Why The Federal Government Doesn’t Need to Make Changes to Australia’s Superannuation System to Increase the Budget Bottom Line

In announcing plans to double the tax rate for superannuation earnings on balances above $3 million and introduce a tax on unrealised capital gains, the Government claimed the measures are needed to improve the Federal budget, and also make the superannuation system more equitable.

The Government expects the changes to bring in an extra $2 billion a year.

However, this fails to take into consideration what will happen if people start to change their approach to superannuation.

It’s not unrealistic that of the 80,000 people expected to be impacted by these proposed measures, those who can, will shift their superannuation balances to different structures and taxation environments – resulting in reduced Government revenue in years to come.

It then makes the proposed changes a finite tax, with the Government facing yet another budget hole in the future.

However, if the Government wants to generate increased revenue that is sustainable over the longer term - and ensure the system is truly equitable - there are two other options available;

• Increase Tax Rate on Superannuation: Raising the current contribution tax rate by just one or two percent would still offer a concessional tax environment that is lower than the marginal tax rate, and have no impact on people’s current standard of living.
• GST: The goods and services tax has remained unchanged for more than two decades. The Federal Government could look to increase the tax rate and/or expand its reach.

Implementing either of the above changes would allow the Government to collect increased revenue well into the future, and importantly, would spread the burden across all Australians, rather than the current argument of pitting the ‘rich’ against the ‘poor’.

Such changes would also provide extra flexibility for the Government to potentially reduce personal income tax, or use the consistently increased revenue to fund infrastructure, innovation, health, and the like.

Such suggestions aren’t radical ideas, and in fact the International Monetary Fund has previously recommended tax reform such as increasing the GST and making better use of indirect taxation.

Ignoring sound economic advice to push ahead with the proposed changes to superannuation will, I believe, not only result in lower-than-expected revenues in years to come, but the Government will find itself with increased spending on the Age Pension, as people will no longer be encouraged to be self-sufficient in retirement.

And should both those predictions come to fruition, we should all be concerned about what changes the Government will consider next.