The Henry Tax Review, released in 2010 and chaired by former Australian Treasury Secretary, Ken Henry, acknowledged that current arrangements around superannuation concessions were inequitable and explicitly recommended making superannuation concessions more progressive:
The structure of the existing tax concessions is inequitable because high-income earners benefit much more from the superannuation tax concessions than low-income earners…
Based on the 2008–09 tax rates, around 1.2 million individuals do not receive a personal income tax benefit from their concessional superannuation contributions. An additional 1.2 million people receive a concession of only 1.5 percentage points (Treasury 2008). This compares with around 200,000 taxpayers (those earning more than $180,000) who receive a concession on their superannuation contributions of 31.5 per cent…
Superannuation contributions should be taxed at a progressive but concessional rate. This would be achieved by treating employer superannuation contributions as income in the hands of the employee, taxed at marginal personal income tax rates. A flat-rate refundable tax offset, payable to the individual, would apply to these contributions to ensure that investing in superannuation retains its preferential tax treatment over other types of saving…
Under the reform proposed by the Henry Review, everyone that contributes into superannuation would receive the same tax benefit, thus maintaining the progressiveness of the income tax system. It would also mean that lower income earners – those that are most likely to rely on the Aged Pension in retirement – would be better placed to build a retirement nest egg, thus limit costs to the Budget from the Aged Pension.
With the above considerations in mind, it was interesting to read Henry’s warning yesterday in The AFR that reforming super concessions could undermine the superannuation system:
“It has always been understood that the encouragement of private saving would come at the cost of somewhat lower public saving. It was always understood that the superannuation system would have a budgetary cost.
“It was always understood that those who have the capacity to save, because they have higher incomes during their working lives, would benefit most from the tax concessions, with lower income employees benefiting most from the pension”…
“The biggest threat to the sustainability of superannuation is not fiscal sustainability or fairness, but complexity. Any proposals to change current arrangements should bear this in mind.
“The fact that one part of the tax system raises less revenue than it might, or that it is not as progressive in its impact as other elements of the tax system, is not a sufficient reason for taxing it harder.”
One can only wonder why Henry’s views around super have seemingly changed?
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