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The retirement income changes contained in the 2018-19 Budget continue the recent pattern of light touch measures that steer clear of structural reform. The 2016-17 Budget was the last to do so, containing a set of modest measures that reduced the regressivity of superannuation tax concessions. Those changes were made within the existing structure of superannuation taxation, rather than attempting to reform it.

Australia’s system of taxing superannuation concessionally at the contributions and earnings stages, with no taxation of drawdowns for those aged 60 and over (the ‘ttE’ or tax-tax-Exempt system), has been the subject of critique and debate. It is an outlier by international comparison. The Henry Review recommended its reform ten years ago. In any event, the subject of superannuation taxation has dropped off the radar in the last two years with neither major political party looking at substantive reform of the area.

Also unchanged is the schedule for increase to the Superannuation Guarantee (SG). It was widely speculated that the government would place a brake on the legislated increase, which sees the SG rising to 10 per cent on 2021-22, and eventually to 12 per cent in 2025-26.

Impact on individuals

The Budget’s headline superannuation change was a suite of measures contained in the Protecting Your Super package. The first of the measures, creating opt-in life insurance, is a good thing despite the warnings from the industry of unintended consequences of higher fees. Certainly, it chimes with the Government’s approach of greater choice in superannuation. The young, the low paid and women will be the primary beneficiaries. Capping fees for accounts with balances of under $3,000 is also welcome; banning exit fees on all accounts is even better.

While low paid women will be beneficiaries of the Protecting Your Super package, this needs to be weighed against the overall slightly regressive impact of the income tax changes proposed in the Budget. As canvassed by the Australian National University’s Centre for Social Research and Methods, tranches two and three of the income tax changes which would take effect in 2023-24 and 2024-25 respectively, will deliver the highest savings to those earning the highest incomes. However, to fully evaluate the distributional impact of the government’s tax changes would require that account be taken of inflation, which will mean that real tax cuts will be less.

Measures to assist women to continue contributing to superannuation while they are out of the paid workforce remain elusive. Labor has committed to introducing superannuation payments during Paid Parental Leave if it forms government.

The Australian Taxation Office (ATO) has been provided with funding to assist individuals to locate dormant superannuation accounts. This is another measure which benefits young people and the low paid, who often have multiple accounts. It would have been good to see additional funding provided to the ATO to pursue unpaid and underpaid superannuation, which has been estimated by the ATO to amount to $2.85 billion per year. This naturally has an impact on individual savings but also on revenue, through lower superannuation contributions overall. The Budget’s Black Economy measures will potentially assist in compliance in the cash economy and therefore raise super contributions by some workers.

Management of funds

Other measures in the area of compliance include higher disclosure duties on superannuation fund trustees. Pulling in the other direction, however, are lower audit requirements for self-managed superannuation funds (SMSFs).

If an SMSF returns three consecutive audits which contain no issues, then the trustees will only be required to do audits of the fund every three years rather than every year. In addition, SMSFs will now be permitted to have six member-trustees rather than four. Loosening the running and oversight of the SMSF sector is interesting and potentially problematic, given the exposure of the sector to an unstable property sector and the prudential concerns raised in the Royal Commission on banks, financial services and superannuation.

If Labor is elected and manages to abolish refundable company tax franking credits, SMSFs will be able to ameliorate this by increasing taxable contributions from an expanded membership base. This will give them a similar benefit to larger Australian Prudential Regulation Authority (APRA) regulated funds.

A final area that the Budget has promoted across policy areas is paid work for older Australians. The rules have been relaxed to provide an exemption from the work test for voluntary contributions to superannuation made by people aged 65-74 with superannuation balances of less than $300,000, in the first year they do not meet the work test requirements. The work test currently restricts the ability to make voluntary superannuation contributions to those aged 65-74 who self-report as working a minimum of 40 hours in any 30-day period in the one financial year. This change supports a narrative of self-reliance in older age that the Government has run with, including through the proposed objective for superannuation ‘to supplement or replace the age pension.’

The Government will increase the income threshold for earned income in the pension means test. This supports earning income by age pensioners, but ironically it will further intensify the discrimination against asset incomes in that test, particularly given the harshness of the asset test. This discrimination is ameliorated by the very concessional treatment of asset incomes in the superannuation system, but that does not help those saving outside of superannuation. The inconsistencies between public and private retirement income regimes remains an issue that governments have inadequately addressed.

 

More from our Budget Forum 2018 series:

Budget Forum 2018: This is not a Genuine or Equitable Way to Simplify the Personal Income Tax System by Andrew Podger

Budget Forum 2018: A Missed Opportunity for Enhancing Australia’s Budget Transparency on Distributional Information by Teck Chi Wong

Budget Forum 2018: Targeting the Black Economy by Joel Emery

Budget Forum 2018: Tax Caps and Tax Cuts: Good for Australia? by Miranda Stewart

Budget Forum 2018: Risks Greater Than I Can Recall in My Working Life by John Hewson

Budget Forum 2018: Should Australia Produce a Citizen’s Climate Budget? by Usman W Chohan

Budget Forum 2018: The Future of Corporate Taxation by David Ingles

Budget Forum 2018: Cuts to Personal Income Tax – A Mixed Bag by Robert Breunig

Budget Forum 2018: A Political Budget Unlikely to Work Politically by John Hewson

Budget Forum 2018: The Government Could Be Boosting the Budget Bottom Line with a Change to How It Taxes Gas by Diane Kraal

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