When the Low Income Superannuation Contribution (LISC) was introduced it was meant to offset the contributions tax low-income earners paid on their superannuation. This was because low-income earners would pay more on their super contributions then they would on wages received. However because the LISC was set at a fixed amount, $500, and didn’t take account of scheduled increases in the rate of superannuation guarantee, as the SG rate increases the LISC won’t offset all contributions tax for some low-income earners.
When the LISC first applied in the 2012/13 financial year, the superannuation guarantee rate was 9%. It was also set to apply up to, but not beyond, income of $ 37,000. Currently $ 37,000 is the upper limit for the 19% marginal individual tax rate. So setting the LISC at a maximum of $ 500 and up to $ 37,000 resulted in it equaling the amount of contributions tax:
However for the 2013/14 financial year the superannuation guarantee rate increased to 9.25%, and then to 9.5% for 2014/15. The super guarantee is currently set to reach 12% from 1 July 2025. This means that over time the LISC will offset less of the growing amount of contributions tax paid by low-income earners.
At 9.5%, which the superannuation guarantee is scheduled to stay at until 1 July 2021, the calculation is:
If the LISC is retained after the next election, once the superannuation guarantee reaches 12% the calculation would be:
It is unclear why consideration wasn’t given to this when the measure was originally legislated, given it was know that the superannuation guarantee was set to increase. Bill Shorten, the then Assistant Treasurer and Minister for Financial Services and Superannuation, noted in the second reading speech:
“This tax reduction is limited to $500 per person which covers the tax due on nine per cent SG at $37,000”
Adjustments to the marginal tax rates would also change if low-income earners pay more tax on super contributions than on wages.
In order to maintain the intent of offsetting contributions tax for low-income earners the LISC should be indexed to the superannuation guarantee, and to changes in marginal tax rates.
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