Super industry warns on cutting concessions

TAX breaks for superannuation are in jeopardy, as the government considers cutting lucrative concessions for higher-income earners to help return the budget to surplus.

By InvestSMART · 21 Apr 2012

By InvestSMART ·
21 Apr 2012

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TAX breaks for superannuation are in jeopardy, as the government considers cutting lucrative concessions for higher-income earners to help return the budget to surplus.

Super industry groups yesterday warned the government against reducing concessions for super contributions, which are forecast to cost the budget $30 billion this financial year, after it was reported they were on the chopping block.

Tax breaks for super are among the most expensive tax concessions, alongside negative gearing and the exemption of owner-occupied housing from capital gains tax.

The concessions allow high-income earners to pay 15 per cent tax on super contributions, rather than the top marginal rate of 45 per cent.

Critics say the concessions disproportionately favour high-income earners and do little to boost national savings. But the superannuation lobby yesterday argued the concessions helped ease the pressure on future budgets by encouraging people to save for their retirement. In a rare moment of agreement between the rival parts of the super industry, both the retail funds owned by the big banks and the union-associated not-for-profit funds slammed the possible cuts.

The chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, said the cuts would leave more older people reliant on the pension in years to come.

"Removing incentives to save more through superannuation will have a snowball effect which will mean reduced voluntary contributions, less money invested in the Australian economy through the diverse holdings of the super pool and a much bigger burden on the taxpayer down the track," Ms Vamos said.

Super groups have welcomed the government's policy of increasing employers' compulsory contributions from 9 per cent to 12 per cent of wages over the next seven years, but they said this could be undone by the proposed cuts.

The chief executive of the Financial Services Council, John Brogden, claimed cutting the concessions was against the interests of people with savings and would hurt future budgets. "Any savings for the budget through reducing concessions in superannuation would be far outweighed by costs borne in future budgets," he said.

In contrast, the Organisation for Economic Co-operation and Development this month recommended member countries' governments look at preferential tax treatment of retirement savings as a way to get their budgets in shape. There was "scant evidence" that tax perks increased the overall levels of saving, an OECD report said.

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Frequently Asked Questions about this Article…

What superannuation tax breaks are being considered for cuts?

The government is reportedly looking at reducing concessional tax treatment on super contributions that currently lets some people pay 15% tax on contributions instead of the top marginal rate (up to 45%). These concessions are among the most expensive tax breaks and are said to be on the chopping block as part of budget repair talks.

Why is the government considering cutting super concessions and how big is the cost?

Cuts are being considered to help return the budget to surplus. Super tax concessions are expensive — forecast to cost about $30 billion this financial year — so trimming them is one option the government is examining to improve the budget position.

Who in the super industry is opposing cuts to super tax concessions?

Major super industry groups — including the Association of Superannuation Funds of Australia (ASFA), retail funds owned by the big banks, union-associated not-for-profit funds, and the Financial Services Council — have warned against cuts, arguing they would hurt savers and future budgets.

How do super industry leaders say cuts would affect retirees and the budget?

ASFA chief Pauline Vamos warned cuts could lead to more older people relying on the pension later on, reduce voluntary contributions and investment in the economy, and create a larger future burden on taxpayers. The Financial Services Council also said any short-term budget savings could be outweighed by higher future costs.

Do critics say the current concessions are fair for all income levels?

No. Critics argue concessional tax treatment for super disproportionately favours higher‑income earners and does little to boost overall national saving, making the concessions contentious.

How does the planned increase in compulsory super contributions fit into this debate?

The government’s policy to raise employer compulsory super contributions from 9% to 12% of wages over seven years has been welcomed by super groups, but they warn proposed cuts to concessions could undo the benefits of higher compulsory contributions.

What has the OECD said about tax perks for retirement savings?

The Organisation for Economic Co‑operation and Development recently recommended member governments review preferential tax treatment of retirement savings. An OECD report said there is 'scant evidence' that tax perks significantly increase overall saving levels.

What should everyday investors do while these superannuation concession changes are being discussed?

Everyday investors should stay informed about policy announcements, understand that potential changes could affect the tax treatment of super contributions (especially for higher earners), and consider how any change might influence their retirement savings strategy and voluntary contributions.