Friday, May 17, 2013

Why Abbott will have to clean up Labor's super tax mess

Here's my advice, written before I knew he was thinking along similar lines.

Accepting the bulk of Wayne Swan's budget cuts will only get Tony Abbott and Joe Hockey so far. Within their first term if elected they will have to confront the one truly enormous and growing budget cost Swan has barely tackled..

The cost to tax of the staged increase in compulsory superannuation contributions from 9 per cent of salary to 12 per cent was to have been funded by the mining tax.

Now scarcely functioning (and set to be abolished by the Coalition) the mining tax will raise just $200 million this year and a total of 5.5 billion over five years if it survives.

By contrast the existing super tax concessions cost $32 billion per year according to the Treasury figures in the budget. That figure is disputed by some in the superannuation industry, but what is not disputed is that it is set to grow.

The budget papers show it climbing from $32 billion to an astonishing $50 billion per year by 2016-17, an extraordinary increase of 60 per cent.

By then super tax concessions would cost more than the pension ($48.5 billion) and more than Family Tax Benefits and Medicare combined ($21 billion and $23.6 billion).

And the ramping up of the costs will have only begun...

The first increase in compulsory super contributions from 9 per cent of salary to 9.25 happens in July. It will be funded by employers, most probably out of wage increases they would have otherwise paid.

But that's not a cost to the budget. The cost to the budget is that those contributions will be taxed at only 15 per cent, instead of the standard rate for wage increases. For middle earners subject to the Medicare levy the standard rate is 34 per cent. (Only Australians on salaries in excess of $300,000 will be slugged more than 15 per cent, and one year after announcing the hike to a still-generous 30 per cent the government still hasn’t produced the legislation.)

The first increase in compulsory super will be followed by a second, to 9.5 per cent in July 2014. The increases won't stop until July 2019 when the lightly-taxed total reaches 12 per cent of salary. Only then, at the end of the decade, will the budget cost level off.

The government hasn't said how much compulsory super will cost the budget by the end of the decade but it if it asked, Treasury would give it an answer.

It'll fall to Abbott and Hockey to wind back what will then be the largest cost to the budget other than grants to the states. The simplest solution, suggested by Melbourne University tax expert John Freebairn is for employers to deduct tax from super contributions at pay-as-you-go rates just as they do for wages. The earnings of super funds and the payouts could be untaxed, for even greater simplicity.

It's a bold solution that should be easy to sell. Something like it will become necessary for whoever is in charge of the budget after the September election.

In The Age

Recommended Reading:

Future Challenges: Australia's Superannuation System Martin Parkinson, November 28 2012

"With the Commonwealth budget coming under increasing pressure over the next few decades, the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny. This scrutiny will be even more important to the extent that existing concessions are seen to favour some at the expense of the majority."

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