Just before announcing a crackdown on super tax concessions for the wealthy, Treasurer Jim Chalmers set the scene for the battle no doubt to come.
New costings from Treasury released on Tuesday showed superannuation tax breaks cost the federal budget about $50 billion a year and largely flow to high-income earners.
Dr Chalmers said the 10 biggest tax expenditures were worth more than $150 billion annually — around one-third of the top 10 is made up of superannuation tax discounts.
“The cost of these concessions is projected to exceed the cost of the Age Pension by 2050,” Mr Chalmers said, repeating a line he often uses as to why these tax breaks should be scaled back.
Currently, earnings from superannuation in the accumulation phase are generally taxed at a concessional rate of up to 15 per cent.
Treasury’s statement suggests the concessional treatment of super contributions will cost about $25.3 billion in uncollected revenue in 2022/23.
In 2019/20, 30 per cent of the benefit went to people in the top 10 per cent of income earners.
Men also attracted a higher average benefit of $1,950 than the $1,390 average for women (Treasury noted that “this reflects men, on average, having higher incomes and making larger superannuation contributions, and facing higher personal income tax rates”).
Likewise, tax breaks on super earnings also advantage wealthier individuals and tend to benefit men more than women.
These tax breaks, which are expected to cost $22.9 billion in 2022/23, result in the top 10 per cent of income earners attracting 39 per cent of the benefit.
Minutes after the Treasury expenditure statement was publicly released, Mr Chalmers announced that people with super balances above $3 million would get less generous concessions.
He said while the 15 per cent concessional rate would continue for all superannuation accounts with balances below $3 million, from 2025-26, the concessional tax rate applied to future earnings for balances above $3 million would be 30 per cent.
This, he said, was expected to apply to about 80,000 people and was expected to generate revenue of about $2 billion in its first full year.
Why super tax concessions are in the firing line over housing tax breaks
Treasury’s data shows that individuals with higher taxable incomes receive a greater tax reduction per dollar of taxable income through deductions.
This is logical, although there have been debates for years about whether the level of deductions makes the tax system less progressive. (A progressive tax is one that progresses to higher tax rates as taxable income increases — it means that individuals with low incomes are taxed at lower rates than individuals with higher incomes.)
Independent economist Chris Richardson notes that the top 20 per cent of personal taxpayers pay around 60 per cent of all personal income tax, and almost half of adult Australians don’t earn enough to pay income tax.
“Taken together, that says the nation’s top 11 per cent of adult income earners pay around 60 per cent of all personal income tax, while the top 5 per cent of adult income earners pay around 45 per cent of all personal income tax,” he says.
“You should expect high-income earners to account for a big proportion of most of the items on this list. It would be unusual if they didn’t.”
So why is the federal government singling out super above all other tax breaks?
Treasury’s data shows housing tax breaks cost more in forgone revenue than superannuation tax concessions do.
Various capital gains tax (CGT) exemptions cost almost $72 billion annually, including $48 billion on CGT exemptions for the family home, and another $23.7 billion in revenue foregone on CGT discounts for individuals, such as property investors and for trusts.
It is estimated that around 2.4 million people claimed $51.3 billion of rental deductions in 2019–20, resulting in a total tax reduction of $18.6 billion.
Of the total number of people with rental deductions, almost half (1.3 million) had a rental loss, known as negative gearing, which added up to total rental losses of $10.2 billion. These rental losses provided a tax benefit of around $3.6 billion in 2019–20.
Work-related expense deductions are also a big area of forgone revenue. Treasury says about 9.8 million individuals claimed $22.6 billion of work-related expense deductions in 2019–20, resulting in a total tax reduction of $8.3 billion.
And the GST exemption on food is expected to cost more than $8 billion in forgone revenue.
Dr Richardson says, while housing tax breaks cost more in foregone revenue, the political cost of scaling back negative gearing and CGT discounts for the wealthy may be greater.
He says for years governments have tried to “sticky tape” super tax concessions so that the wealthy pay a higher portion of tax.
“The key underlying problem is super was introduced as a flat tax of 15 per cent on super contributions, so if you were a low-income earner you were worse off and if you were a high-income earner, you were better off,” he said.
“Ever since, they [governments] have tried sticky tape on the system. So we are (under Mr Chalmer’s $3 million cap) continuing to use sticky tape to make the super system more progressive — that is, to get the rich to pay more and poor to pay less tax.”
He adds that super tax breaks are, politically at least, an easier target than housing tax breaks.
“It’s reasonable policy but it’s also populist policy,” Dr Richardson says.
Revamping the $3.3 trillion super system — what next?
Despite the politics partially dictating Mr Chalmer’s announcement to scale back super tax breaks, the entire system is under review.
By 2060, Treasury estimates one-third of all withdrawals from superannuation will be paid out as bequests.
Mr Chalmers has said the government will soon legislate the “objective” of superannuation.
As part of that, it plans to stop Australians “raiding” their super for things like buying a home.
A discussion paper released by Mr Chalmers last week suggested the need to “preserve savings restricts access to superannuation savings for a person’s retirement only”.
It follows policy decisions made by the former Morrison government, including an election policy to allow first-home buyers to access a large slice of their superannuation for a deposit.
And during the pandemic, the Coalition allowed people to access $20,000 of their superannuation over two years, resulting in $36 billion being drawn.
The ideological difference between the government and the Coalition on whether people should be able to draw on their super to pay for things like a home will no doubt play out over the coming months.
And questions about what’s “fair” will likely dominate upcoming discussions about scaling back super tax concessions.
In the face of a large and ongoing structural deficit, it remains to be seen whether the government will decide to tackle other areas that are costing the budget heavily, and look at reducing property tax breaks.
While that may be good policy, it could be bad politics.