High-income earners do well indeed out of the tax cuts in the Federal Budget. Andrew Leigh from the Australian National University says that whereas an average worker will get an extra $510 a year, Malcolm Turnbull will get $6200.
But that’s just the beginning. The real gift to the well-off is in the plan to abolish the tax on superannuation payouts.
Don’t believe for a moment that the benefits will trickle down.
Lump sum payouts below about $130,000 are already untaxed. Removing the tax won’t help low-income earners. But it will help high-income earners, and the higher the income the greater the help. This is partly because the higher your income the more you put into superannuation automatically; and partly because the higher your income the more spare cash you have to pump into superannuation over and above what is required.
And if you can get your employer to pump it in for you, there’s no better place for it.
Thanks to Bill Leak.
High-income earners are well advised ‘salary sacrifice.’ They get their employer to cut their take-home salary by, say, $30,000 and put the money into superannuation instead. They no longer lose perhaps as much as half of that money in tax. They lose only the 15 per cent superannuation contributions tax. And any earnings the fund makes are taxed at only 15 per cent as well, instead of something closer to 50 per cent.
It’s such a rort for the well-heeled who scarcely need encouragement to save for their retirement that in his first (and some would say, only) courageous Budget Peter Costello introduced a superannuation surcharge for high-income earners of an extra 15 per cent, taking the total tax to a still-concessional 30 per cent.
Here’s what he told me at the time in an interview on the ABC’s AM program:
At the moment if you’re on a 48 per cent marginal tax rate, and an employer makes a contribution into superannuation on your behalf, you get a 33 cent tax concession if you are a millionaire or a multi-millionaire.
If you happen to be under $20,000, and an employer makes a contribution on your behalf, you get a 5 per cent tax concession.
Now, our tax system is premised on the fact that rates should go up as incomes go up. But under this superannuation system, concession goes up as income goes up. That’s the basic unfairness.
How do you look the battler in the eye and say ‘when your money goes into super, you get a 5 per cent tax concession. When a millionaire’s money goes into super, he gets a 33 per cent tax concession?’
Peter Costello’s concern about the rort for the rich was short-lived. About a decade later when his Party gained control of the Senate it abolished its own surcharge.
The only thing left standing in the way of Australia’s biggest government-created tax lurk was the superannuation exit tax of 16.5 per cent applied to lump sum payouts of more than $130,000.
The Treasurer now plans to remove that as well as part of his plan to ‘simplify and streamline’ superannuation. As the plan revealed on Budget night puts it, from mid 2007:
All lump sum benefits paid from a taxed source to an individual aged 60 or over would be tax free when paid. There would be no reasonable benefits limit.
In removing the last hurdle facing one of Australia’s last legal tax dodges the Treasurer hasn’t even pretended that superannuation is overtaxed. He knows it is not.
Three budgets ago at the lock-up press conference a television journalist who had presumably been worded up by the superannuation industry asked the Treasurer why superannuation was so heavily taxed, and taxed ‘three times’ on the way in, as money is earned, and from the well-off on the way out.
Peter Costello’s reply sent a chill through some who listened. He said that, even after those three levels of tax, the overall tax take from money paid into a super fund was lower than it would have been if the money had been paid out in the form of wages.
His implicit threat: if you really think superannuation is heavily taxed how would you like to be taxed at normal rates?
The Treasury’s estimate is that the concessional tax treatment for superannuation costs it an astonishing $16 billion a year. It is by far the biggest of Australia’s so-called ‘ tax expenditures.’ The extra tax breaks proposed in this latest Budget will push that bill up by an extra $2.4 billion each year.
There was scarcely pretence by the Treasurer on Budget night that the proposed extra tax break will boost national savings. As he put it, in his interview with Kerry O’Brien:
If you are thinking of saving, put some money in superannuation. When this plan goes through it will be the best way of saving.
Too right. Some of the money that was going to be saved anyway will be saved now in the form of superannuation. The rich and well-advised will get a much bigger tax cut than the one advertised, and the rest of us will pay an extra $2.4 billion to give it to them.
The superannuation plan isn’t a done deal yet. The Treasurer has called for comments . He wants them by 9 August.
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