Tinkering with super would make tax system less fair
Far from increasing the fairness of our tax system, Treasury's latest proposal to replace the flat rate 15 per cent contributions tax by a similar rebate will only increase the tax burden on wage earners relying on compulsory super for their retirement. Everyone else, particularly high-income earners, will be largely unaffected by the change.
Replacing the 15 per cent contributions tax by a 15 per cent rebate increases the tax burden on super contributions by between 4.5 and 19 per cent of all contributions up to the annual cap of $30,000 or $35,000 (50 and over) for taxpayers with taxable incomes above $37,000 a year. The maximum annual tax increase will be $6,650 and a $100,000 annual earner receiving compulsory super would pay about $850 more a year in tax.
All this additional tax will reduce the money building up in personal superannuation and, unlike the current arrangements where the ATO assesses the true liability only for individuals earning more than $300,000, personal assessments will be required for most taxpayers. The meagre discussion to date provides no information about how much all compulsory super contributions will lose and the cumulative effect of this.
The self-employed and workers making salary sacrifice contributions have an easy option. They can change their savings strategies and invest elsewhere. Why, for example, wouldn't a top 49 per cent marginal rate taxpayer focus on negative gearing where the tax deduction is the full 49 per cent rate with no limit on the total deduction claimed?
Similarly, compared with receiving a 15 per cent tax advantage by voluntary super contributions, the options of over-investing in the family home and paying off outstanding mortgages would be highly attractive at all income levels. The tax-free capital gains on the sale of the home and privileged access to the age pension are the resulting benefits.
By attacking super without addressing negative gearing and owner-occupied home tax advantages, the government would place wage earners forced to contribute to super at a huge disadvantage. Younger families already struggling to achieve home ownership wouldn't be helped by encouraging even more negative gearing by higher-income taxpayers.
By its very nature, superannuation isn't an attractive savings vehicle. The money's untouchable until at least age 60, with the additional risk of further rule changes. Without compensating tax advantages, its attractions will decrease even further.
Perhaps the best evidence of the potential detrimental impact of further reducing the tax advantages of voluntary super contributions is the increase in the number of taxpayers who own investment properties since 1990. Today about 2 million taxpayers own investment properties. In 1990 there were 600,000. And because of negative gearing refunds, no income tax is collected from this investment sector.