Home' Policy Magazine : Policy Vol 32 - No 3 Contents 18 POLICY • Vol. 32 No. 3 • Spring 2016
HOW SHOULD SUPER BE TAXED?
the further changes now proposed. Adoption in
2012 of a two-tier (15% and 30%) rate structure
for concessional contributions introduced a new
complication. Single rate taxes on concessional
contributions and fund earnings are the simplest
for super funds to administer because it means
they need no information about the tax status of
The proposed cap on pension funds will impose
a new compliance burden on fund administrators,
as there is currently no cap on individuals’
superannuation balances. When individuals hold
multiple accounts the pension components will
need to be aggregated to ensure compliance with
the cap. Defined benefit pensions will need to be
actuarially converted to a lump sum equivalent for
inclusion in the cap. The cap will also lead members
with existing pension balances above $1.6 million
to maintain separate accumulation and pension
accounts whether or not they already do so.
The proposed lifetime cap on non-concessional
contributions will require record keeping and
aggregation across multiple accounts over many
years. Against that, members will no longer need to
comply with annual caps.
There will no doubt be unintended consequences
to be identified and addressed in the process of
consultation and legislative drafting.
The existing system is by no means simple,
but the government’s proposals will exacerbate
complexity. It is not clear that this cost has been
properly accounted for and is worth bearing in
order to meet other objectives.
Since 2007 the superannuation tax regime has been
based on the principle of concessional taxation of
contributions and fund earnings, with no further
tax taken once members begin to withdraw benefits
from their fund. This concessional approach is
justified by reference to tax policy principles, even
if the exact architecture is not ideal.
However, the degree of concessionality has
been eroded by past and proposed increases in
contributions tax for higher income earners, and
the scope for current and future participants to
benefit from concessions has been severely curbed
through past and proposed tightening of caps on
contributions and the scope of tax-free pension fund
earnings. These changes have been made in response
to budget pressures and community pressures for
greater ‘fairness’ in superannuation tax.
Fairness is a subjective concept, but what can be
said objectively is that the overall tax/transfer system
is highly redistributive without any further reshaping
of superannuation taxes to mirror the progressive
personal income tax. Moreover, there are significant
simplification benefits in flat superannuation taxes.
The recent and proposed changes are introducing
new complexities to the system.
Balancing the budget is an important objective
but in itself does not override the principle of
concessionality for superannuation. Revenue
constraints will always require limits on access
to concessionality, but the tightening of access
proposed by the government is draconian and little
justification has been provided for the details. The
government needs to go back to the drawing board,
review its proposals, and produce a green paper
for consultation, including the actuarial basis for
1 Michael Potter, The Case Against Tax Increases in Australia:
The Growing Burden, Research Report 15 (Sydney: The
Centre for Independent Studies, 2016).
2 Treasury, Tax Expenditure Statement 2015 (The Australian
Government the Treasury, 2016).
3 Ken Henry et al, Australia’s Future Tax System: Report to
the Treasurer, December 2009, Part Two, Detailed Analysis,
Volume 1 (Commonwealth of Australia, 2010), p. 12.
4 Australia’s Future Tax System Review, Retirement Income
Consultation Paper, December 2008 (Commonwealth of
Australia, 2008), p. 23.
5 Friedrich A. Hayek, The Constitution of Liberty (Chicago:
University of Chicago Press, 1960).
6 Superannuation Charter Group, A Super Charter: Fewer
Changes, Better Outcomes, Report to the Treasurer by the
Charter Group (The Australian Government the Treasury,
2013), pp. 25-26.
7 Peter Whiteford, ‘The Australian Tax-Transfer System:
Architecture and Outcomes’, Economic Record
86:275 (December 2010), pp. 528-544.
8 Ross Clare, Mythbusting Superannuation Tax Concessions
(Sydney: ASFA Research and Resource Centre, August
9 Budget 2016-2017, ‘Budget Speech’ (Commonwealth
of Australia, 2016), http://www.budget.gov.au/
10 Ron Bewley, So How Much Should the Superannuation Cap
Be? (Woodhall Investment Research, 8 June 2016), www.
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