The Problem with Australian Super Laws

I have just read a petition by GetUp! regarding unfair superannuation laws in Australia. Usually, I have no issues with GetUp! petitions and sign many of them; their vision and mine tend to overlap a lot.

Today, though, I read this petition, Only Super For Some, which calls for Australia to “change current superannuation laws which provide the greatest benefit through tax concessions to the wealthiest Australians while the least well off get nothing.”

We all put a standard 9% of our income towards our superannuation account, designed to support us when we retire. The government also contributes to our super, only in a slightly different way. Instead of contributing cash directly, the government allows us to contribute some of the money we owe for tax into our super accounts. Now, here’s where the problem is. The percentage of their tax bill that high-income earners are allowed to keep is far higher than low-income earners. In fact, the bottom 10% of earners can get absolutely no help with their super from the government, while the top 10% are allowed to keep over $15 billion. This is money that could otherwise be spent on healthcare, education, infrastructure or any number of worthwhile areas.

I’m used to reading spin from colleagues in marketing companies and from politicians, but it’s rare to see this from a “change for good” type organisation. The petition doesn’t even propose a solution. Perhaps I’m just a little naïve, but if you’ll indulge me, I’d like to offer an alternate perspective. You see, what they’re describing is the tax deduction of personal superannuation contributions made by an employee to their own super fund. They can donate any part of their salary to super, and the amount will be taken off the final taxable income. On a side note, you can also do this for $300 of stationery, work related books, conferences, etc. If you let a house and make a loss, that also reduces your taxable income.

So, let’s look as a concrete example. Let’s take someone who earns $60,000 per year, plus super. This means the employer will pay 9% of their salary ($5,400) to super every year. The employee will then pay income tax on the $60,000 which comes to $11,550. At this salary, they are in the 30% tax bracket, they earn $48,450 a year, or $4,370.50 a month.

Let’s say this person decides they only need $3,500 a month to live on, and choose to put the rest in to super. They put in $750 per month in to super, which comes to $9,000 per year. This brings their previous taxable income from $60,000 down to $51,000, which means they only pay $8,850 in tax and net $42,150 per year.

The point GetUp! is making is that someone earning less than $6,000 a year gets no tax benefit from personal super contributions, because their salary is completely tax free.

Why are Personal Super Contributions Tax Free?

Income is only taxed once, and if you put it in to super tax free, it will be taxed on the way out. Let’s say that the laws were changed so that personal super contributions were not tax free, and the rich didn’t “benefit”. Let’s look down the track. The $750 per month the previous example was contributing would be taxed at 30%, so would only be worth $525. Plus the $450 from the employer = $975 per month. After 10 years of contributing $975 per month, a total of $117,000 would have been contributed, and with compound interest in a super fund earning 4% per annum, this would have grown to $143,028.53. In that time, $27,000 has been paid in tax. If, after retirement, $14,302 (10%) is paid out in pension payments per year, no tax will be payable.

But we don’t tax up-front, so the full $750 goes in, plus $450 from the boss = $1200. After 10 years of contributing $1200 per month, a total of $144,000 will have been contributed, and with compound interest in a super fund earning 4% per annum, this will have grown to $176,035.11. If, after retirement, $17,603 (10%) is paid out in pension payments per year, $1,740.45 in tax will be payable every year, and the pension becomes $15,862.55 nett per annum.

This person gets about $1,500 more per year, and the government, over that 10 year period, gets less than it would have up front.

In addition to this, there’s another significant benefit to enticing those with lots of money to give it to super funds. Australia’s older population is growing and superannuation funds don’t have the money to make payments to pensioners.

[Now, alarm bells should be ringing for a different reason. If they’re giving your payments to pensioners now, what are they investing, and will you have a pension when you retire?]

By encouraging people to put away extra in to super now, the super companies have money to play with. Take away the tax deductible status of personal super contributions, and you won’t actually get more in tax, because people will put the additional money they have in to something that is tax deductible, like a negatively geared property.

I don’t see anything wrong with this, but would love your thoughts. Have I missed something?

I have missed one thing: self managed super funds. The super funds probably aren’t getting much of the contributions anyway, they’re going in to entities controlled by the employee. The same still holds true though; change the super laws to reduce the tax concessions for the top income earners, and the top income earners will invest in something else.

Perhaps GetUp! should be targeting the income tax laws.

Update: I’ve created a spreadsheet you can play with to see how different incomes affect the different scenarios. Note how the only people who are not worse off under the current scheme are those on the lowest income bracket!

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