The Grattan Institute says changes to superannuation announced in the 2016 Budget will make the super system fairer and help repair the budget bottom line, while agreeing with Government estimates that only around 4% of people will be adversely affected.
Update: the Government has released the first tranche of superannuation legislation for the changes announced in the 2016 Budget.
“Winding back superannuation tax breaks is an acid test of our political system, and should be one of the first items of business in the current Parliament,” said the Institute, releasing the report: A better super system: assessing the 2016 tax reforms.
“Overall, both the Government’s and the ALP’s proposed changes are a big step in the right direction. Those affected are overwhelmingly high-income earners who are unlikely to ever qualify for the Age Pension in retirement. Yet the changes don’t go far enough.”
The Grattan Institute agrees with a number of the Government’s proposed changes to superannuation, including reducing the concessional contributions cap and lowering the Division 293 threshold, while taking issue with some of the other Budget changes.
The report says it is “unclear” how the Low Income Superannuation Tax Offset, which replaces the LISC, will help boost retirement incomes.
“It remains unclear whether the best way to improve retirement incomes for low-income earners is to provide extra super tax breaks such as the LISTO, or additional Age Pension support,” says the Institute, calling for more evidence based on super fund records.
Unlike the ALP, the Grattan Institute supports removing the restriction on employees claiming tax deductions for personal super contributions, saying the measure “does promote consistency”.
However the Institute agrees with the ALP that the ‘carried forward’ concessional contribution cap provisions are “not needed”.
“While most of the Government’s proposed changes will better target contributions tax breaks, the ‘carry forward’ provisions are a step backwards,” says the Grattan Institute.
“The primary beneficiaries of these ‘catch up’ provisions are likely to be younger high-income earners, overwhelmingly men.”
“If the carry-forward provisions nevertheless remain, they should be more tightly targeted to those with broken careers. For example, they might be limited to those who have worked part-time in the previous five years and restricted to those with lower super balances, such as $300,000.”
The Institute is also opposed to removing the ‘work test’. “This change is undesirable because it does not serve the purpose of superannuation. Removing the work test for older Australians will do little to support genuine retirement savings, but will turbocharge tax planning for wealthy retirees.”
Up to 785,000 people to be adversely impacted by changes, in line with Government estimates
The Grattan Institute concurs with the Government estimates that the superannuation changes announced in the 2016 Budget will only adversely affect approximately 4% of superannuation account holders.
The Institute estimates that up to 785,000 people will be adversely affected by the changes, almost 4.2% of people with superannuation accounts, with 550,000 impacted by the reduced concessional contribution cap and lower Div 293 threshold.
ASFA estimates that 550,000 people will be affected by the changes to Transition to Retirement pensions, with 9% of super account holders to be adversely affected, are rejected “unreliable” and the result of double counting. The report says ASFA overestimated the number of people affected by conflating the number of TTR accounts with the number of people and by double counting by not accounting for people affected by more than one of the changes.
Super changes could save $1 billion a year if some spending measures dropped
The report notes that the Government’s proposed super measures are estimated to save $775 million in 2019/20, after accounting for new spending such as the LISTO. But an additional $305 million could be saved by dropping the carried-forward concessional contribution cap, retaining the work test and not changing the spouse tax offset.
“If these changes do not proceed, the budgetary savings from the government’s package would be boosted to about $1 billion a year in total.”
“In contrast, many amendments to the government’s package advocated by industry groups, such as watering down the limits on super tax breaks for high income earners that don’t need them, could easily result in a package that makes the budget position worse overall.”
“The paper shows that there is broad agreement between the Government’s proposals and the ALP’s policy. If the Government concedes on some of the details to get a deal with the ALP in the Senate, it will probably improve the budget position.”