prescriptions for reform of australia’s superannuation tax ... · contributions to a spouse...

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* Professor Kerrie Sadiq, School of Accountancy, QUT Business School, Queensland University of Technology, and Adjunct Senior Research Fellow, Faculty of Business and Economics, Monash University.

This paper was accepted for publication on 28 February 2012.

Prescriptions for reform of Australia’s superannuation tax concessions

Kerrie Sadiq*

Abstract

The highly controversial and often politicised issue of Australia’s retirement savings regime featured prominently throughout the two day Federal Government’s October 2011 Tax Forum. Calls for reform of this regime are by no means new. Reform debate over the years has focused on each of the three separate pillars: the age pension, compulsory superannuation, and voluntary saving, as well as the interaction of those three elements. However, recently there has been a significant shift away from reliance on the age pension, with its associated risks falling to the government, to a defined contributions scheme where the associated risks fall to the individual taxpayer. Consequently, Australia’s superannuation regime is predominantly subject to current debate, and, as such, the subject of this article.

This article considers the history of Australia’s retirement savings regime, along with a framework for evaluating the superannuation tax concessions. It then discusses the recommendations of the Australian Future Tax System (AFTS) Review Panel and ensuing debate at the Tax Forum. Finally, it suggests two proposals to achieve the objectives of the AFTS Review in relation to retirement, those objectives being a system which is broad and adequate, acceptable to individuals, robust, simple and approachable, and finally sustainable. The first, whilst potentially requiring some

372 (2012) 27 AUSTRALIAN TAX FORUM

‘tinkering’, is relatively simple and a blue print has already been provided to the Federal Government – the adoption of Recommendations 18 and 19 of the AFTS Review. The second is one of management. Superannuation concessions are fundamentally categorised as tax expenditures and the management of these tax expenditures, not just the reporting, should be undertaken.

1 Introduction

This article considers Australia’s retirement savings regime which has been part of the tax reform agenda for many decades, and is no less prominent in the current debate on tax reform. The perceived political importance of the retirement savings regime is evidenced by the request of the Federal Treasurer for the Australian Future Tax System (AFTS) review to release a separate and preliminary report into the retirement income system. The advance report,1 released in May 2009 taking into account the findings of an earlier pension review,2 was provided to allow the recommendations to be taken into account in addressing pension adequacy in the 2009-10 budget. The retirement savings regime was also addressed in detail in the final report of the AFTS review with seven of the 138 recommendations specifically relating to retirement incomes. While the specific recommendations have not been adopted, the Federal Government has subsequently implemented some changes and proposed others. For example, there has been a tightening of the concessional contributions threshold, along with announcements for the increase of the superannuation guarantee rate from 9 per cent to 12 per cent, the increase in superannuation guarantee age, and changes to the low-income earners government co-contribution.

The highly controversial and often politicised issue of Australia’s retirement savings regime also featured prominently throughout the two day Federal Government’s October 2011 Tax Forum. Indicative of the fervent nature in which the retirement savings regime was addressed, discussion was preceded by no less than ten separate submissions by bodies representing industry and stakeholders,3 accompanied by further submissions from academics and other tax experts.4

Theoretically, Australia’s retirement income system is designed to encourage individuals to self-fund their retirement through a voluntary and compulsory

1 Australia’s Future Tax System, The Retirement Income System: Report on Strategic Issues, May 2009.

2 Harmer, J, Pension Review Report, Department of Families, Housing, Community Services and Indigenous Affairs, 27 February 2009.

3 Specifically: Association of Super Funds of Australia, Australian Institute of Superannuation Trustees, Challenger Limited, Financial Planning Association of Australia, Financial Services Council, Industry Funds Management, SMSF Professionals’ Association of Australia, National Seniors Australia and Association of Independent Retirees.

4 See, for example, Saul Eslake, Program Director (Productivity Growth), the Grattan Institute, Ann O’Connell, University of Melbourne, and Paul Gerrans, University of Western Australia.

