Is Super a tax dodge for the rich?

Superannuation is a tax dodge for the rich

AFR senior correspondent, Aaron Patrick, has taken aim at Paul Keating’s compulsory superannuation system, claiming it “has evolved into a state-sponsored tax shelter for non-self-made millionaires”:

Super is stacked in favour of the rich… men like former prime minister Paul Keating who spent their careers in high-paid careers now benefit from super rules so loose that today more than 10,000 people with $5 million and above in their accounts receive at least $70,000 a year in tax concessions…

“With higher-income earners receiving more superannuation tax concessions than lower- and middle-income earners, the superannuation tax concession component of government support increases inequality of private incomes for people aged 65 and over,” the [retirement] review states on page 40…

The consequence, according to the analysis by Callaghan, Kay and Ralston, is that superannuation has evolved from promoting retirement self-sufficiency to preserving family assets to pass on to children…

While the debate rages over increasing the superannuation guarantee, which would generate tens of billions for the superannuation and finance industries, a more serious challenge is mostly ignored.

Over the long term, super tax breaks are going to become a bigger budget cost than the age pension, which already consumes 2.5 per cent of total economic output, according to the review.

In other words, Keating and his fellow rich retirees will get more from the state than most struggling pensioners.

Well argued. Because one’s superannuation nest egg is a function of how much they earn and how long they work, it automatically misses lower income earners and those with broken employment histories (such as mothers).

Accordingly, the lion’s share of tax concessions flow to higher income earners – a situation made worse by the 15% flat tax on superannuation contributions/earnings, which gifts higher income earners the biggest tax benefits:



As illustrated above, taxpayers spend at least twice as much supporting the retirements of the top 1% of income earners as they spend on someone receiving the age pension.

Looking at superannuation specifically, the top 1% of income earners are projected by the Treasury to receive more than $700,000 in superannuation concessions over their working lives, roughly 14-times the $50,000 of concessions received by the bottom 10% of income earners.

Thus, the superannuation system effectively takes the disparities in working-life incomes and magnifies them in retirement, enshrining inequality in the process.

At a minimum, the scheduled increase in the superannuation guarantee to 12% should be cancelled by the federal government, since it would only worsen the above inequalities and further damage the federal budget.

Preferably, the compulsory superannuation system should be abolished altogether, with the massive budget savings redirected into lifting the Age Pension – Australia’s true retirement safety net.

-------//-//--------

Interested in opinions AND more importantly fairer ways to manage the situation, and in particular Super and Age Pension. Another discussion at a later point could be more general and cover all tax events and centrelink payments.

IMHO:

1. I can see there could be issues with the super-rich claiming large tax reductions but I thought that was mitigated with the $1.6M cap.
2. In addition, if Super was changed the super-rich would find another way to optimise whereby the main demographic disadvantaged by changes are the hardworking middle class.
3. Given the super rich are paying, through their taxes, for the Age Pension of many Australians, I would suggest a decrease in Super concessions should be complemented with an equivalent decrease in Age Pension payments.
4. Targeting those who are obviously auper-charging the economy can only impact the economy.
5. I'm against payments for nothing, unless there is a physical or mental disability involved, which will polarise opinion. A lot of countries have no such payments and their society functions effectively. There is always work out there (answering phone calls?), which an intelligent government could tease out and offer to those who need a job. If people work and their Super contributions are managed by a government fund that doesn't charge fees and invests properly, then they will have a nest egg and part of the problem is solved.

​

I do agree that our government is not competent, but saying Keating created Super to feather his own nest, and those of his pals, is a bit far fetched. Scrap Superannuation but scrap the age pension too, or just pay every person the exact same Age Pension.

Sorry for the long post but I hope it may generate some positive discussion, which someone may read and even apply. That being said, changes to this system will take a very long time to implement, which is why we should start now.

 

Just because something has some undesirable consequences doesn't mean it's a bad idea overall.

No super and no pension would condemn millions to abject poverty. It's morally unthinkable unless you think poverty is a personal failing.

The same pension for everyone would naturally mean much less for everyone, which condemns people with lower savings to greater suffering than if it was income or means tested. The higher income / asset people who get it won't need it.

 

I haven't read that long post but would say super certainly benefits the rich.

 

I’m not arguing it’s required ... this is a hypothetical in response to your hypothetical .... but if it were to be demonstrated that it is as inequitable as suggested , perhaps a simple solution may be to introduce bracket creep within super . Instead of a flat 15% rate pre pension , and a zero rate after pension age , could something like this work ?

SMSF earnings up to 50k - tax free
50-150k taxed at 15%
150k + taxed at 30%
dividend imputation would retain its full effect on incomes up to 50k , would lose approx 50% of its effect between 50-150k and lose all its effects above 150k

might make things a good deal less costly to taxpayers while still preserving very generous concessions for the majority of super retirees

 

Of the 26,000,000 people in Oz, a whole 10,000 odd have reasonable resources, what's the issue? More people should be striving for this level of unleveraged assets.

Being a millionaire is nothing compared to what it meant in previous generations. If Sydney's median is over $1M, houses in above-median suburbs are above $2M.

The govt subsidising 10,000 punters whilst how many receive the pension is a pittance by comparison - whingers complaining that they haven't made the most of their lot in life and been able to set aside some of their income for later stages of life, it's borne out of jealousy & not a true reflection of a desire for equality - we see all born equal but some of us are more equal than others.

(rant off)

 

People think they want equality, but they would spit on it if they saw what it really meant.

Want to work - equally - as hard as Jeff Bezos, for example? I wouldn't even want that, and I'm quite a hard worker.

