Thirty per cent contributions tax for high-income earners, delayed changes to contribution cap

Budget Review 2012–13 Index

Kai Swoboda

Concessional tax treatment for superannuation contributions and earnings is estimated to cost the Budget around $27.2 billion in 2010–11,[1] although some industry groups and commentators believe the methodology used by Treasury overstates their real value.[2]

The Australian Greens’ recent call for a reduction in tax concessions for higher income earners[3] and the value of potential savings to the budget bottom line by reducing the value of tax concessions may have influenced the Government’s proposal for two measures in the 2012–13 Budget that have equity and budget savings impacts:

  • imposing an additional 15 per cent tax to be paid on their deductible superannuation contributions for individuals earning more than $300 000, and
  • deferring a higher concessional contributions cap for people aged 50 or over with a superannuation balance of less than $500 000 from commencing in 2012–13 to 2014–15.[4]

The proposed measure to increase the tax paid on superannuation contributions by 15 per cent is expected to impact on around 128 000 people in 2012–13, or 1.2 per cent of people contributing to superannuation.[5] The annual value to an individual of the changed higher tax rate is in the order of $7500, with analysts estimating that an individual would need to be paid an extra $14 019 to get back to their original position.[6] The proposed measure will apply to all members of both accumulation and defined benefit schemes whose adjusted taxable income exceeds the $300 000 threshold and who make a personal contribution to their super, including members of parliament and public servants who are members of defined benefit schemes.[7]

The proposed deferral of lifting the concessional contributions cap—the maximum amount of eligible superannuation contributions attracting a 15 per cent contributions tax rate—for those aged 50 and over with a superannuation balance of less than $500 000 will mean that for 2012–13 and 2013–14 a threshold of $25 000 will apply for all individuals, irrespective of their age or stage of life.

Combined, these two measures improve the budget outcome by almost $2.5 billion over the forward estimates (table 1).

Table 1: Budget savings attributable to selected superannuation measures ($million)

Measure

2012–13

2013–14

2014–15

2015–16

Total

Additional 15 per cent contributions tax for those earning more than $300 000

Nil

200 

355

475

1030

Delay in implementing a higher concessional contributions cap for those aged 50 or more with a superannuation balance of less than $500 000

580

730

130

-10

1430

Total

580

930

485

465

2460

Source: Australian Government, Budget measures: budget paper no. 2: 2012–13, Commonwealth of Australia, Canberra, 2012, pp. 40–41, viewed 9 May 2012.

What are the equity considerations in increasing the contributions tax for higher income earners?

Perceptions about the equity of tax concessions for superannuation are largely due to benefit derived by higher income earners compared to those on low incomes:

  • the Australian Greens note research that almost half of the tax concessions go to the top 12 per cent of income earners—although the superannuation industry points out that this statistic relates to 2005–06 when much higher contributions caps applied. The superannuation industry notes that updated research based on 2009–10 data shows that the top 5 per cent of employees (in terms of income) accounted for less than 20 per cent of the total superannuation contributions (in terms of value). The industry also claims that if consideration is given to current superannuation policy settings the distribution of superannuation tax concessions across income groups is more even.[8]
  • the Henry Tax Review considered that the structure of the existing superannuation tax concessions was inequitable because high-income earners benefit much more from the superannuation tax concessions than low-income earners. To address this inequity the Review proposed a number of measures including taxing superannuation contributions at an individual’s marginal tax rate (less a flat rate tax offset which should be set so that a majority of taxpayers do not pay more than 15 per cent on their contributions) and maintaining a $25 000 concessional contributions cap, which would be doubled for those aged 50 or over. [9]

The Government has made an explicit link between fairness and increasing the contributions tax for higher income earners, with the Minister for Financial Services and Superannuation noting that:

It is clear that a small number of people on high incomes are getting a better tax deal out of super than millions of Australians on average incomes. ... The Government will make the system fairer by ensuring that the tax incentives for super are more in line across income ranges.[10]

There are a number of ways the income tax system and superannuation system interact to affect the value of tax concessions provided to different income groups. For example, although the income tax system is progressive in the sense that higher income earners pay a higher proportion of additional income in tax, the superannuation system ignores this progressiveness by generally providing for superannuation payments in retirement to be tax-free, irrespective of the income of the recipient.

In a broader context, discussions about the equity of retirement income should also consider other equity aspects, such as government assistance through the age pension, vertical and horizontal equity so that that people in similar positions should be treated equally and people should pay taxes or receive government benefits according to their ability to pay and intergenerational equity of treating individuals differently depending on when they were born.[11]

In the absence of any other related measures, the value of the tax concession is considerably larger for higher income earners than those on low incomes. For example, those on the highest marginal tax rate, which in 2011–12 means those earning more than $180 000, face a marginal tax rate of 45 per cent (excluding the Medicare levy) and therefore receive a tax concession of 30 per cent on their eligible superannuation contributions This compares with those on between $37 001 and $80 000 who face a marginal tax rate of 30 per cent (excluding the Medicare levy) and therefore receive a tax concession of 15 per cent on their eligible superannuation contributions.

