Tax breaks for superannuation will cost the federal budget $52.5bn this financial year, almost as much as the old pension, according to new analysis.
A research paper by the Australia Institute argues that since supertax concessions cost almost as much as the $55.3bn spent on the pension, Australia has “two classes of state-funded pensioners in Australia”.
The progressive think tank is seeking major changes, ahead of a review of the purpose of superannuation proposed by assistant treasurer Stephen Jones, which could pave the way for capped balances or other restrictions on tax concessions.
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Australia’s super generous tax breaks are designed to encourage workers to save more for retirement and reduce reliance on the old age pension.
The concessions include allowing workers earning less than $250,000 to make super-rate contributions at a tax rate of 15%, much lower than the personal income tax rates for middle and high income earners.
Accounts with a balance of less than $1.7m are not taxed on investment earnings. For accounts with a balance over $1.7m, only investment earnings are taxed at 15%, well below the top marginal tax rate of 45%.
The Australia Institute found that tax breaks for excellence are now the three highest spending programs by cost in the federal budget, narrowly trailing the national disability insurance scheme ($35.5bn) and funding for state hospitals ($26.6bn).
The report said that “little has been done under the Coalition Government to reduce the cost or improve the distribution of tax relief for superannuation”.
“Major changes are needed, such as removing concessions for people whose current superannuation balance leaves them ineligible for the age pension,” he said.
That could mean a worker loses access to tax breaks after accumulating $620,000 in super.
Richard Denniss, executive director of the Australia Institute, said ATO data shows there are about 897 self-managed super funds producing income of $1m or more.
“The current system is not straining the budget to provide a dignified retirement for all Australians, but it is certainly providing a lucrative tax avoidance facility for multi-millionaires,” he said.
“There is a strong case for limiting tax concessions to high income groups and it is being said that even the leaders of super industry agree that reform is needed.”
In November, Jones told the Australian Financial Review’s wealth summit he was not “surprised” concessions had become a “lightning rod for discussion” citing that 32 self-managed super funds have more than $100m in assets.
“If the purpose of the superintendent is to provide a tax resource for estate planning, you could say it’s doing its job,” he said.
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“I celebrate the success, but the tax concessions on funds like this have a real cost to the budget, which needs to be considered … tax concessions on a single $10m self-managed super fund could support 3.1 full-age pensions.”
In January, Jones confirmed to the AFR that he would look into superannuation tax concessions after enacting a Super Labor objective.
“One of the things that sticks out is extremely high balances that don’t seem to have any connection or relationship to retirement income,” Jones said. “That’s where my mind is focused right now.”
When asked about limiting supertax concessions in January, treasurer Jim Chalmers told reporters in Canberra that the government was considering a combination of “spending restraint” and “responsible tax changes” to balance the budget to repair.
But Chalmers warned that the government had not said it “definitely intends to go down that path”. “If we get sensible suggestions about how we fix the budget … we’re obviously willing to consider it.”