373PReScRIPTIONS FOR ReFORM OF AUSTRALIA’S SUPeRANNUATION TAX cONceSSIONS

contributions scheme with a safety net in the form of a pension for those who do not meet this goal. However, the regime which has developed is not seamlessly integrated but rather a set of complex, interwoven elements to what is collectively known as the “three-pillar” architecture of the retirement income system. Reform debate over the years has focused on each of the three separate pillars: the age pension, compulsory superannuation, and voluntary saving, as well as the interaction of those three elements. In recent years, however, there has been a significant shift away from reliance on the age pension, with its associated risks falling to the government, to a defined contributions scheme where the associated risks fall to the individual taxpayer.5 Consequently, whilst Australia’s superannuation regime is considered part of the “three-pillar” architecture of the retirement income system, stakeholder interest, along with the unique concessional regime for contributions and earnings, and exemption from tax for withdrawals, is predominantly subject to current debate, and, as such, the subject of this article.

2 The Three Pillars of Retirement Savings

Australia’s history of superannuation can be traced back to the mid-1800s, with individuals being encouraged to plan for their own retirement through tax concessions as far back as 1915.6 However, it was not until the 1970s, spurred on by industrial relations claims, that superannuation became widely available. The 1980s saw an even greater campaign for superannuation for low and middle-income workers, with the Australian Council of Trade Unions successfully seeking employer superannuation contributions to be paid into an industry fund. Prior to 1986, it is estimated that approximately only 40 per cent of individuals had superannuation coverage.7 However, this increased in the following four years to an estimated 79 per cent, with coverage in the private sector growing from 32 per cent in 1987 to 68 per cent in 1991.8 Until this date, Australia had a two-pillar system consisting of the age pension and voluntary contributions. In 1986, a form of compulsory retirement savings scheme was implemented when industrial awards required individuals to have 3 per cent of their wages or salary paid as superannuation contributions. In 1992, a legislative scheme which made employer contributions compulsory (the superannuation guarantee scheme) was introduced, extending the requirement to all employees, and the three-pillar system, discussed below, was born.9

5 For a discussion dealing with the risk along with the consequences of moral hazard and information asymmetry, see Richard Vann “Never-ending Tax Reform and Financial Services” (2011) 14(4) The Tax Specialist 186, 192.

6 Australia’s Future Tax System Retirement Income Consultation Paper, December 2008, 43.7 Ibid.8 A recent history of superannuation in Australia, APRA Insight, Issue 2, 2007, Special Edition, p3.9 For more detailed discussion on the history of superannuation in Australia and the development

of the three-pillar retirement savings regime see the author’s previous work entitled “Tax Expenditures as Part of Australia’s Retirement Income System: The Elevation from Disguised Expenditures to Architectural Pillars of the 21st Century” 13.1, in Philipps, L, Brooks, N and Li,


The three pillars are made up of the age pension, compulsory savings through the superannuation guarantee, and voluntary retirement saving. The retirement income system in Australia has undergone significant changes since 1983 and, whilst it may appear that the three pillars are part of the one system, they have developed independently and therefore their interaction is not seamless.

The first pillar, the age pension, is a form of defined benefits scheme that provides a means tested guaranteed minimum income stream for eligible individuals from the age of 65 years.10 As at 1 January 2012, the single age pension is $689, while a couple receives a maximum of $519.40 each. Whilst outside the scope of this article, it should be noted that the first pillar of the retirement savings regime has undergone amendments recently, prompted by the 2009 report into pensions.11

The second pillar is the superannuation guarantee, a compulsory scheme introduced in 1992, which currently requires employers to contribute a minimum amount of 9 per cent based on the employee’s salary or wages up to a maximum amount. This percentage is to be increased gradually to boost it to 12 per cent by 2019-20. The superannuation guarantee varies significantly from the first pillar in that it is a defined contribution scheme rather than a defined benefits scheme. As this pillar is based on contributions, those who earn more over a lifetime necessarily accumulate greater wealth in superannuation. This scheme is restrictive in its application: it does not apply to business income thus excluding those who are self-employed; nor does it applies to employees with wages of less than $450 per month and there are some other exclusions. It is this second pillar which receives most of the tax concessions with contributions to a “complying superannuation fund”12 up to a certain cap taxed at a flat 15 per cent. Earnings by the fund are also taxed at a flat 15 per cent, while capital gains are generally taxed at 10 per cent. Provided taxpayers are 60 years or older when withdrawing funds, there is no further tax payable as benefits will be exempt.

