A tax cut designed to encourage Australians to save for retirement could be at the forefront as the government seeks solutions to its growing budget woes.
It has been described by the government as “one of the most important conversations” the nation needs to have, but what exactly does that mean for the everyday Australian?
So what is it?
Super tax breaks were created as an incentive to encourage people to save money instead of relying on old age pensions.
It meant that if you were still working and earning less than $ 250,000, anyone could contribute to their pre-tax pension at a 15% rate.
Retirees with more than $ 1.7 million in super also have their excess funds taxed at a generous 15% subsidized tax rate.
This rate is much lower than the marginal rate of 45 percent taxed on high-income earners.
What’s the problem?
The main concern is that the system is now being used to create wealth, not to save for retirement.
In a speech to AFR Wealth and Super Summit, Financial Services Minister Stephen Jones revealed that there were 32 self-managed super funds with over 100 million assets under them.
The largest, he said, had grown to $ 400 million.
The funds all benefit from lower fees than if the money were kept outside the super.
“If the super’s goal is to provide a fiscally privileged means of estate planning, it could be said that it’s doing its job,” Jones said.
“I celebrate success, but the preferential taxation of funds like these has a real cost to the budget that needs to be considered.”
In the financial year 2020-2021, the super tax breaks cost the federal government about $ 45 billion in lost revenue.
By comparison, the aged care pension cost the budget $ 53 billion.
Mercer estimates that the tax relief on a single $ 10 million self-managed super fund could support 3.1 senior citizens’ pensions.
Additionally, the Grattan Institute said the concessions are poorly targeted, with half of the tax benefits going to the richest 20% of households.
What can be done?
The social security industry appears to be comfortable with discussions about the cap on tax breaks on balances of $ 5 million.
There are only about 11,000 people who have balances above that amount, and the move would save the budget around $ 1 billion annually.
But lowering the ceiling to $ 2 million would affect 80,000 people and, according to the Grattan Institute, would save the budget $ 2.8 billion a year.
However, Labor was not elected on a pension reform platform, which makes any potential change a difficult topic to navigate.
Financial opposition spokesman Stuart Robert has labeled the debate “the definitive definition of the politics of envy.”
“Unfortunately, Labor went into the elections saying there were no changes to the pension,” he said.
“The Treasurer said the super wars were over, but here we find only months later the Assistant Treasurer looking for every opportunity to beat up anyone who has done well.”
But Mr. Jones pointed out that any changes would not be made without consultation.
“Australians have their say,” he said.
Originally published as a government conversation on pension tax relief