Super & Tax Expenditures: What's the fuss?

Super & Tax Expenditures:  What’s the fuss?

Much TV and newspaper time has been consumed by the topic of superannuation.  In particular, for the need to reform (read change) the superannuation system.  The arguments put forward for reform tend to focus on the “cost of the super tax concessions”.  The concessions referred to are primarily the tax deductions for superannuation contributions and the concessional taxation of superannuation earnings.

If you want to argue for change in the superannuation concessions – you will use tax expenditures as the measure of the cost of the concessions, as tax expenditures will give the greatest cost.  If you want to be more mature and thoughtful when considering whether there should be changes in the superannuation concessions, you will want to use the “revenue foregone” arising from the current concessions.  Revenue foregone will generally be less than the tax expenditure approach.

However, to appreciate the nuances of tax expenditures and revenue foregone, the measuring benchmark must first be established.

The benchmark (as used by Treasury) for superannuation is that contributions should be taxed at the marginal tax rate of the individual member and fund earnings are also taxed at the marginal tax rate of the individual member with benefits being untaxed.

A tax expenditure is the difference between the tax which would have arisen if the benchmark treatment applied as against the tax which actually arises under the current treatment.  Generally, the tax under the benchmark treatment is greater than under the actual treatment – hence the claim that actual treatment (eg tax deduction for contributions or concessional taxing of fund earnings) is costing the government money.  Less common is the case where the tax arising if the benchmark applied is less than the tax arising from the actual treatment.  An example is the taxation of super benefits.

The revenue foregone is an attempt to measure the actual revenue which is not raised because of the particular tax concession.  This costing of the concessions will be less than the tax expenditure measure as taxpayers will change their behaviour if the concession no longer applies.  Hence the revenue forgone will reduce if the concession is altered.

A for instance.  If the current tax concessions for superannuation contributions were to change – so that only compulsory super (“SG contributions”) contributions were deductible – the value of non-SG contributions would dramatically decline.  Hence, the “true” cost of the contributions concession is really the revenue foregone rather than assuming people would still maintain their level of contributions in the absence of tax concessions.

Tax expenditure estimates are provided as a means of identifying government expenditure.  Consider the following situation:  the Government proposes to assist the Australian film industry.  The assistance (financial assistance rather than requiring every person to attend a cinema to watch a remake of Smiley) could be $100m given to a body to provide as film finance to deserving thespians.  This would be public and subject to audit.  Alternatively, the Government could allow a tax deduction (at $1.5 per $1) for financing of qualifying films.  This second method of financing is less open to public scrutiny, is not audited and the Government has no control over the amount claimed for deductions.  Tax expenditures were intended to identify and quantify government expenditure which is off balance sheet so to speak.

The most recent tax expenditures statement (December 2015) has quantified the tax concessions in respect of 2015/16 as superannuation contributions ($17,060b); fund earnings ($14,130b) and the negative tax expenditure of $740m on benefits.   The figure for benefits is a negative tax expenditure as this is an example of where the benchmark is that benefits are not taxed when the actual tax treatment is that they are taxed (if received before age 60).

Given all this information, what is the fuss?  Well the newspaper and TV headline “cost” of super is treated as being in excess of $31b.  (No account is made of the negative tax expenditure of $740m.)  The argument seems to be that if super were reformed (ie tax concessions removed) then the Government would immediately have an additional $31b and therefore there would be almost no deficit.   Unfortunately, this will not be the case.

Without tax incentives, why contribute to super?  The tax incentives are necessary to offset the loss of access to and control over money once it is invested in super.  If tax on earnings in pension phase were to be introduced, a significant portion of fund balances would be removed and invested in the individual’s own name (to take advantage of the tax free threshold of $18,200 for 2015/16).  

The long and the expenditure of the matter is that yes – superannuation concessions do reduce taxation revenue.  However, the likely revenue lost is not accurately measured by the tax expenditure statements.  And, by the way, the real issue is whether the increased revenue (arising from “reforming” super) would be well spent by this or the next Government as against being invested and used for retirement purposes.