Treasury methodology on super “flawed”

During the week, the Treasury tax expenditure estimates attracted further criticism. Detailed research published by actuarial and advisory firm Mercer concluded that in an international context our superannuation concessions are not overly generous. Among other things, our means-tested age pension system generates substantial savings from retirees with larger superannuation accounts.

The Treasury methodology also attracted justified criticism of the unrealistic assumptions made. The estimates assume that the total contributions to super would not change if full marginal tax rates apply. Apart from compulsory super where the member has no say, it is a nonsense assumption that taxation at full rates would not affect the level of contributions.

Why would anyone in their right mind divert fully taxed money into super when it’s tied up untouchable until at least 60 (for anyone born after July 1, 1965), especially with continuing speculation about increases in this minimum age?

As Asset Check highlighted last week, Treasury does not even consider negative gearing to be tax expenditure. But for as long as this strategy remains available, taxing super at full rates would also divert pre-tax dollars to this investment alternative.

The reality is that tax concessions for voluntary super are needed to compensate for the money being tied up for so long and not being accessible to help pay off a house mortgage. Higher tax on super will see more money flowing into tax-free owner-occupied housing and paying off the mortgage. Once the non-deductible interest on the mortgage is paid off, the investor can use the house as collateral for a negatively geared investment.

Furthermore, as Robert Gottliebsen points out, the Treasury methodology for assessing the loss in tax on investment income is also flawed. 

Changing the super tax regime would reduce the annual amount of income received by superannuation funds. As more tax is levied on contributions, there will be less money invested in the fund. At a 15 per cent tax rate, $85 out of every $100 contributed is invested. At a 35 per cent average tax rate, only $65 will be invested to earn income. At higher tax rates, the effect is even greater and over time the reduction in total annual fund investment income will be more marked.

Short term, the effect would also be large as older members clear debts. Treasury has long had a hostile view on private super. It’s about time it faced up to the benefits from encouraging Australians to invest in productive assets.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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