Superannuation tax concessions

How well do super tax breaks work for you?

Are you a super saver, or a super sucker?

Let's face it: not enough of us know nearly as much about superannuation as we should, let alone how it's taxed. It's one of those things we're aware will be important down the road – but hey, we'll figure out the details when we get there.

Considering the next election is set to be fought on who has the better plan for taxing super, it's worth knowing the ins and outs.

What is the super tax concession?

The government wants you to save super. The more super you have when you retire, the less the state has to spend supporting you with the pension. So to encourage people to contribute to their retirement savings, the government offers tax discounts on things like:

  • the minimum 9.5% super contribution your employer has to make,
  • extra contributions you make through pre-income-tax salary sacrificing, and
  • investment earnings your fund makes, if you have a self-managed super fund.

These are all taxed at a flat rate of 15%. That rate is a little bit less than the income tax rate for a worker on the average annual wage – which is about 17% for an income of $60,000.

Self-managed super funds (SMSF) have to pay capital gains tax on the profit made from selling assets such as property. For SMSFs the tax rate is the same as for other super earnings: 15%. However, if you hold on to an asset for more than a year, you can get a one-third tax discount, meaning that your SMSF might pay as little as 10% on the income.

High rollers

But what if you earn a lot? A person on a $200,000 salary puts away a minimum $19,000 a year in employer contributions, taxed at 15%. Then, thanks to our progressive income tax system that taxes higher earners at a higher rate, the ATO will want to take a bit under 30% of the $181,000 they're left with.

You can see where this is going. The more money you earn, the bigger incentive you have to stick a larger proportion of your cash into a super account. Who would pay 30% tax on their take-home salary when they could stick some of it in a super fund and get a substantial tax discount?

For the mega-rich, there are limits. Your super gets taxed at 30% for every dollar you earn above $300,000 (before super). Say a person earns $350,000 and through a salary sacrifice has their employer put $80,000 of that into their super fund – nearly three times the required 9.5%. $30,000 of that contribution is taxed at the concessional 15% rate, and $50,000 – the difference between the salary and the $300,000 threshold – is taxed at the higher rate of 30%. This is called the Division 293 tax.

It's supposed to discourage the rich from parking too much of their wealth in what is essentially an on-shore tax haven, but it's still cheaper than paying income tax.

Winners and losers

You can probably guess by now that this is not a system that everyone can reap the benefits of equally. The less you earn, the less tax incentive you have to contribute more to your super, since the difference between the super tax rate and your income tax rate is lower. In fact, if your wages are less than $48,000, your super contributions are taxed at a higher rate than your take-home pay. (People with an taxable income of $37,000 or less get this offset by the government's low income super contribution.)

Share of total superannuation tax concessions by income decile

Treasury data shows the wealthiest 20% score more than half of all superannuation tax concessions.

Source: Financial System Inquiry

Tax concessions will cost the Commonwealth about $31 billion in "revenue forgone" this financial year – money it could have collected as income and capital gains taxes, but chose instead to let Australians save as super. The 2014 Murray Inquiry into Australia's financial system found that in 2011-20 half of these savings went to the richest 20% of Australians (although note that this was two years before Division 293 came in).

The system works best for the wealthy, and politicians from both sides know this. Last November Treasurer Scott Morrison warned against widespread gaming of super tax breaks: "While superannuation should ensure adequate retirement incomes, it should not be seen as an open-ended savings vehicle for wealthy Australians to accumulate large balances in a tax-preferred environment, well in excess of what is required for an adequate retirement."

Racing to the bottom

Last April Labor proposed changes to super tax, which the Opposition claims will save $14.3 billion over the next decade. Part of the plan involves lowering the Division 293 threshold from $300,000 to $250,000. This reduction will net an extra 110,000 people in the 30% tax rate, accounting for $5.1 billion of those savings.

Last week the government raised the stakes, leaking their own planned changes to the media. The Sydney Morning Herald reported that in next month's Federal Budget, the Division 293 threshold will be cut even further, to $180,000.

The move will put an extra 244,000 taxpayers above the threshold, and significantly reduce the super tax concessions being claimed by the highest earners. According to the unconfirmed report, the government will save a $2 billion a year.

However, while high earners will pay more on super contributions, the tax hike is set to come in just as the 2% Budget Repair Levy expires, which will do something to ease the burden for people earning over $180,000.

The Budget will be delivered on May 3.

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