Inequality = freedom. I have the freedom to work as much or as little as I want, and will be remunerated accordingly.

 

They want to be rich not all equally poor aka the North Korean model.

 

Super benefits high income earners but high income earners also pay more tax. As an average income earner I use super to minimise my taxable income by making concessional contributions. If concessional contributions were outlawed I wouldn't invest in super and would be more likely to end up reliant on the Aged Pension...

 

Of course any tax deductions favour higher income earners, they pay more tax in the first place. Simple maths.

 

i do NOT have a formal super fund , i found a loophole liquidated my super and bought AMP shares ( and exited in profit just before the Hayne Royal Commission ) and reinvested the proceeds elsewhere

i have some shares and some property ( and now a disability pension )

but worry that in the future the Aged pension will disappear or dwindle to a pittance barely worthy of the paper-work required to apply

now with Super you are putting a LOT faith in some fund managers ( after looking after my own portfolio i can tell you it is not as easy as it looks , but at least i can look in the mirror and question bad outcomes made , sometimes even learn better strategies )

now when i did have a company-controlled super fund , i DID read the yearly reports and some really raised my eyebrows, even the regulator asked some questions ... 3 years later

think of your super as the pension you would have got if you retired in the 1970s ( maybe the government will still giver Senior's discounts )

now true they are effectively you own forced savings invested on your behalf ( because the government has no faith you can invest wisely ... HUMPH )

i think worrying about us v. them on super is counterproductive , i would encourage members to focus on what is best for them ( and their family ) sure watch the other guy to learn more ( good AND bad ideas ) don't get distracted by jealousy , tax breaks etc etc

 

but the current system seems to want ( nearly ) everyone to be equally poor and fighting for crumbs ( including i suspect , many billionaires , who are now just basically upper-middle class or like plain millionaires back when i was earning $25 a week at my first official job )

a lot of those billionaires might be our future neighbours ( and not because we won the lottery )

 

Labor, this is what you needed to be talking about instead of attacking franking credits. Super is unsustainable if anyone over 60 essentially stops paying tax.

I disagree with the choice of wording here. It's not a tax concession, it's just an (near) unlimited tax free threshold. There's a difference, but it's there. If no tax is owed, then it's not a concession.

So no the government doesn't give the "rich" more handouts than those who rely on the pension. But it does beg the question, should retirees pay more tax? Should super be incentivising at the pension phase, or should the emphasis be on the accumulation phase (ie the accumulation phase becomes tax-exempt, and the pension phase is where tax is paid). These are questions which should be asked.

To those that say franking credits are a tax concession, here is where I disagree:

If your employee over-withholds tax each week on your payslip, it's not a tax concession when the ATO refunds it to you. So when the ATO holds the franking credits on your behalf, and your tax bill is less than your franking credits, that's not a tax concession either.

 

I think it is a shame the author omitted to include the "However..." which those guys and gals in Government would be well aware of. The However is "Death has a way of fixing that."

Deaths in Australia, Age at death - Australian Institute of Health and Welfare

Granted the wealthy can afford better health care which may extend their longevity but eventually they die and those death benefits will have to be removed from superannuation.

So with the balance cap on super, in the long term will there be funds with balances of $5m or so and will high income earners be prepared to plow money into super given Div 293 and other taxes or will alternatives be found?

 

You may have found where the limit on the concession should be placed - the concession should cut out at the equivalent of the full pension (including all of the other tack ons available eg transport, utilities etc which attract a discount but not given to self funded retirees). Any income in super above that still gets hit with the 15% that super would otherwise attract.

 

There's many different ways of doing it. Not going to hypothesise an outcome.

Between super, the offshoring of multi-national profits and the stagnation of wages, it's becoming quite clear that the current tax system is stuck in Keating's 80s and needs to be modernised.

 

i disagree , i think all current attempts to 'modernize' it are the problem

sure the super-rich are going to do well , they add thousands a month to the investment ( and have the bucks for quality investment advice )

Keating's plan was always to take the pressure off the Aged pension which was going to be under pressure as soon as university attendances increased ( instead of going to work in your teens and paying tax for more than 40 years )

changing it all the time only makes investing harder for the planners and probably strangles outcomes as well

one obvious flaw i do note is our Super funds seem to resist early investment in infrastructure projects which could have built value for the whole economy ,

may incentives to be more like the Canadian Super funds which seem to be buying up a lot of Australia

 

The rich are always going to find ways to minimise tax - even the non rich will do. The vehicles they chose to minimise will change over time according to how much the govt changes tax laws for the various possibilities.

I find the idea of Superannuation and independant retirement funding to be a great idea so would hate to see the govt meddle with it further to try and tweak extra tax income in people's golden years.

The small minority who the article talk about I really don't think affect the overall economy that much surely?

 

I suspect the elites in DPNK are ridiculously privileged compared to the peoples. Grass is only greener from the other side of the fence.

 

i would have thought the fund managers of the Australian super funds would have had a bigger impact , NOT implying any wrong-doing but simply by their investment decisions , i.e. do they invest in an upcoming float or buy some corporate bonds due to be issued , buy in during a capital raising etc. etc etc

a million in the right place and right time can do a lot

the late Kerry Packer would term it tax-minimization and a sensible thing for every sensible investor ( it MIGHT teach governments fiscal responsibility )

yes the system has lumps , bumps and warts , . BTW i see the occasional warning from Peter Costello regarding the Future Fund , so we can't expect the government to tweak the workers super better than they manage their own

 

am not sure how many 'elites ' are in DPNK ,

but unless our economy spirals into a very dark place , there is still some slightly green grass which is awesome for late summer here ( there is always a chance it will be burning this time of year )