The next tax raid in the super wars

One predictable consequence of the change of government in May was that it would take about five minutes for the taxation of superannuation to come back on to the policy agenda.

This is not because the Labor campaign platform foreshadowed any changes in this area, but because the new government is seen by the advocates of increased superannuation taxation as being more likely to make such changes — particularly in a difficult budgetary context.

Not long after the election, the Secretary to the Commonwealth Treasury made a speech highlighting, among other issues, the alleged high budgetary cost of superannuation tax concessions. It is unlikely he made that speech without the prior approval of his political master, Treasurer Jim Chalmers.

Chalmers recently declared that the super(annuation) wars had ended, but he was referring to issues such as the minimum rate of contributions and the regulation of super funds rather than to taxation.

Unlike the Coalition, Labor in opposition did not rule out adverse changes to taxation of super in the current term if it won. Next month’s budget will be the first opportunity for the new government to reveal whether it has any such intentions.

There is nothing new in certain organisations, interest groups and independent economists demanding increases in some aspects of super tax. Ever since the Howard government liberalised it in 2007, there has been an ongoing campaign of fluctuating intensity to reverse some of those changes; which led to some tightening up by the Gillard government and then by the Turnbull government in 2017.

However, none of this fully satisfied the advocates of increased taxation — and the campaign has continued, refreshed by the election result.

The current super tax arrangements are seen by some policy wonks, such as the Grattan Institute, as bad tax policy disproportionately favouring the better-off. Other wonks say with good reason that they are wrong.

Then there is a conga line of organisations and interest groups with their eye on extra tax revenue from super to fund their wish lists of new and increased social benefits. Indeed, the bigger the super pot becomes, the more vulnerable it is to tax raids.

Surprisingly, some representatives of big super funds have also supported increased super tax, but only changes that will not harm their own members’ interests. Institutional super perceives a risk of increased super tax for fiscal policy reasons and is happy to sacrifice self-managed super in the hope that this keeps the wolves at bay.

One possible change that has been flagged and received support from the abovementioned parties is a cap on the total amount any individual can have in super. Much publicity has been given to Tax Office data revealing there is one self-managed fund with assets over $400 million. A cap of $5 million has been mentioned. The idea is that anyone with more than $5 million would be forced to remove the excess from the super system (with its 15% tax rate on fund earnings) and put it somewhere else.

The reality is that nobody in their right mind would rearrange their finances in such a way as to expose the excess to a 47% marginal tax rate, so the gain to tax revenue would be nothing like what is claimed.

But even leaving that aside, policy consistency and trust in government are at stake. Large balances have been accumulated because the rules in the past allowed large contributions, and presumably because of astute investment decisions or luck. And these large balances haven’t just come about since the Howard government’s policy changes in 2007 — they have been enabled by the rules that were in place for many years, including under Labor governments.

It would be impossible to amass very large balances under the contribution rules now in place. We may or may not agree with those rules, but at least they are known to everyone and we can act on them going forward. Huge balances will disappear from the system as the fund members entitled to them die off.

A balance cap would be completely different. It would be nothing but a retrospective denial of the validity of the contribution rules which, over many years, enabled large balances to accumulate. What would this say about policy consistency over time, and what would it do for trust in government?

Even the changes made in 2017 were open to the charge of retrospectivity, but at least the imposition of a $1.6 million transfer balance cap (the maximum amount that could benefit from zero taxation on fund earnings) did not require removal of any excess from the superannuation system. It was a partial undoing of the changes made in 2007.

But a total balance cap would be much more clearly retrospective as it would require all the excess above the cap to be removed from the super system.

Treasury is no doubt examining the total balance cap and other super tax measures in the lead-up to next month’s budget.

One possibility that has received some airing — albeit not from government — is suspension of indexation of the transfer balance cap. This cap is supposed to increase in line with the CPI, but only in steps of $100,000. One such step occurred on 1 July 2021, and the rise in the CPI has been such that another step-up is a certainty for 1 July 2023.

The government could stop this. But the short-term revenue gains would be trivial as any increase would only benefit people starting super pensions for the first time, not those already on such pensions.

If indexation is suspended, the suspension may well become permanent (a freeze at $1.7 million) or last a long time. There is a precedent for this in the income thresholds for the private health insurance rebate and the Medicare levy surcharge, which were ‘paused’ for two years in 2014 and remain ‘paused’ eight years later.

Governments know that indexation merely preserves the real value of a threshold; but they act pragmatically in the knowledge that stopping a benefit from increasing in nominal terms is politically much more saleable and less noticeable to voters than cutting it.

In the final analysis, the underlying issue is whether the critics of super tax concessions are right, and they are not. No government will make wholesale changes that harm a large number of people and raise a large amount of revenue, but that is not to say they won’t be led into making changes that have a large impact on a small number of people and raise little extra revenue.

As one of the architects of the super system, Bill Kelty, recently told the Australian Financial Review, “People are sick of changes to super. They don’t like tinkering with the tax system — just leave it.”

Robert Carling is a Senior Fellow at the Cenre for Independent Studies and a former World Bank, IMF and federal and state Treasury economist.

Photo by Erik Mclean