destroyed much of our mining industries. Treasury did not pick up that the sums were wrong. The then prime minister Kevin Rudd and Treasurer Wayne Swan announced the tax and it cost Rudd his job.

Then a new mining tax was concocted and from day one Treasury’s estimates of likely revenue looked wrong. They did not revise them and Wayne Swan spent the money he expected to get.

There was no worthwhile money in that tax so the government spent vast sums that were not there and not likely to be there for a long time. This has been a major problem for a government wanting to find money for education and disability insurance.

And so it turned to Treasury to calculate the so-called 'middle-class welfare' subsidy in superannuation. Treasury calculated the tax benefits as costing the government about $30 billion a year. According to the government this seemed to be middle-class welfare that must be attacked to fund its plans.

After the mining tax debacles I should have checked its figures. Instead it was a body called the Self Managed Superannuation Fund Owners Alliance that revealed the mathematical error.

The Treasury people made two base calculations, both of which were justifiable. The person who made the calculations warned that they should not be added. But some bright spark did add them and Wayne Swan did not pick it up.

The SMSFOA illustrates the mistake with a taxpayer putting $100 into super now and earning income on this investment over 35 years, which Treasury calculates at 7 per cent annually.

Firstly, the $100 is taxed at 15 per cent leaving $85 to be invested. If the contribution were taxed as income at a marginal tax rate of 46.5 per cent (top rate plus Medicare levy), instead of the 15 per cent concessional rate, the tax on the $100 contribution would then be $46.50 not $15.

Accordingly the taxpayer has received a tax concession of $31.50. The benefit sums that came from that calculation are mathematically correct.

Secondly, they did a separate sum which says that if the taxpayer invests that $85 over 35 years at 7 per cent interest compounded, the return is $656 on just this one contribution. A 15 per cent tax on that $656 is $98.40. Once again Treasury compared the 15 per cent tax rate to a 46.5 per cent rate to determine how much was being subsidised. Once again that produced a correct mathematical sum.

Thirdly, as the original researcher warned, these sums cannot be added because if the taxpayer was taxed at 46.5 per cent when the money is invested, then the taxpayer would have only $53.50 to invest rather than $85. Accordingly the returns are obviously slashed, as is the claimed subsidy. So as the original researcher warned, when you add the figures it produces nonsense and a very large overstatement of the government subsidies.

But there are more problems with the sums. Treasury has assumed a 7 per cent return over 35 years. That’s not been the experience of superannuation investors in recent years. Given our low interest rates and China’s change in direction it might also not be the experience in the future (China makes a frightening energy shift, February 7). A 5 per cent return calculation would have been more realistic.

Very clearly those aged over 60, when they invest their superannuation money tax free to produce a pension, gain a benefit, which is in the sums. But to gain a reasonable income on today’s interest rates (not some 7 per cent return trumpeted by Treasury) you need about $2 million.

So if you want to tax people with superannuation balances over $2 million at a higher rate you will create an administrative nightmare. And you will not raise a lot of money because few have those sort of sums, and the government now restricts how much can be invested in superannuation.

And then of course no calculation is made for the reduction in aged pension liability that superannuation delivers. That surely must be in the sum. We need to do the sums again and when that's done Wayne Swan will find that housing is where the big subsidies are and they can’t be touched.

Wayne Swan has dodged a dangerous bullet. Had he repeated the mining tax mistakes and spent money being raised in superannuation on the basis of false sums the community would have erupted in fury.

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