The third pillar of the retirement savings regime, voluntary saving for retirement, consists of a combination of additional voluntary contributions by employees, contributions to spouse accounts, and contributions by self-employed individuals, all of which attract tax concessions. Low and middle income earners who make a voluntary contribution are entitled to a government co-contribution,13 whilst contributions to a spouse account may qualify for a means tested offset. Self employed individuals are entitled to deductions for contributions to a fund, with tax paid on those contributions in the hands of the fund at 15 per cent. Salary sacrifice, that is,

J (Eds) Tax Expenditures State of the Art (2011).10 From 1 July 2011, women born between 1 July 1947 and 31 December 1948 will qualify at 64

years and 6 months. For women born between 1 January 1949 and 30 June 1952, the qualifying age is 65 years. For both men and women born on or after 1 July 1952 the pension age will progressively increase from 65 to 67, starting on 1 July 2017, reaching 67 in 2023.

11 Harmer, n11.12 See the Superannuation Industry (Supervision) Act (Cth) 1993 for compliance requirements.13 For the 2011-12 income year the maximum amount is $1,000. Under the new reforms it was

announced that changes would reduce this to $500 from the 2012-13 income year.


payments made from pre-tax income, by higher income earners is also a significant part of the third pillar, although has been somewhat mitigated recently by the lowering of the concessional contributions cap to $25,000 for individuals under 50 years.

This article now turns to a consideration of the framework for evaluating the superannuation concessions and the underlying rationale for the subsequent debate.

3 Evaluating Superannuation Tax Concessions

A framework for evaluating superannuation tax concessions is required before the recommendations of the AFTS review and the ensuing October Tax Forum debate can be considered. Superannuation can be taxed at three points: contribution, earnings and payment. At each of these three points tax may be imposed at the full rate (T), at a concessional rate (t), or an exemption may apply (E). In Australia, the current concessionary regime and the tax consequences at these three points is considered to be ‘ttE’, a unique system compared to most developed countries. This framework is important both from the perspective of an analysis of the possible tax points and concessions at those points, as well as the underlying assumptions relating to the debate. Debate on retirement savings concessions is often dependent on two underlying assumptions: measurement and framework, each of which are themselves the subject of dispute.

First, the measurement of the fiscal value of superannuation savings is often used as the basis for arguing that certain concessions should be abolished. However, different stakeholders rely on different valuations depending on the benchmark used. At the centre of this debate is whether the ‘comprehensive income tax benchmark’ or the ‘expenditure tax benchmark’ should be used to determine the fiscal cost of superannuation tax concessions.14 Currently, Treasury in their annual Tax Expenditures Statement uses a comprehensive income tax benchmark to estimate that the aggregated tax expenditures for funded superannuation on the 2011-12 year is at a cost of $30.45 billion, with concessional taxation of employer contributions estimated to be $15.8 billion and concessional taxation of superannuation fund earnings estimated to be $13.6 billion.15 The comprehensive income tax benchmark used to value these concessions is the standard tax treatment that applies to similar taxpayers or types of activities, taking into account various structural elements. In other words, the income tax benchmark for superannuation ‘is that contributions are taxed like any other income in the hands of the fund member, earnings are taxed like any other investments in the hands of the investor and benefits from superannuation are untaxed. Any costs associated with superannuation investments are deductible under

14 For a further discussion on the alternate benchmarks see Hanegbi, R, “Improving our Superannuation Regime: A Post-Henry Review look at Superannuation Taxation, Raising Superannuation balances and Longevity Insurance” (2010) 25 Australian Tax Forum 425.

