Labor’s superannuation policy change is sensible in these difficult fiscal times

With the Albanese government recently announcing that it will increase tax earnings from superannuation balances over $3 million from 15 to 30 per cent from 2025-2026, estimated to affect around 80,000 people and raise $2 billion in the first year, the policy is sensible at a time when Australia may need considerable fiscal reform.

As superannuation tax concessions on contributions and earnings are currently worth around $48 billion for the 2022-23 year according to the recent Tax Expenditures and Insights Statement, a figure not far behind the amount paid to the aged pension and far higher than spending for aged care, something is going to have to give if Australia is to meet a variety of policy needs without an ongoing reliance upon more public debt.

But how a government adopts sensible reform is important and should not alienate key players as being unfair, as suggested by Labor’s approach which is far more balanced than recommended by the far left.

While Labor’s limit for a 15 per cent taxation rate on earnings at $3 million is lower than the $5 million urged by most superannuation industry bodies, the Greens called for the limit to be set at $1.9 million, that the policy come in force from 1 July this year, and that Labor’s proposed 30 per cent taxation be raised to the full income tax rate on such accounts instead of any concessional rate.

The Parliamentary Budget Office indicates that the Greens' policy would affect around 210,000 people and raise $54.6 billion over the next decade.

But Labor’s policy is fair, albeit the $3 million amount may have to be indexed to inflation over time in line with tax-free super balances on retirement which is due to increase from $1.7 million to $1.9 million in July this year as it is indexed to inflation in increments of $100,000.

Despites the rumblings of the Coalition leadership, most Australians support the policy with a survey of 6830 Australians by CoreData Research on March 2 finding two-thirds support for the reform, despite most acknowledging that Labor had promised before the last election not to alter superannuation arrangements.   

Given Treasury’s estimate that just 10 per cent of Australians would be affected by 2050, Alex Dunnin (Rainmaker Group) estimates that reaching the $3 million cap would require someone to be earning $200,000 a year by age 25 within an assumption he or she is receiving super contributions at 12 per cent per year, earnings are 5 per cent per year for the next 42 years and 1 per cent is paid in fees).

Labor’s policy gives dissatisfied Australians plenty of time to restructure their financial planning, albeit the 30 per cent tax rate on excess amounts is still a pretty good rate when compared to other options with high-income earners currently paying a 45 per cent income tax rate plus the Medicare levy.

But doing nothing would have been a poor option for Labor in light of the evidence which showed the many large super accounts had benefited greatly from successive governments allowing large annual contributions of non-concessional contributions as high as $1 million which go beyond the concessional compulsory contributions (currently limited to $27,500 a year).

With the Australian Taxation Office recently reporting that Australia’s 100 largest self-managed super funds had a total $9.7 billion of assets, including one super account with $401 million in assets, wealthy Australians have benefited greatly from a 15 per cent tax rate on earnings with many ultimately using superannuation as a taxpayer-funded inheritance scheme.

There is indeed something clearly wrong when benefits far exceed a decent retirement amount through favourable taxation concessions in a superannuation scheme that is supposed to help Australians save enough for a decent retirement and reduce the nation’s reliance on the pension at a time when Australia’s population is ageing.

As it stands, the proportion of the population aged 65 and over receiving the Age Pension has declined from 74 per cent in 2001 to 62 per cent by 2021, yet the proportion receiving the full pension rather than a part payment actually rose from 59 per cent in 2015 to 68 per cent.

While the rich can always find options to boost their wealth, superannuation should be beneficial to ordinary Australians to help them gain a decent super account at the time of their retirement given that 2019-20 ATO data shows huge differences between the average and median of funds for older Australians.

Hence, Labor could do more to ensure greater fairness in terms of promoting the superannuation savings of low-income earners.  

As it stands, many low-income Australians pay a 15 per cent tax rate on both their super contributions and earnings, far in excess of their taxation rate for total income.  

For Australian workers who earn the minimum wage of $42,000 per year in 2022, over two million according to the Fair Work Commission, the tax amount paid (around $4,500) calculates to be around 10.8%.

For those earning less, which is likely to include many women working part-time due to child commitments, the real income tax rate would be even lower.  

While the Low Income Superannuation Tax Offset provides a maximum payment of $500 per year, it is no wonder that some of the biggest industry super funds have called on the Albanese government to raise the amount and/or pay superannuation guarantee contributions on paid parental leave.

In contrast, median income earners (currently around $65,000 per year) have a capacity to benefit much more from superannuation rules, at least those who have paid of their house and have spare cash.

With concessional compulsory contributions currently limited to $27,500 a year, someone on $65,000 could salary sacrifice around $20,000 to boost super savings while reducing income taxation liabilities by $3250 (from a 32.5 per cent rate to 15 percent).

The median income earner can also contribute $3000 to their low-income spouse and receive a further $500 tax rebate.

A low-income earner can also contribute $1000 to get a maximum $500 co-contribution from the government if total income does not exceed $37,000.

In coming years, however, if Australia’s fiscal positions worsens, there may be more calls to save further revenue from superannuation concessions with some arguing already that all retirees should pay some tax on their superannuation income given the current tax-free super balances on retirement is $1.7 million.

It remains to be seen what the future holds, but for the time being Labor’s recent tax is a reasonable  and fair reform in these tougher times where old and new policy demands are placing much greater pressure on the public purse.

In the end, Labor’s superannuation reform is indeed a sign that something has to give and there may be more reforms to come.