Superannuation tax breaks will cost budget $52bn, almost matching Australia’s age pension

New analysis calls for major changes including restrictions on concessions as the country risks having ‘two classes of state-funded retirees’

Tax breaks for superannuation will cost the federal budget $52.5bn this financial year, almost as much as the aged pension, according to a new analysis.

A research paper by the Australia Institute argues that since super tax concessions cost almost as much as the $55.3bn spent on the pension, Australia has “two classes of state-funded retirees in Australia”.

The progressive thinktank is calling for major changes, ahead of a review of the purpose of superannuation that the assistant treasurer, Stephen Jones, has suggested could pave the way to capped balances or other restrictions on tax concessions.

Australia’s generous super tax concessions are designed to encourage workers to save more for retirement and reduce reliance on the aged pension.

The concessions include allowing workers earning less than $250,000 to make contributions to super at a tax rate of 15%, much lower than personal income tax rates for middle and high income earners.

In most cases retirees’ investment earnings are not taxed on accounts with a balance of less than $1.7m. On accounts with a balance above $1.7m, investment earnings are taxed at just 15%, well below the top marginal tax rate of 45%.

The Australia Institute found that tax concessions for super are now in the top three expenditure programs by cost in the federal budget, dwarfing the national disability insurance scheme ($35.5bn) and funding for state hospitals ($26.6bn).

The report said that minor changes under the Coalition government had “done little to reduce the cost or improve the distribution of tax concessions for superannuation”.

“Major changes are required, such as abolishing concessions for people whose existing superannuation balance makes them ineligible for the age pension,” it said.

That could mean a worker loses access to tax concessions after accumulating $620,000 in super.

Richard Denniss, the executive director of the Australia Institute, said ATO data shows about 897 self-managed super funds are producing incomes of $1m or more.

“The current system is not taking pressure off the budget to provide a dignified retirement for all Australians, but it certainly is providing a lucrative tax avoidance facility for multimillionaires,” he said.

“There is a strong case for limiting tax concessions for high-income groups and it’s telling that even super industry chiefs agree reform is needed.”

In November, Jones told the Australian Financial Review wealth summit he was “not surprised” that concessions had become “a lightning rod for discussion” citing the fact 32 self-managed super funds have more than $100m in assets.

“If the objective of super is to provide a tax-preferred means for estate planning, you could say it is doing its job,” he said.

“I celebrate success, but the concessional taxation of funds like these has a real cost to the budget which needs to considered … tax concessions on a single $10m self-managed super fund could support 3.1 full age pensions.”

In January, Jones confirmed to the AFR that after legislating an objective for super Labor would examine superannuation tax concessions.

“One of the things that does stick out is incredibly high balances that just don’t seem to have any bearing or relationship with retirement income,” Jones reportedly said. “That’s where my mind is focused at the moment.”

Asked about limiting super tax concessions in January, the treasurer, Jim Chalmers, told reporters in Canberra the government was considering a mix of both “spending restraint” and “tax changes where they are responsible” to repair the budget.

But Chalmers cautioned that the government had not said that it “intends to definitely go down that path”. “If there are sensible suggestions made to us about how we repair the budget … then obviously we’re prepared to consider it.”

• This story was amended on 4 February 2023 to clarify that it is only the investment earnings of retirees that are taxed on accounts with a balance above $1.7m.


Paul Karp

The GuardianTramp

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