15 Australia, Department of the Treasury, Tax Expenditures Statement 2010 (Canberra: Department of the Treasury January 2011), 238.


the benchmark.16 The comprehensive income tax benchmark can be regarded as ‘TTE’ with the value of the tax concessions a measure of the difference between TTE and ttE.

The result is very different when the expenditure tax benchmark is used to value the superannuation concessions. There are two types of expenditure tax benchmarks: the pre-paid expenditure tax and the post-paid expenditure tax. The pre-paid expenditure tax benchmark is based on direct taxation of labour income with an exemption for saving and can be described as a ‘TEE’ model. The comparison, therefore, is between TEE and ttE, resulting in a much lower estimate of the cost of superannuation tax concessions. In 2008, Treasury estimated that in the 2007-08 year, the superannuation tax concessions would have an estimated aggregate cost to revenue of $4.6 billion, compared to $26 billion in the same year using the comprehensive income tax benchmark based on the pre-paid method. For obvious reasons, the superannuation industry has lobbied over the years for this method to be formally adopted. However, currently Treasury uses the figures released in the Tax Expenditures Statement as the official estimated fiscal cost, a method which is consistent with other OECD countries and arguably in line with encouraging retirement saving.17

Whatever the fiscal value of the superannuation concessions, no-one doubts that there are costs involved. However, a second debate which flows on from this valuation centres around whether superannuation concessions should be seen as part of the tax system, and therefore part of the tax expenditures regime or whether they should be evaluated as part of the three pillar architecture of the retirement savings regime within our broader tax transfer system. For the present purposes it is clear that while the AFTS Review had the opportunity to assess the concessions as part of the tax expenditure framework, their focus was in fact on an evaluation within the retirement income regime and tax transfer system. Whilst it may be argued that the significant fiscal costs associated with the superannuation concessions warrant a traditional tax expenditures analysis by treating the relevant tax expenditures as the equivalent to direct spending programs, a broader institutional approach is justified and consistent with both the modern economic approach to taxation and alternative theoretical methods of tax expenditure analysis.

Measurement of superannuation concessions, as described above, is officially based on the traditional approach of departures from the comprehensive income tax base and reported in the Treasury annual Tax Expenditures Statement. The traditional approach to tax reform has also been based on the assumption that a comprehensive tax system is the ‘ideal’. However, the AFTS review demonstrated a marked shift from this traditional method to a modern welfare economics approach.18 As described by Vann:

16 Ibid, 207.17 Australia’s Future Tax System “Final Report: Part 2 - Detailed Analysis - Volume 1“ December

2009, 95.18 For a discussion on the shift in approach from the traditional comprehensive tax system to a

modern economic welfare approach, see Richard Vann, n 5.


‘The welfare economics approach to taxation means that there no longer are any accepted absolutes in tax policy analysis like the comprehensive tax base. Analysis of tax reform thus requires sophisticated theoretical and empirical studies to substantiate claims made in relation to the economic efficiency and distributional consequences of the proposed tax measures’.19

The consequence of this approach is that tax can no longer be: ‘analysed in isolation from the rest of the economic system, most notably, the tax and transfer (social security) systems need to be viewed as a whole, and indeed it is often necessary to take into account other economic policies in evaluating the economic impacts of the system on individual choices.’20

Consequently, it can be argued that any analysis of the superannuation tax concessions must be placed within the broader social system.

Even if it is maintained that superannuation tax concessions are tax expenditures, it is possible to reconcile a shift to a modern welfare economics approach within a tax expenditures framework as it may be argued that tax expenditure decisions are purely ones of institutional design. If we reject the comprehensive tax base (and functional equivalence) as the tax expenditure benchmark, the focus shifts from the narrower assessment of taxation policy to a broader assessment of how the government chooses to compartmentalize its functions.21 This method of tax expenditure analysis, suggested by Weisbach and Nussim in 2004, is based on the premise that, assuming the underlying policy remains the same, there are no effects of putting a program in or out of the tax regime. As such, the focus is on the broader question of government policy as contrasted with the more traditional approach of focusing on the effects on the tax system in isolation. The real issue, they argue is one of how government spending should be organised.22 Weisbach and Nussim refer to the 1969 work of Bittker,23 one of the earliest opponents to tax expenditure analysis, to support their argument that the broader organisation of a bureaucracy should not depend on a definition of income. Rather, if the question is one of how to implement a government program, they see the definition of income or comprehensive income as entirely irrelevant. Within the context of the current retirement savings debate the question moves away from the absolute approach of assessing the fiscal cost of the concessionary programs within the tax regime to one which accepts that retirement needs to be funded by a government program in one form or another and then assesses the best practice for achieving this.

