Super changes will slug Australian workers

Australian workers should be very wary of a proposal to change the tax treatment of superannuation — it could mean a cut in take-home pay. Currently, the contributions tax of 15% is paid by the super funds.

There are a number of proposals being touted that may result in the tax being paid by employees instead. This would mean employees will suffer a reduction in income after tax. All Australians making super contributions will be worse off.

This is a bad idea and will rightly be opposed by many taxpayers. It has been a number of years since a change to the personal tax rates, so most Australians are already being hit with a stealth tax increase due to bracket creep (when tax rates go up because tax thresholds aren’t indexed to inflation). In addition, real wage growth at the moment is very sluggish. The last thing Australian taxpayers need is to be hit with additional tax.

This issue has arisen through proposals to change the current tax treatment of concessional super contributions. Currently, the tax rate is 15%, and is paid by super funds. The proposal is to change this to a tax rate that varies, depending on the contributor’s marginal tax rate. Deloitte Australia proposed that the discount off the marginal rate be 15%. The Henry Tax Review in 2010 proposed a discount of 20%. That report specifically recommended that the contributions tax be paid by employees and noted that this will cause a reduction in taxpayers’ disposable income.

As an example, an employee earning $70,000 would have super contribution made on their behalf of $6,650. The super fund pays a contributions tax of $997.50, and this cost would be transferred to the employee under some proposals. The employee would be almost $1,000 worse off per year (and would be even worse off under the Deloitte proposal, losing more than $1,100 per year).

However, the employee taking the tax hit is not the only option. The contributions tax could continue to be paid by super funds. But this would be particularly complicated to implement. The current approach is fairly easy: super funds pay a tax of 15% on concessional contributions.  This would be replaced by a tax on funds that varies depending on the member’s marginal tax rate. But this marginal tax rate won’t be known until the member submits their personal tax return — many months after contributions have been made.

The complexities of this are obvious. Super funds will incur large costs to do reconciliations — paying extra tax or receiving tax refunds on behalf of members. The administration costs of super are already fairly high, and they will go up again. This will cut the retirement incomes of many Australians.

So the two options — tax paid by employees, or tax paid by super funds — are fraught with difficulty. Either there will be a cut in take home pay for most working Australians, or a large increase in super fund costs. It isn’t clear that either option is worth doing.

There is an alternative: the tax could be paid by employees, but the impact of this offset by a cut in the superannuation guarantee rate to around 8% (technically, a reduction of 15% off the current contribution rate of 9.5%): the net money going into super funds will remain about the same, and take home pay will actually go up for lower income Australians. This option should be explored in more detail.

Discussion about changing the taxation of super is possibly being driven by the misconceived assertions that the value of super tax concessions is enormous, rivalling the cost of the Age Pension. But this analysis is wrong. Only the most absurd estimates generate a cost even approaching the cost of the Age Pension. In particular, the high cost figure (around $41 billion 2015-16) requires us to assume that super contributions will remain completely unchanged if the tax concessions are removed — a laughably unrealistic assumption. In addition, the high cost figure uses a benchmark that greatly inflates the cost, and ignores the reduced cost of the Age Pension when superannuation savings are higher. A detailed analysis of this issue was published by CIS Senior Fellow Robert Carling earlier this year.

Many of the proposals for changes to super mean a large increase in the total tax burden — never is a good idea. The tax to GDP ratio is currently at or around its long term average, and does not need to increase. Economic growth is currently below its historical trend and the last thing we need is an increase in the tax burden on the economy. So any change to superannuation system should be broadly revenue neutral, unlike the proposals by some (including the Deloitte report published recently).

It is also important for any proposal to be targeted at reducing the pressure on the Age Pension. It isn’t clear the proposals being touted will do this. For example, all the proposals cut taxes for low income earners, even though this group are unlikely to have enough in super when they retire to cut their reliance on the pension.

All these concerns suggest more work is needed on the possible reforms to super, including a better explanation of what is being done and how it will affect take-home pay. A change is not needed to bolster revenue or cut back ‘massive’ tax concessions; if a change is to occur, it needs to focus particularly on cutting long-term budget costs.

Michael Potter is Research Fellow in the Economics Program at the Centre for Independent Studies