What a cap on superannuation tax concessions means for you

Treasurer Jim Chalmers has made "modest adjustments" to super for the wealthy.

Treasurer Jim Chalmers has made "modest adjustments" to super for the wealthy. Photo: AAP

Treasurer Jim Chalmers opened the gates to reform last week with the wording of the long-awaited objective of superannuation to be legislated later in the year.

And a week later, the government has unveiled an overhaul of super changes that will increase tax on superannuation contributions for those with balances over $3 million from 15 per cent to 30 per cent.

The measures, which will affect an estimated 80,000 people, are tipped to save the federal budget $2 billion a year – money Dr Chalmers said will be used to help repair government finances.

“The modest adjustment we announce today means 99.5 per cent of Australians with superannuation accounts will continue to receive the same generous tax breaks,” he said in Canberra on Tuesday.

“The 0.5 per cent of people with balances above $3 million will receive less generous tax breaks.”

Tax concessions halved for accounts with over $3m

Changes not retrospective

The changes will come into force from July 2025, after the next election, and will not be retrospective, meaning the new tax rate will only apply to new super earnings.

The amendments will be combined with a change to the wording for the objective of super to stipulate that the system must “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. 

That seemingly obvious statement effectively begins discussion on how much money you need for a “dignified retirement”.

The answer is definitely not in excess of the $100 million that 32 Australians have in their self-managed super funds.

Superannuation is built on tax concessions deemed necessary to convince people of the need to put money away for 30 or 40 years.

And you might be surprised by how much those concessions cost the budget each year.

Current Treasury figures show that super tax concessions, concessions on contributions and earnings for those working and tax-free pensions for retirees, cost the budget $52.3 billion, almost as much as the $55 billion spent on the aged pension.

That’s more than the $35.5 billion for the NDIS and the $27.1 billion for aged care.

“We need to be really careful about tax concessions as they cost a lot of money and they need to be targeted,” Chant West research director Ian Fryer said.

Dr Chalmers, the man with his hands on the nation’s purse strings, is looking for ways to prune back those super costs without picking a political fight he can’t win.

And on Tuesday hints turned into policy when he unveiled a crackdown on the fewer than 1 per cent of super members with more than $3 million.

That’s about 16,000 people.

Cap coming

The cap on concessions for balances above $3 million is below that recommended by the super industry, which wanted it set at $5 million, and above that called for by the Grattan Institute, which had said $2 million was a better figure.

“The current system is offering billions of dollars a year to the wealthy who won’t spend them in retirement,” Grattan Institute economic policy program director Brendan Coates said.

“The main effect of that is to boost the value of inheritances which makes Australia less equal.”

Given only 80,000 people have balances above $3 million, the average person is not likely to be affected.

They will never build the types of balances the proposed caps would hit, so they wouldn’t notice the change.

But there’s a problem for the government in that it won’t deliver Treasury enough money to stem the rise in super costs.

So, the Grattan Institute has other ideas that would help deliver budget savings without drawing the sort of ire from retirees that cost Labor the 2019 election.

Tax and contributions

Currently anyone earning above $250,000 is levied tax of 30 per cent on their super contributions on that excess.

On the income below $250,000 their contributions are taxed at 15 per cent like everyone else.

Contributions tax is the tax the government takes out of concessional super contributions. Most people’s employers take this from their wages for them.

The Grattan Institute says that limit should be cut to $220,000 and a tax of 35 cents in the dollar could be levied above that income.

Grattan Institute also wants the maximum concessional contribution to be cut from the current maximum of $27,500 to $20,000.

“Most people contributing more than $20,000 are in the top 20 per cent of income earners and will never spend their super in retirement,” Mr Coates said.

“That will save $1.6 billion a year and reducing the income level at which section 293 tax [on high incomes] to $220,000 would save another $1.1 billion.”

The hard  stuff

Those changes would be relatively easy to sell to the electorate as they would affect only a relatively small number of high-income earners, and average earners would not feel like the Treasurer was coming for their retirement savings.

But collectively they might bring in only $4.2 billion.

“The elephant in the room is that most people are still earning tax-free income in retirement,” Mr Coates said.

He suggests charging retirees a 15 per cent tax rate on earnings inside their funds in retirement.

That means a tax on the money your money generates in investments inside the fund, not the income paid out to retiree members.

“That would raise $6 billion a year for the government,” Mr Coates said.

However, that would likely be seen by retirees as retrospective because it wasn’t the deal they signed up to when they entered the system.

It would also be easily portrayed as a tax on battlers who had worked hard all their lives.

So it’s unlikely to come up as a policy move from an ALP that still smarts at its 2019 clobbering over what the Coalition labelled as a “retiree tax”.

The New Daily is owned by Industry Super Holdings

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