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Solving the super debate is not that hard

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By Paul Rickard

I am staggered that the Government hasn’t been able to put the super debate to bed. Sure, changing super legislation requires careful drafting, but you would think that more than two months after the election, the key measures would be done and dusted.

After all, the package is in the main fair, and there wasn’t any noticeable electoral backlash (see my analysis of the voting in safe liberal seats here). Perhaps a few Liberal diehards didn’t get out and staff the polling booths or make donations, but that wasn’t the reason PM Malcolm Turnbull ended up with a one seat majority.

Fortunately, the debate has moved on to addressing the adequacy of the caps. But even so, Treasurer Scott Morrison still seems some way from gaining the necessary support. Recognising that politics is the art of compromise, and that in addition to his own side, he will need the support of either the ALP or some of the Senate cross-bench to pass the legislation (the Greens are likely to support), here’s how I’d solve it. And, it takes heed of the Treasurer’s position that any changes to the package need to be neutral to the budget. But before looking at the solution, a quick recap on the package.

The package

The Government proposed a package of 11 changes to the super system. Over the forward estimates, the package raises around $5.4bn, with a net $2.0bn in 2017/18. Five of these changes were enhancements to the super system and cost the taxpayer money. Remarkably, they got almost zero traction, with all the media and political attention on the revenue raising measures.

The eleven measures and their budget impacts are set out below.

The major expense measure is the re-instatement of the Low Income Super Contribution (to now be called the Low Income Super Tax Offset), which rebates to the super fund, the tax of 15% charged on super contribution by persons earning up to $37,000 pa. Effectively, low income workers’ contributions would be tax free.

The other expenses measures included: (i) allowing contributions up to age 75, irrespective of employment status (ie the abolition of the work test); (ii) catch up concessional contributions for those with super balances under $500,000; and (iii) anyone will be able to claim a tax deduction for personal super contributions, regardless of employment status.

The last of these measures is probably the least understood and least appreciated, and comes at a cost of $1.0bn over the forward estimates.

Currently, one of the eligibility rules to claim a tax deduction for a personal super contribution is that income from employment sources can’t be more than 10% of a person’s total assessable income. This is intended to limit the entitlement to the genuinely self-employed such as sole traders.

From July 2017, all individuals will be able to claim a tax deduction for personal super contributions, regardless of employment status. These contributions are also classified as concessional contributions, and will be subject to the $25,000 cap.

This means that those who are partially self-employed and partially salary and wage earners will be able to claim a tax deduction, as well as individuals who work for an employer that does not offer salary sacrifice arrangements.

It also means that retirees under age 75, or non-working spouses who have investment income over the tax free threshold of $18,200, could make a personal contribution to super and obtain a tax deduction.

The obvious solution

The industry largely agrees that the $500,000 lifetime cap on non-concessional contributions is too low. And even if they don’t, when the retrospective debate is added to the mix, an increase goes some way to ameliorate the disaffected.

The concessional cap of just $25,000 is also way too low. However, this measure raises the most revenue, almost $2.5bn over the forward estimates, so changing this is the most difficult if the budget impact is to be neutral.

So, a higher lifetime cap of $750,000 on non-concessional contributions seems like a reasonable compromise between those arguing for a limit of $1m, and the Treasurer’s $500K proposal.

How to pay for it? There are two obvious solutions. Firstly, don’t proceed with the change to allow anyone to make a tax deductible super contribution. While it is well intentioned and will suit a number of tradies as well as those working for employers who don’t offer salary sacrifice, it will also be accessed by others (such as non-working spouses with investment income) who don’t really need another tax deduction.

The other option is to lower the threshold for the higher rate of tax on super contributions by high income earners (the so called Division 293 tax) from $250,000 to $200,000. As the following table shows, people earning between $180,000 and $250,000 will enjoy the highest effective tax benefit from making super contributions.

The argument against making this change is that the Government didn’t go to the election with the proposal and it would impact around 220,000 taxpayers. While it is a valid argument, it’s only a matter of time before this threshold is lowered to $200,000. If this Government doesn’t do it now, the next Government searching for budget savings will do it, because the benefit is unfair and squeals from persons earning $200,000 won’t resonate very far. There’s absolutely no reason why a person earning $225,000 should enjoy a higher benefit than a person earning $175,000, or a person earning $275,000.

Come on, Scott

Stick to your guns, Scott, but give a little and get it done. Let’s move on. It is not that hard to find the offsetting revenue measures that will allow for an increase in the cap.


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Published: Thursday, September 08, 2016

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