The purpose of the above discussion is not to debate whether the superannuation tax concessions should be regarded as tax expenditures, which are the equivalent of direct spending programs and analysed as such.24 Rather, the purpose is a much more

19 Richard Vann, n 5, 187. 20 Richard Vann, n 5, 187.21 David Weisbach & Jacob Nussim “The Integration of Tax and Spending Programs” (2004) 113

Yale L.J. 955, 958.22 Ibid, 960.23 Boris Bittker “Accounting for Federal Tax Subsidies” (1969) 22 Nat’l Tax J. 244.24 The author would argue that this is in fact the correct approach.


pragmatic one which accepts that historically Australia has moved away from this form of assessment in relation to superannuation tax concessions and the retirement saving regime towards a broader institutional design approach. Arguably, this is the approach adopted by the AFTS and many of the submissions to the October Tax Forum.

4 The AFTS Review of Retirement Savings

When the AFTS review was established in 2008 its terms of reference were broad. However, several constraints were placed on the Review Panel, including the preservation of the tax free superannuation payments for individuals over 60 years.25 Consequently, the Panel was constrained to make recommendations as to the concessional tax treatment of the first two taxing points; contributions and earnings. Shortly after the establishment, the Panel was asked to bring forward its consideration of the retirement income system and report to the Government by the end of March 2009. After calling for submissions and releasing its consultation paper in December 2008, the AFTS Review Panel delivered a separate report in May 2009 on strategic issues for the retirement income system.

The underlying principles on which the AFTS Review Panel reported was that superannuation’s sole purpose is to provide a lifetime savings vehicle, and savings should be invested to maximise returns without being subject to competing policies that would require, for example, specific asset allocation.26 Further, they were guided by the principle that superannuation should receive preferential income tax treatment compared to other savings. The Panel stated that the objectives for the taxation of superannuation savings should be to ‘provide an equitable distribution of concessions for people with different incomes, consistent with the degree of progressivity in the personal income tax rates scale, encourage saving for retirement, make it simpler for people to get access to concessions and ensure the sustainability of the retirement income system into the future.’27

The key finding of the May 2009 report was that the three-pillar architecture should be retained, noting that it had strong community support. However, it was also recognised that there was a ‘need and an opportunity to calibrate the three-pillar architecture to meet better the future challenges, and to reform some structural weaknesses within the system.’28 At this point, the AFTS Review Panel made eight broad preliminary recommendations, including maintaining the compulsory superannuation contribution at 9 per cent. The approach by the AFTS Review Panel of considering tax reform in general as part of the broader tax transfer system, was coherent with it evaluating the

25 Australia’s Future Tax System “Architecture of Australia’s Tax and Transfer System“ August 2008, 328.

26 Australia’s Future Tax System “Final Report: Part 2 - Detailed Analysis - Volume 1“ December 2009, 98.

27 Ibid.28 Australia’s Future Tax System - The Retirement Income System: Report on Strategic Issues“ May

2009, 2.


retirement savings regime as part of the broader tax transfer system, and, as such, final recommendations were deferred until December 2009.

