Of the cutbacks resulting from the Mining Tax withdrawal, little attention has been paid to the removal of the Low Income Superannuation Contribution (LISC), which was introduced by Labor and only started this year. LISC is a long overdue 15 per cent rebate that refunds the over-taxing of very low income earners. It offers a small amount of compensation for other low income earners’ very limited concession on their contributions.
Current tax rates below show how unfair the current tax concessions on super contributions are for low income earners. Contributions are taxed 15 per cent on the way into your fund, regardless of your marginal tax rate.
| Income | Tax |
| 0-$18,200 | Nil, so on super contributions you pay 15 per cent too much tax |
| $18,201-$37,000 | 19c for each $1 over $18,200, so you get a 4c tax discount on top rate |
| $37,001-$80,000 | $3,572 plus 32.5c for each $1 over $37,000 so you get a 17.5c discount |
| $80,001-$180,000 |
$17,547 plus 37c for each $1 over $80,000 so you get a 22.5c discount |
| $180,001 and over | $54,547 plus 45c for each $1 over $180,000 so you get a 30c discount |
The low income supplement refunds tax payments of up to $500, which means that both low income groups above would get some tax concessions to reward them for putting money away for their retirement, by putting their money into super and not in the bank or under the bed.
Overtaxing super savings has been an unfair part of the system for the over 20 years, so LISC was a welcome, if minor, adjustment. Its removal is a gender issue — 2.1 million of the 3.5 million recipients of the rebate are women. The women who receive the LISC concession are also likely to be older, low earning, often long-term, part-time workers with family responsibilities. Conversely the men who receive it will mostly be young and not yet in full time work.
The current tax concessions massively advantage high income earners, who use them for tax avoidance. The removal of LISC is further evidence of the inherent bias of a flat rated tax system of retirement savings based on earnings. It is completely inappropriate and unfair to demand that low income people contribute, as they get no or little tax advantage and lose control over income they might need for current needs.
The rise to 12 per cent compulsory contributions is not appropriate for them and wasn’t supported by Ken Henry in his tax review for that reason. Take Julie as an example. She has earned $10,000 as a part-time child care worker. Her super contribution, paid by her employer, is $900, and it is taxed $135 over the year, so only $765 is added to her retirement account.
LISC will rebate this, but if it is withdrawn, she will pay more tax on this than she pays on her other income — as her marginal tax rate is zero. This makes little sense. Over her lifetime, these deductions, plus unfairly taxing the interest her savings earn at 15 per cent, will reduce her already minimal savings further.
The rationale for the change was described by the last government thus:
"Currently, as a result of the flat tax rate for all superannuation concessional contributions, low-income earners receive little or no concession. This measure will improve the equity of superannuation taxation arrangements by effectively returning the tax payable on superannuation guarantee contributions made for low-income earners."
All governments over the last 20 years have been guilty of overtaxing low and no income earners' super savings. If parents take unpaid time off from paid work, their earnings on their savings will still be taxed, even though they have no taxable income. As women are more likely to take time out and to earn low incomes, when employed, the bulk of these extortionate taxes have come from them.
Removing this small, belated redress which is adding maybe a few thousand to often fairly minimal retirement funds, is a mean and unnecessary response. It can easily be paid for by doubling the tax rate on the highest income earners, who excessively benefit from these concessions. The anomalies are clearly outlined here by ACTU economist Matt Cowgill.
But unfortunately, those high income recipients are almost all men who are in the relevant decision-making roles. That kind of change seems most unlikely!