There are inequities in the current system that need addressing to ensure it remains sustainable and fairer. Once these long-standing issues are addressed it needs to be left alone to fulfil it’s primarily role of encouraging individuals to self-fund their retirement, eliminating or reducing their need to access the government-funded pension.
One of the better options for reform being proposed is the contribution tax changes proposed in the Henry Review, where everyone gets the same tax advantages out of a dollar going into super. Under this proposal everyone receives a flat concession of 15 per cent off their marginal tax rate for contributions.
Hence someone with a marginal tax rate of 21 per cent will pay a contribution tax of 6 per cent, whilst a person earning between $180,000 and $300,000 on a 49 per cent marginal tax rate pays contributions tax of 34 per cent.
Those earning over $300,000 are subject to an extra 15 per cent tax rate on contributions, which can be disbanded if this proposal was implemented.
This proposal has the benefit of avoiding the need for any grandfathering or adding extra taxes on earnings so it would be administratively easy to implement. Most of the other proposals put forward create administrative nightmares to implement. It also addresses one of the main criticisms levelled at the current regime in that the benefits are skewed in favour of high-income earners. The contribution tax change adds progressivity to the superannuation system similar to the way our income tax rates impose higher taxes on individuals on higher income.
Leaving superannuation untouched as part of the wider tax reform agenda makes little sense when all options need to be part of solution.
Tony Greco FIPA is the IPA general manager of technical policy. He can be contacted on (03) 8665 3134 or at tony.greco@publicaccountants.org.au