Consistent with the strategic report on retirement income systems, the final report by the AFTS Review Panel also stated that the three-pillar architecture should be retained and that privately funded superannuation should remain a key component of the retirement income system and should continue to receive concessional tax treatment compared to other savings.29 To this end, recommendations were made within the context of those three pillars, specifically pillars two and three. Seven recommendations were handed down by the AFTS in December 2009. Of those seven, recommendations 18 and 19 were the most significant in terms of stakeholder impact of potential reform of the retirement savings regime. The first of those recommendations dealt with the concessional tax treatment at the contributions stage of retirement savings and stated:

Recommendation 18

The tax on superannuation contributions in the fund should be abolished. Employer superannuation contributions should be treated as income in the hands of the individual, taxed at marginal personal income tax rates and receive a flat-rate refundable tax offset.

(a) An offset should be provided for all superannuation contributions up to an annual cap of $25,000 (indexed). The offset should be set so the majority of taxpayers do not pay more than 15 per cent tax on their contributions. The cap should be doubled for people aged 50 or older.

(b) An annual cap on total contributions should continue to apply.(c) The offset should replace the government co-contribution and

superannuation spouse contribution tax offset.(d) Compulsory superannuation contributions made by employers should

not reduce eligibility for income support or family assistance payments. They should also not form part of the calculation for child support.

The rationale for recommendation 18 was to ensure a more equitable distribution of tax concessions aimed at achieving a ‘fairer’ concessionary regime that did not discriminate against low-income earners. Under the current regime, high-income earners receive significantly larger concessions than low-income earners because of the progressive rates of taxation that apply. The current regime is arguably regressive in nature. The adoption of the recommendation would ensure that superannuation is taxed on a progressive basis but at a concessional rate achieved by taxing the contributions as employee income with a flat rate refundable tax offset. It was also suggested that a single refundable offset would reduce complexity within the system.

The effect of this recommendation is as follows:

29 Australia’s Future Tax System “Final Report: Part 1 - Overview“ December 2009, 34.


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The second significant recommendation, number 19, dealt with the concessional tax treatment at the earnings stage of retirement savings and suggested that further concessions should be granted. It stated:

Recommendation 19

The rate of tax on superannuation fund earnings should be halved to 7.5 per cent. Superannuation funds should retain their access to imputation credits. The 7.5 per cent tax should also apply to capital gains (without a discount) and the earnings from assets supporting superannuation income streams (currently not taxed).

The rationale for reducing the already concessional tax flat rate of 15 per cent on earnings (10 per cent on certain capital gains) was to reduce the influence of the compounding effect over the lifetime of the funds. The AFTS Review Panel reported that by halving the tax rate to 7.5 per cent, the tax paid on the earnings of an average superannuation fund would be close to zero after allowing for the effect of imputation credits.30

While the remaining five recommendations are not insignificant, their adoption is not likely to elicit the same degree of debate as Recommendations 18 and 19 for two reasons. First, there are fewer stakeholders affected by Recommendations 20 to 24 (for example, Recommendation 20 provides for the removal of the restriction on people aged 75 and over from making contributions) and second, the fiscal cost is much less significant (for example, Recommendation 23 provides that the government should help make people more aware of the retirement income system, and therefore better able to manage their superannuation).

To date, the Federal Government has not directly acted on the recommendations and, in fact, in some cases acted against the recommendations. For example, which the AFTS review recommended that the 9 per cent compulsory contribution was adequate, but the Federal Government has subsequently announced an increase to 12 per cent. On 29 November 2011, the Federal Government announced, as part of its Mid-Year Economic and Fiscal Outlook, several superannuation related measures. The measures, aimed at better targeting low-income earners, include the reduction in the government co-contribution31 coinciding with the introduction of the low-income superannuation contribution as well as the abolition of the maximum superannuation guarantee maximum age limit.32


31 From 1 July 2012, the maximum co-contribution will be $500 with the matching rate reduced to 50%. The co-contribution will be available for individuals with an income up to $31,920.