While there are other superannuation-related measures that also have equity implications—including the low income government contribution of up to $500 for those earning less than $37 000 and the availability of a capped $1000 government co-contribution for those earning less than $61 920—the Government’s rationale to implement a 15 per cent additional contributions tax for those earning more than $300 000 appears to do little to address the distributional effects of superannuation tax concession. Rather, it adds additional complexity into the superannuation system by retaining the existing 30 per cent tax concession available to those earning between $180 000 and the $300 000 threshold.

Views on the proposals and expected impact on superannuation savings

As expected, the superannuation industry does not support the proposed changes, with the Association of Superannuation Funds of Australia considering that superannuation tax concessions must be set with a long-term view of ensuring better retirement incomes for ageing Australians and that making small changes at the edges to gain revenue for short-term political gain does not contribute to the development of long-term sustainable retirement incomes policy.[12] The Financial Services Council, representing for-profit superannuation funds, considered that the changes undermine retirement planning and that the Government had ‘confirmed its willingness to use retirement savings to pay for other political objectives’.[13]

Social service advocacy groups have generally supported the Government’s proposals, with the Australian Council of Social Services considering that the redirection of ‘that wasteful spending to begin the work on some of our most pressing social issues’.[14]

The Coalition have not explicitly commented on the Budget announcement, but the Coalition spokesman on financial services and superannuation, in response to pre-budget speculation about possible increases in superannuation contributions tax for high income earners, was reported to be critical of such a proposal on the grounds that it was a ‘tax grab’ which would make it harder for people to achieve self-funded retirement.[15]

The anticipated savings from the proposed changes imply that there will be a reduction in superannuation contributions and therefore lower superannuation balances for affected individuals than had the changes not been implemented. It is argued that the implication of such a reduction is that higher income earners will invest in other types of assets that attract tax concessions (such as housing) and that there will be an additional cost to government as some individuals become eligible as a result of lower superannuation balances for transfer payments such as a part- pension and associated benefits.[16] However, these effects are difficult to quantify.



[1].       Department of the Treasury, Tax Expenditures Statement 2011, January 2012, p. 4, viewed 3 May 2012.

[2].       Association of Superannuation Funds of Australia (ASFA), The equity of government assistance for retirement income in Australia, Research Paper, February 2012, pp. 18–21, viewed 6 May 2012; D Ingles, The great superannuation tax concession rort, Research Paper No. 61, The Australia Institute, February 2009, pp. 11–13, viewed 6 May 2012.

[3].       Australian Greens, Fairer superannuation tax concessions, February 2012, p. 1, viewed 3 May 2012.

[4].       Australian Government, Budget measures: budget paper no. 2: 2012–13, Commonwealth of Australia, Canberra, 2012, pp. 40–41, viewed 9 May 2012.

[5].       Ibid., p. 41.

[6].       S Patten, ‘Well-off to take $7500 hit’, Australian Financial Review, 1 May 2012, p. 7, viewed 9 May 2012.

[7].       P Wong (Minister for Finance and Deregulation), Superannuation tax concession changes, media release, 9 May 2012, viewed 10 May 2012.

[8].       Australian Greens, op. cit.; ASFA, op. cit.

[9].       Henry Tax Review, Australia’s future tax system Report to the Treasurer, Part Two: Detailed analysis, December 2009, p. 100, viewed 6 May 2012.

[10].     B Shorten (Minister for Financial Services and Superannuation), 2012–13 Budget – Superannuation reforms, media release, 8 May 2012, viewed 10 May 2010.

[11].     Association of Superannuation Funds of Australia, op. cit., p. 4.

[12].     Association of Superannuation Funds of Australia (ASFA), Parliamentary Inquiry needed into tax efficient investments: ASFA, media release, 8 May 2012, viewed 9 May 2012.

[13].     Financial Services Council, More super changes: Less savings, more complexity, media release, 8 May 2012, viewed 9 May 2012.

[14].     Australian Council of Social Services (ACOSS), Robin Hood comes good, except for single parent families, media release, 8 May 2012, viewed 10 May 2012.

[15].     V Tait, ‘Govt must rule out super tax concession cuts’, Investor Daily, 23 April 2012, viewed 10 May 2012.

[16].     H Ergas, ‘Doubling super tax will destabilise savings strategy’, The Australian, 30 April 2012, viewed 9 May 2012; Australian Institute of Superannuation Trustees, Budget hits older worker’s ability to catch up on super, media release, 9 May 2012, viewed 9 May 2012.

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