The Abbott government’s tax discussion paper released earlier this month, has thrown open the doors to a broad ranging debate on tax reform. One of the central themes is of course superannuation, can we expect to see it’s earnings kept tax free when the budgetary pressures created by an ageing population are considered? (Spending on the age pension is due to rise from the current 2.9 per cent of GDP to 3.6 per cent or approx. 180 billion dollars in 2054-55, source Intergenerational Report 2015). According to Joe Hockey “it will be difficult”.
The issue; the tax free nature of retirement incomes from super, have been labelled by many as unfair and nothing but a “tax cut for the rich”. We can only hope that the term “rich” is used with perspective and geared more towards the 475 Australians (out of 24 million) with superannuation account balances exceeding $10 million and not the masses in the middle who, in the past, were told to save for retirement, and accordingly did so responsibly and prudently.
The majority of Australians desire a superannuation system that is sustainable and equitable, but exactly how this is achieved promises to be a hot topic leading into the May Budget. The current system is complex and there is room for improvement but before the lobbyists and ‘experts’ dive in with their proposed reforms, perhaps as a nation we should first understand what it is we are trying to achieve – Is super intended to replace, complement or improve upon the age pension? It is difficult to have the answer when we cannot agree on the question!
Following are some of the biggest myths cited when it comes to superannuation tax concessions – a little clarity, so you can join the conversation with confidence.
MYTH: Superannuation is not helping reduce the government’s spending on the Age Pension
FACT: Super saves the government $7 billion in Age Pension expenditure annually, and these savings will only increase as the system matures
Superannuation is boosting incomes and providing a lifestyle in retirement that is better than that which can be sustained on the Age Pension alone. Around 32 per cent of those aged 65 in 2013 were fully self-funded in retirement, up from 22 per cent in 2000. This number is projected to rise to 40 per cent by 2023.
MYTH: Superannuation tax concessions cost the budget $30 billion annually – more than the total spending on the Age Pension
FACT: The actual cost of tax concessions is around $16 billion a year
Tax concessions applied to superannuation concessional contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement. The Association of Superannuation Funds of Australia (ASFA) analysis of data from 2011/12 found that around 75 per cent of the tax concessions applied to contributions went to those paying either of the (then) middle income marginal tax rates of 30 per cent or 38 per cent: those earning between $37,000 and $180,000 a year.
MYTH: The most important tax concessions received by high-income earners relate to superannuation
FACT: High-income earners get the most benefit from concessional capital gains tax treatment, negative gearing and exemptions for the family home
The bulk of the wealth of high-net-worth individuals is in the form of shareholdings or property, both residential investment properties and commercial real estate. Around $360 billion is held in superannuation by those with more than $1 million in super. This is just over 20 per cent of the $1.6 trillion investable assets held by high-net-worth individuals.
For most high-net-worth individuals, tax arrangements relating to capital gains, negative gearing and the family home are likely to have more impact on the achievement and maintenance of wealth than superannuation tax concessions.
MYTH: Only high-income earners make salary sacrifice contributions
FACT: Many middle-income individuals make salary sacrifice contributions
Only around 35 per cent of employees with incomes above $150,000 a year make salary sacrifice contributions. Around 85 per cent of salary sacrifice contributions relate to employees with incomes below $150,000 a year. Over half a million Australians earning between $40,000 and $80,000 a year make salary sacrifice contributions.
MYTH: Most people take a lump sum from their super when they retire, spend it all on a big holiday or to pay off debt, then end up on the Age Pension
FACT: The majority of superannuation assets end up in income stream products when people retire
There is no evidence that the majority of retirees are using their super to pay off debt or using a lump sum to fund the purchase of boats, cars and overseas trips before going on the full Age Pension.
The vast majority of Australians are very sensible with their retirement savings. The great bulk of larger balances are retained in the superannuation system in order to generate ongoing income in retirement. In 2012/13, around $45 billion in superannuation assets were invested in phased drawdown income-stream products, compared to just $8 billion taken as lump sums.
MYTH: Compulsory superannuation has not increased household or national savings
FACT: National and household savings have been substantially lifted by compulsory super
The household savings rate has increased by around five percentage points from five per cent in 1992, when compulsory superannuation was first introduced, to around ten per cent in 2013/14.
MYTH: Government funds spent on superannuation tax concessions would be better directed at helping other areas of the economy
FACT: Superannuation provides broad economic benefits that are the foundation for growth and prosperity
Superannuation plays, and will continue to play, an important role in providing the foundations for economic activity and prosperity. It currently lifts household savings by around 2 percentage points of GDP or nearly $40 billion a year and, with the increase in the compulsory Superannuation Guarantee from 9.5 per cent to 12 per cent, this is expected to rise to 2.5 percentage points of GDP. Higher levels of domestic savings reduce the cost of capital in Australia, increasing investment by Australian businesses, which drives stronger economic growth.
MYTH: Private superannuation savings could be confiscated and that process has already started
FACT: Superannuation entitlements and account balances are strongly protected by law including constitutional requirements that property can only be acquired on just terms
No political party in Australia has a policy that would involve the nationalisation of superannuation savings
Myths and Facts Source: The Association of Superannuation Funds of Australia (ASFA)