32 Currently, employers only need to make compulsory contributions for employees under 75 years of age.


5 Debate at the Forum

The Federal Government’s October 2011 Tax Forum sparked considerable debate about the retirement savings regime, particularly the superannuation concessions. Broadly, the debate was triggered by the same concerns expressed by the AFTS Review Panel, being the regressive nature of the concessions along with the adequacy and sustainability of the regime due to the ageing of the population, longer life expectancies and many more people falling within the system.33 These issues were raised throughout the two days of the October Tax Forum and a great deal of time was spent discussing superannuation tax concessions specifically as part of a group of tax provisions collectively known as tax expenditures. Special interest groups called for greater concessions or exemptions from taxation whilst others, in the name of equity or fairness called for adjustments to existing concessions or exemptions. In part three of this article the possible frameworks for evaluating retirement savings concessions were discussed, and, in reality, many times the arguments shifted from talking about superannuation tax concessions as provisions of the tax regime which exist within the narrow income tax system to those provisions being part of Australia’s tax regime which exist because of Federal Government’s broader social and economic policy. However, if we accept that the tax regime is simply the mechanism by which the current retirement savings policy is delivered, the underlying rationale upon which both written and oral submissions were made does not affect their substantive contributions.

Prior to a review of the concerns raised over the retirement savings tax concessions, it can be noted that they were by no means the only tax expenditures discussed. Broadly, tax expenditures were present in each of the six sessions, arguably demonstrating sectional interests. For example, in the business tax session the issue of accelerated depreciation was raised, as was the argument that small business concessions were not effective. During the State taxes session Bob Katter MP argued for reform of the zone rebate. In the third session on environmental and social taxes it was argued that fossil fuel subsidies should be abolished. However, the most notable of the arguments for changes to tax expenditures came on day two in the transfer payments session and personal tax session. The potentially disproportionate concessions for savings and investments, superannuation concessions and the CGT discount were but a few of those raised. It is at this stage that the issues surrounding the inequities within, and inadequacies of, our retirement savings regime were raised.

Insight into the consensus on the current retirement savings regime is gained from what was not said rather than what was said. At no stage did any forum participants propose the abolition of the current concessionary tax regime for retirement savings. This supports the conclusion that the current system is one which garners broad public support and the maintenance of the three-pillar architecture of the retirement saving regime as advocated by the AFTS Review Panel. This does not mean that arguments raised for reforms to the current regime are trivial, nor are they without merit. The



arguments raised fall within one of three broad categories and while participants proffered their views often using different statistics and anecdotes each related to either the lack of equitable treatment between different taxpayers, the adequacy of the current regime or the sustainability of the concessions, particularly the tax-free withdrawals phase for over 60s.

The regressive nature or lack of equity within the current concessionary regime is arguably the most significant consideration in the debate on superannuation concessions. The current regime clearly favours high-income earners as compared to low- and middle-income earners. The AFTS Report suggests that recent figures indicate that around 2.5 million individuals receive little or no personal income tax benefit from their superannuation contributions while around 200,000 taxpayers (those earning more than $180,000) receive a concession on their superannuation contributions of 31.5 per cent.34 In broad terms, these figures speak for themselves. However, the story is more complex. It is often women who are the biggest losers within the superannuation regime due to lower paying jobs, often part-time work and longer periods of disruption in the workforce due to family commitments35 – all issues raised at the October Tax Forum.

The second theme regarding superannuation reform related to questions surrounding its adequacy and ability to satisfy longevity. Both adequacy and longevity relate to the system as a whole as well as its application to the individual stakeholders, or individual (future) retirees. We have recently seen the Federal Government announce an increase in the compulsory guarantee from 9 per cent to 12 per cent. This was generally seen as a positive move and one which helped go some way towards mitigating the possibility (or in many cases, the probability) of taxpayers going through their retirement savings prematurely. However, a great deal of concern was still expressed as to the fiscal adequacy of individual retiree’s funds.

A third concern echoed throughout the discussion regarding Australia’s retirement savings regime was the constant change to both the concessions and the rules (for example contributions caps and tax free withdrawals) over the last two decades leading to uncertainty and confusion. This point was not lost on the AFTS Review Panel and was specifically addressed in the context of proposing that its recommendations would take Australia’s superannuation system towards its logical design conclusion — as a subsidised expenditure tax.36 Several participants in the October Tax Forum also emphasised the need for stability and confidence in the system and arguably, this can only be achieved via a system which is sophisticated in its application, mature in its function and easy to understand.

