Morrison’s self-imposed dilemma - The Centre for Independent Studies
Donate today!
Your support will help build a better future.
Your Donation at WorkDonate Now

Morrison’s self-imposed dilemma

The Prime Minister and the Treasurer must rue the day they allowed their public service advisers to talk them into a $500,000 lifetime cap on non-concessional super contributions with nine years of back-counting. If they don’t, then they should. It’s one thing to bear political pain for a measure that is soundly based in policy principles and makes a major contribution to budget repair, but the non-concessional cap passes neither of those tests.

Non-concessional contributions are non-concessional in the sense that full tax has been paid on the income from which they are sourced. So they are not nearly as attractive to the taxpayer as concessional contributions. The attraction is that the earnings generated by non-concessional contributions will be taxed at 15%, which is a significant concession for some, but one that can be defended on grounds of tax principle (see my Policy article, ‘How Should Super be Taxed’).

Perhaps the present non-concessional limits ($180,000 a year or $540,000 over three years) are too generous — although even Labor didn’t think so in its pre-election version of a crackdown on super concessions. But to reduce it to $500,000 over a lifetime, and then start counting from nine years ago, is draconian. The idea of a lifetime cap instead of an annual or moving three-year cap is worth looking at, but the figure is too low.

Turnbull’s and Morrison’s political antennae should have alerted them to the high risk that anything with nine years of back-counting would be seen as ‘retrospective’. Morrison says people who have contributed a lot over the last nine years should not be allowed to contribute more and benefit from the 15% tax on earnings from those contributions, even if the cap on pension account balances will bar them from a zero tax on earnings on new contributions.

However, anyone who contributed a lot did so under the rules then in place – and put in place, by the way, by a previous Coalition government. The nine years of count-back is in effect a way of retrospectively denying the validity of those rules. Any change should be prospective.

We keep hearing that the ‘saving’ (that is, boost to tax revenue) from the $500,000 backdated cap is $550 million, which sounds a lot. But it’s only this much in the funny-money of aggregated four-year forward estimates.

More meaningfully, it is $50 million in the first year rising to $250 million in the fourth year (2019-20). In other words, without this measure the projected deficit would be $37,131 million this year instead of $37,081 million, and by 2019-20 it would be $6,205 million instead of $5,955 million. These are not huge differences.

Even these estimated revenue gains from the new non-concessional cap are subject to a huge margin for error, and are more likely to be over-estimates than under-estimates given that much of the money that won’t be able to go into super will find a low-tax home somewhere else in the system. The roundness of Treasury’s estimates gives the game away: $50, 100, 150 and 250 million in the four consecutive years.

Scott Morrison’s problem isn’t that the $500,000 cap is a huge contributor to budget repair that he can’t do without, but that having made the mistake of falling for the cap he can’t now be seen to give something away without getting something else in return. He doesn’t want to set a precedent that might imperil other budget savings measures (more than they are already imperilled).

When the government is struggling to bring the budget into balance, the principle of refusing to concede one extra dollar without an offset somewhere else is a good one. But the $500,000 cap is a terrible measure to have to defend, and it’s really up to the Treasury portfolio to come up with something to replace it. Morrison can’t just put the onus on others. And there is no reason the ‘something else’ has to come from super.

Robert Carling is a Senior Fellow at the Centre for Independent Studies