The Combined Pensioners and Superannuants Association (CPSA) has proposed that superannuation tax concessions should not apply once a super balance has reached a level where the member is ineligible for the age pension, in a Tax Discussion Paper submission.
The CPSA submission says it is clear that the superannuation system is in need of reform, “based on economic and social equity grounds.”
“The cost in terms of forfeited tax revenue is now roughly on par with the cost of the Age Pension system, which the Australian Government has labelled as financially unsustainable. It follows that the superannuation system must be overhauled as well to reduce its cost to the taxpayer.”
CPSA identifies two aspects of the superannuation system as inequitable, the tax rates applying to income in superannuation, and the lack of limits on superannuation balances. CPSA says reform of these areas “can deliver the cost savings which will make superannuation sustainable.”
The CPSA submission says the flat tax rate applying to income in super funds in accumulation phase, without a tax-free threshold, means many low income people pay more tax on their superannuation than they do on their employment income.
“On the other hand, people on high incomes who are on higher or the highest marginal tax rate for their employment income receive a significant tax benefit as a result of the single rate of income tax applied to compulsory and salary-sacrificed super contributions alike.”
The second issue targeted in the submission is the lack of an upper limit on the value of superannuation balances. CPSA says this is “inconsistent with the annual limits to concessional and non-concessional contributions to superannuation.”
“While these annual contribution limits were perhaps envisaged as sufficient to prevent extremely high superannuation account balances, they have largely been ineffective.”
CPSA says it is “unclear” why no upper limit has been set for superannuation accounts, and “clearly, to achieve its public policy purpose,” tax concessions should cease when superannuation balances reach a level where the member is ineligible for the age pension.
“The savings capable of being achieved by setting such a limit would easily fund an increase to the full rate of the Age Pension and ensure that Age and other types of Pensioners would have retirements funded at a safe level above the poverty line.”
The CPSA submission also supports the recommendation of the Henry Tax Review for superannuation contributions to not be taxed in super funds, but instead in the hands of the individual, at marginal tax rates with an offset.
The Tax Discussion Paper is the first step in the Tax White Paper process, and includes consideration of many taxation issues, not just superannuation. Submissions in response to the Tax Discussion Paper are being released in batches and are available here.
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