34 Australia’s Future Tax System “Final Report: Part 1 - Overview“ December 2009, 34.35 Australia’s Future Tax System Retirement Income Consultation Paper, December 2008, 5.36 Australia’s Future Tax System “Final Report: Part 1 - Overview“ December 2009, xxii.


6 Prescriptions for Reform

It would appear that future reform of the concessional tax treatment of superannuation would need to be undertaken within the confines of the three-pillar architecture of the retirement savings regime. To this end, it is worth reiterating the objectives underpinning the AFTS Review Panel findings when assessing the retirement income system, as these objectives are consistent with the current shift towards a modern welfare economics approach to tax reform. The five objectives in relation to retirement incomes system were:

• It should be broad and adequate, in that it protects those unable to save against poverty in their old age and provides the means by which individuals must, or can, save for their retirement.

• It should be acceptable to individuals, in that it considers the income needs of individuals both before and after retirement, is equitable and does not bias inappropriately other savings decisions.

• It should be robust, in that it deals appropriately with investment, inflation and longevity risk.

• It should be simple and approachable, in that it allows individuals to make decisions that are in their best interests.

• It should be sustainable, in that it is financially sound and detracts as little as possible from economic growth.37

Two proposals are suggested to achieve these objectives.

The first, whilst potentially requiring some ‘tinkering’, is relatively simple and a blue print has already been provided to the Federal Government – the adoption of Recommendations 18 and 19 of the AFTS review. Recommendation 18 reintroduces progressivity to the concessionary superannuation regime by ensuring the removal of the upside-down effect that currently ensues with the flat tax rate of 15 per cent on contributions. The recommendation, with the annual cap, offset, and the removal of any interaction with income support or family assistance also goes towards addressing inequities. Recommendation 19 goes towards addressing some of the adequacy and longevity concerns and whilst it imposes initial further costs on the Federal Government it is ultimately consistent with the critical aim of Australia’s retirement income system which is designed to have individuals self-fund their retirement. As such, from a broader tax transfer system design, an increase in the concessionary tax rate on superannuation earnings to achieve the aims of the three-pillar retirement savings system is a positive step.



The second proposal for achieving the objectives of the retirement income system is one of management. Whilst the above discussion has adopted a broad acceptance of the modern welfare economics approach in undertaking any analysis, it is not possible to completely dismiss the tax expenditure nature of retirement savings concessions. Superannuation concessions are fundamentally categorised as tax expenditures within our income tax regime. To this end, the management of these tax expenditures, and not just the reporting, should be undertaken. Very little was discussed at the October Forum in relation to the management of tax expenditures. This is despite the Final Report of the AFTS Review Panel making four recommendations in relation to tax expenditures, all of which increase the integrity of the introduction and reporting of tax expenditures. Currently, the reporting of tax expenditures is just that, a report rather than a framework for the management of potentially new and existing tax expenditures. Arguably, a review of Australia’s tax regime aimed at making our economy stronger, by boosting participation and productivity, and providing better incentives to work, save and invest; making our tax system fairer, by ensuring concessions are appropriately targeted and tax rules achieve their original policy intent; and making our tax system simpler, by removing unnecessary complexity requires this sort of robust management.38

Most significantly, a robust tax expenditures management framework lays the foundation for preventing the erosion of our most robust and efficient broad based taxes of personal income, business income; rents; and consumption. Ultimately, taxpayers themselves then become more confident in the system because there is a significant increase in transparency and fairness. Not only does a management framework ensure the integrity of existing tax expenditures but in due course ensures that Australia only adopts a tax expenditure once there has been a rigorous appraisal of alternative mechanisms. The current retirement savings regime falls squarely within the bounds of such a warranted framework.

38 These were the three broad areas of the Federal Government’s priority in relation to the Tax Forum. http://www.futuretax.gov.au/content/Content.aspx?doc=TaxForum.htm.

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