Roberts and Cowling

Currently taxpayers can contribute up to $25,000 per annum (or $50,000 for people over 50) in “concessional” contributions. Concessional contributions are typically eligible for a deduction either by your employer (Super Guarantee) or yourself (deducted super contribution for self-employed). Currently those contributions are taxed inside a super fund at a flat rate of 15% for every dollar contributed.

Bob Brown (Greens leader) rightly points out that low-income earners earning less than $16,000 per annum aren’t taxed at all on their income, but their employer super contributions are taxed at 15%. On an average scenario this would mean for an employee earning $16,000 per annum, their super contributions would be $1,440. These contributions would be taxed at 15% meaning tax of $216 would be paid on those contributions.

The Greens are advocating a position where a person’s super contributions are taxed at their individual marginal rates less 15%. An example of this would be an individual on the highest marginal rate of 46%. Under the Greens proposal the contributions from this individual would be taxed at 31%.

Perhaps this proposal from the Greens goes too far. Shouldn’t superannuation be a vehicle of saving to take the retirement burden off the age pension in future years. This proposal would mean that superannuation is no better than the company tax rate for high-income earners and may cause a significant shift away from superannuation in high-income earners (or at least a stagnation of the pace in which high-income earners are saving in super). Perhaps it would be better to view the major problem here. The major problem is that low-income earners paying no income tax are being taxed more in their super funds not that high-income earners are getting great tax advantages by having their contributions taxed at 15%.

Not only that, but the administrative burden on superfunds to know what marginal tax rate was applied to the contributing individual would surely see higher fees inside superfunds and much slower reporting. In many cases self-employed people wouldn’t know their marginal rates until their tax returns are complete- which in many cases aren’t due until May of the following year. How do superannuation funds keep to their reporting and tax paying regimes when this is the case? It would be administratively cumbersome.

Perhaps there is a middle ground. Perhaps the first $1,440 in concessional contributions to a superfund could be tax free, and everything above that taxed at 15%. In regards to cost to the government, lets say there are approximately 15 million Australians employed earning contributions in excess of $1,440. A policy such as this would cost approximately $3.24 billion each year in taxes (but put the same amount back into the super savings of everyday Australians- thereby not really lost to the economy). The government is already counting on tax concessions from super contributions to increase from $30 billion currently to $42 billion by 2014-15. This proposal would not be administratively burdensome but would further invest in the future retirement of low-income earners and helping to reduce the burden on the age pension in years to come.