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Should wealthy superannuants be taxed?

David James |  27 April 2015  |  Investing

ideaThe Labor government has shown some suprising honesty in putting forward a policy to tax wealthy superannuants. They say it will raise more than $14 billion over a decade with about 180,000 Australians affected by the changes. It is pushing for them to come into effect in 2017. The two initiatives wouldresult in retirees losing tax-free status on annual superannuation earnings above $75,000, and more people paying 30 per cent tax on contributions. The previous threshold was $100,000 but the Opposition is saying that has been revised down because of the worsening Budget position.

The SMSA has prepared a report analysing the distribution and magnitude of very high superannuation account balances. It found that there are over 200,000 people who have superannuation account balances in excess of $1 million, with around 70,000 people having balances in excess of $2.5 million:

 

"Approximately 24,000 self managed superannuation fund members in the pension phase with balances in excess of $2 million received around $5.2 billion in tax-free income stream payments in the 2012/2013 financial year. This is an average tax-free income stream payment of around $216,000.  This is compared with the 232,000 SMSF members with balances of less than $1 million who received a total of $8.9 billion in tax-free income stream payments, or an average tax-free income stream payment of around of around $38,000."

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That figure of $38,000 suggests that many will not be caught by tax. One question is what will happen when there is a one off event, such as the sale of a property. Will that be treated as income and attract a high rate of tax?

The pressures are certainly great, and some adjustment seems inevitable. The Budget is in long-term structural decline, and superannuation concessions are projected grow by10.8% per annum between 2014-15 and 2017-18 to about $49 billion.

But the much bigger problem in Australia is the distorted property market. Notionally at least, these distortions are in the hundreds of billions, not tens of billions. And with arguments by the Grattan Institute that the family home should be used to assess eligibility for the pension is troubling sign. The claim that Australia's pension system is poorly targeted is flat out wrong. Australia's social welfare system is one of the best argeted in the OECD. There may be some inequities on the margin, but overall there are few developed countries better at getting the money where it is most needed.

Property, however, has become a massive tax rort, and one which is inherently unproductive, because it is in the end just related to land prices. Macrobusiness has pointed this out:

 

ScreenHunter_7209 Apr. 27 07.14

 

The claims that it is for lower income workers is simply false:

 

"As you can see, negative gearing was significantly under-represented at the lower income levels and over-represented at the higher income levels in 2011-12.

The picture gets even worse when one considers the share of total negative losses claimed at each taxable income level. As shown below, higher income earners – who are already over-represented in their negative gearing activities – claim an even higher share of the negative gearing losses:

ScreenHunter_7213 Apr. 27 07.25

 

 

Super may have created problems on the margin, but the big distortion is property.

 

 

 

 

 

 

 

 

 


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