Chris Murphy’s article in The Conversation on June 3 calling for a rethink of superannuation tax arrangements misrepresents Ken Henry’s review recommendations for taxing super and overlooks the subsequent measures taken by the Gillard and Turnbull governments.
The current regime is not that different from the one Henry proposed, and claims of excessive concessions skewed towards the rich are highly exaggerated.
There may be a case for some tinkering, such as the government’s current proposals (but even these go too far in my view), but the widespread view, encouraged by Treasury and Murphy, that superannuation is heavily subsidised, particularly for the rich, needs to be robustly challenged.
Rather than continue this obsession over tax arrangements, the focus for reform needs to be on helping retirees convert their savings into retirement incomes. Until we fix that, our system is not world-leading as some claim, but in fact at the bottom of the class.
Comparing Henry to the current tax regime
Murphy claims we need to implement the Henry Review’s recommendations for taxing super in order to reduce current concessions and achieve greater equity. This misrepresents how current arrangements compare with Henry’s proposals.
Henry proposed both a simplified personal income tax scale (with a high threshold, a standard marginal rate of around 35% for 97% of taxpayers and 45% for top income earners) (Henry Volume 1 p29) and a simplified tax regime for super (with a standard ‘concession’ of around 20% on individuals’ marginal tax rates for the tax on contributions and a flat 7.5% tax on fund earnings applying both before and after retirement) (Henry Volume 1 pp 34-5).
Combining these would result in:
- A tax on super contributions of 15% for most taxpayers and 25% for the top 3% (those on more than three times average earnings), compared to the current regime of 15% for most people and 30% for those on more than $250,000 (less than three times average earnings). Henry also proposed paying a co-contribution to those below the tax threshold (which I am not convinced is needed, given our means-tested age pension).
- A standard tax on fund earnings of 7.5% applying in both the accumulation and pension phases, compared to 15% now applying, but only in the accumulation phase.
- No tax on benefits, except for the proposed 7.5% on fund earnings.
Other than at the very bottom, the Henry regime is, if anything, less progressive than the current regime. And it would raise less, not more, revenue.
Comparing Australia’s approach to common OECD practice
The Australian approach is unique and highly complex. Most countries tax benefits in full and exempt contributions and fund earnings (EET), this being consistent with the objective of helping people to spread their lifetime earnings. As Murphy emphasises, we don’t tax benefits, but we are also almost unique in taxing both contributions and fund earnings, albeit at rates below the marginal rate of personal tax (ttE).
Interestingly, overall, the tax take is around the OECD average. Moreover, unpublished research a decade ago (Gallagher 2016 referred to in Podger, Breunig and Piggott 2023 – 5. Retirement Incomes: Increasing Inequity, Not Costs, across Generations Is the Intergenerational Problem) suggested that our ttE regime delivers about the same after tax incomes in retirement from super as the more common EET approach would, and at all income levels.
Assessing ‘tax expenditures’
Treasury’s estimates of superannuation tax expenditures continue to mislead the Australian community and contribute to an excessive public focus on tax issues rather than retirement income issues.
Estimating tax expenditures requires choosing a ‘neutral base’ for comparison. Henry firmly opposed applying a comprehensive income tax lens (TTE), arguing that an expenditure tax lens (based either on TEE or EET) was a more appropriate basis for comparison (Henry Vol 1 p32, 34). Yet, Treasury continues to use TTE as the base in its annual reports on tax expenditures.
No country uses TTE for super. It would not be a neutral regime but would penalise savings, doing so most when savings are held for a long time and when the marginal tax rate is high. Surely, no one would suggest that high-income earners should pay 45% tax on their contributions, and again on their fund earnings every year for forty years! Henry, in fact, argues strongly against using TTE even for short-term bank interest.
Unfortunately, it is the Treasury figures that get continually quoted, along with Treasury’s presentation of subsidies skewed towards the rich. In 2017, under Parliamentary pressure, Treasury presented the tax expenditure estimates based on an expenditure regime (TEE) as well as an income regime (Tax Expenditures Statement 2017). The difference was dramatic. For example, the tax expenditure estimate from fund earnings arrangements went from around $20 billion to a negative $10 billion. Most of the skewing to the rich would also have disappeared. Inexplicably, Treasury has not repeated this use of an expenditure tax lens in subsequent reports.
Refocusing the debate
There may be a case for some tinkering with super tax arrangements, such as the government’s current proposal to cap the amount of superannuation attracting the ‘concessional’ tax on fund earnings so as to ensure the savings are genuinely for retirement income purposes (though such a cap needs to be indexed and unrealised gains should not be taxed). I would not even rule out Murphy’s suggestion of applying a tax on fund earnings in the pensions phase as well as the accumulation phase (though, as Henry suggested, that should be at a lower rate than 15% in both phases). There is no case, however, for any major increase in super taxes, and Treasurer Chalmers should stop the narrative that superannuation receives big tax subsidies.
Far more important is to help retirees convert their accumulated savings into regular incomes and to address more effectively and efficiently the risks they face — markets, inflation and longevity. We need the system to stop focusing on the apparently large amounts of accumulated savings (hundreds of thousands or millions of dollars), and to think in terms of the much more modest amounts of income these should produce. The proposed cap of $3 million represents an indexed lifetime annuity of around $150,000 — high, but not unreasonably so.
Governments have been kicking this can down the road for two decades now. They need to act, and Grattan’s recent report (Simpler super: Taking the stress out of retirement), recommending the Government offer lifetime annuities to address the market failures our system has generated, provides useful guidance.
Not fixing this represents a fundamental failure of the Australian system. And it contributes more than anything else to excessive inheritance payments and the risk of increasing inequality amongst future generations.
First published at The Mandarin on Wednesday 11 June 2025.
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