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Super tax concessions: what’s behind the curtain?

Super tax concessions: what’s behind the curtain?

Dana Fleming and Ross Stephens discuss the pros and cons of superannuation tax concessions.

Ross Stephens

Director, Corporate Tax

KPMG Australia


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With the 2018 Federal Budget rapidly approaching, there will no doubt be the usual media commentary on the sustainability of the cost of concessions provided by the Government and in particular, to the superannuation industry.

Concessions are broadly a benefit provided by Government, usually to implement policy objectives. For example, the reduced rates of tax of 15 percent on superannuation fund moneys in accumulation phase and zero percent in pension phase are concessional compared to the marginal tax rates that individuals pay. These concessions are an incentive for Australians to save for their retirement and thereby take pressure off the cost to Government of the aged pension in the long term.

Conversely, every dollar provided in a tax concession is arguably revenue lost to the Government and represents an opportunity cost for alternative uses of this money such as Health, Education and other services.

Treasury releases annually a Tax Expenditures Statement (TES), which essentially lists the tax concessions (tax expenditures) of Government and estimates the loss (or gain) to revenue projected over four years into the future. The 2017 TES listed 289 tax expenditures. As in prior years, the two largest groups of concessions are:

  • The family home capital gains tax exemption – approximately $74 billion and
  • The concessional treatment of superannuation contributions and earnings – approximately $36 billion.

With the 2017 Budget changes regarding the $1.6 million cap on superannuation balances in pension phase and reductions to contribution caps coming into effect from 1 July 2017, it could have been expected that the value of these concessions would have largely been contained into the future.

Instead Treasury’s projected costings continue to show sizable growth, and indeed higher growth than projected before the Budget changes were announced. Estimates for FY18 show the cost of the superannuation concessions remaining at $36 billion and then rising to approximately $50 billion by FY2021 – nearly 40 percent in just three years. This is driven mainly by the earnings concession, which is highly dependent on Treasury’s assumed rate of return within funds. It may therefore be inferred that Treasury has significantly revised upwards the rate of returns in the future.

Accordingly, future projections of the cost of superannuation concessions should be carefully interpreted and consequent potential inflammatory commentary cautioned, given the value of the tax concessions disclosed in the TES is highly dependent on the volatility of markets and assumed rates of return by Treasury.

Some commentators continue to argue that too large a proportion of the superannuation tax concessions benefit those with the highest incomes or balances. However, the significant tax changes to superannuation from 1 July 2017, which were primarily directed at the concessions for those on high incomes or balances, does not appear to have resulted in significant changes to Treasury’s calculations for the present and projected level of superannuation tax expenditures. This indicates that most of the value of the superannuation tax concessions accrue within middle income groups, and thus that it may be argued are already well targeted.

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