Do the super concessions really cost that much?

Much newspaper space and letters to the editor (or, in the case of social media  -  comments to anyone silly enough to read them) is made of the tax cost of the various superannuation concessions.

In respect of the 2014/15 financial year, the estimated tax cost (ie the tax foregone due to the granting of the concession) of the superannuation concessions was $18,450b (super earnings) and $17,800b (deductions for super contributions): a total of $36,250b.

The concept of tax costs was introduced to try to capture the loss of revenue due to the Government granting a tax concession.  For example, if the Government decided to pay each lawyer $20,000 as recognition of lawyers outstanding contribution to Australia there would be outrage amongst the general non-lawyer population.  However, if the Government decided to amend the tax law so that each lawyer was entitled to claim a $40,000 deduction (this deduction of course only applies to lawyers) then it would be less obvious and it would be more difficult to quantify the “cost” of granting such a deduction to lawyers.  The concept of tax cost (also known as tax expenditure) was invented to try to bring home the hidden cost of granting tax deductions (or offset) to favoured groups or favoured types of expenditure as these costs do not appear on the Government’s balance sheet.

However, the use of the estimated tax costs must be realistic.  If from 1 July 2015, the Government removed any tax deduction for super contributions and increased the tax rate on super funds from 15% to 37% (or even 47%) would the Government’s revenue immediately increase by $36,250b? And the current deficit be eliminated in one year?  

The answer to both questions is No.  The reason being is that in calculating the tax cost, no allowance is made for changed taxpayer behaviour.  If those changes were made, no one would make any personal contributions after 1 July 2015 and those who could would likely take out their super as soon as possible.  Hence the increased revenue would be very substantially less than $36,250b.  Most likely, the money would be redirected to the other great tax concession – private housing. 

To determine superannuation policy by reference to unrealistic estimates of the revenue foregone by reason of the concessions to superannuation is not a wise approach.   

The other furphy is to suggest that the tax concessions should be reduced because they disproportionately favour wealthy superannuation investors.  While there are some SMSFs which have very substantial account balances – most do not.  In any event, these very large account balances have their origin in the pre 1 July 2007 superannuation system where there were no caps on contributions.  In the current system there are caps on contributions – being $30,000 (or $35,000 if the member is age 49 or more).  The current contribution caps will prevent very large balances accruing in respect of contributions made since 1 July 2007.

For more information on this see the post-Budget report by the SMSF Owners Alliance - After the Budget Hysteria