Super's tax concession blowout comes at a cost
When Tony Abbott rules out changes to super only in his first year as PM, you know both parties are taking aim - and that the opposition is hoping like crazy that Wayne Swan shoots first in May.
Thursday's Treasury Tax Expenditure Statement reckons individuals' superannuation concessions of one sort or another will cost the tax man $31.8 billion this financial year, overtaking housing's $30 billion.
More impressive is that, on current policies with an ageing workforce making the most of the opportunity, Treasury estimates super concessions will cost $34.6 billion next financial year, $39.6 in 2014-16 and $44.8 billion in 2015-16. On top of individuals' super tax breaks, the concessional taxation of employer contributions will cost another $13.2 billion this year - so $45 billion all up in super concessions.
Housing remains relatively stable, reflecting that with not much in the way of capital gains, owner-occupied housing being exempt from CGT isn't costing much more. Treasury reckons the "tax expenditure" for housing to dip from $30 billion this financial year to $29.5 in the next, recovering to $30 billion in 2014-15 and rising to $30.5 billion in 2015-16.
Together, superannuation and owner-occupied housing make up nearly two-thirds of all tax expenditures which, at $115 billion, represent 7.5 per cent of GDP this year.
It used to be worse. In Peter Costello's last budget year, tax expenditures reached $126.5 billion - 10.7 per cent of GDP.
As a percentage of GDP, Treasury forecasts tax concessions will dip another notch to 7.4 per cent next financial year before starting to rise again.
That's not necessarily a reflection of the Labor government tightening up on tax perks and the Coalition handing more out - there were more capital gains about in 2007-08.
There are other "interesting" tax expenditures for fiscally constrained governments to consider - the $4.2 billion in capital gains tax discounts for individuals and trusts, for example - but for treasurers of either party facing our demographic inevitabilities and education, welfare and infrastructure ambitions, it's the big bags of money that will attract attention.
There are tax sweeteners for superannuation on the way in, while it's accumulating and, most of all, on the way out again. Concessional rates of tax apply to a super fund's earnings and payments are tax free no matter how wealthy an individual might be - and that's without getting into some of the exotic engineering involving part-pensions and such.
The extent of the Howard/Costello super concessions overwhelmingly benefited those on the highest tax brackets and have been pegged back a little by Swan.
Many in the industry expected super's massive tax advantages to be hit harder than they were in the last budget - but there's another one every May.
Frequently Asked Questions about this Article…
Treasury's Tax Expenditure Statement flagged superannuation as the nation's biggest tax concession. It estimated individuals' super concessions will cost about $31.8 billion this financial year — overtaking owner‑occupied housing — and, when you add concessional taxation of employer contributions (about $13.2 billion), super concessions amount to roughly $45 billion this year.
According to Treasury, individuals' superannuation concessions ($31.8 billion) now exceed the tax concession for owner‑occupied housing (about $30 billion). Together, super and owner‑occupied housing account for nearly two‑thirds of all tax expenditures, making them the largest components of the government's tax‑expenditure bill.
Treasury projects superannuation concessions to rise: about $34.6 billion next financial year, roughly $39.6 billion in 2014‑16 and $44.8 billion in 2015‑16 (as reported). Overall tax‑expenditure as a share of GDP is forecast to dip slightly to 7.4% next year before rising again.
The article notes that the Howard/Costello era super concessions overwhelmingly benefited people on the highest tax brackets. While later changes under Wayne Swan have partially pegged those concessions back, concessional tax rates still apply to a fund's earnings and many payments are effectively tax‑free on the way out, which can particularly advantage wealthier individuals.
Tax sweeteners apply to multiple stages: concessional tax treatment applies while super is accumulating (including favourable tax rates on fund earnings), to employer contributions, and often to payments taken out of super. The article also mentions there are more complex arrangements in some cases (for example involving part‑pensions).
The article says superannuation is under political scrutiny because of the large sums involved. While Tony Abbott ruled out changes in his first year as PM, both major parties are described as 'taking aim' at super concessions and large tax expenditures are likely to attract attention from fiscally constrained governments — particularly around budget time in May.
Treasury highlighted a range of tax expenditures. One example given is the capital gains tax discount for individuals and trusts, estimated at about $4.2 billion. The report also put total tax expenditures at around $115 billion this year, equal to about 7.5% of GDP (compared with $126.5 billion or 10.7% of GDP in Peter Costello's last budget year).
Everyday investors should be aware that superannuation tax concessions are large and under scrutiny. That means policy settings could change over time, especially for the biggest tax breaks. A sensible takeaway is to stay informed about Treasury statements and annual budgets (often in May) and consider how any policy change might affect retirement savings — particularly if you hold large super balances.
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