John Daley, Grattan Institute and Brendan Coates, Grattan InstituteIn the past week, both major parties have made welcome, albeit tentative, commitments to tackle much-needed budget repair. The Turnbull government has moved quickly to lock in budget savings that Labor supported in the federal election campaign. Now Labor has signalled its support for the bulk of the government’s proposed changes to superannuation tax breaks, while proposing some extra budgetary savings of its own.

The ALP has endorsed the main elements of the government’s package of reforms to super tax breaks. It has accepted the government’s moves to tighten the annual cap on pre-tax super contributions to A$25,000 a year, and to put a A$1.6-million cap on tax-free super earnings in retirement.

These changes will better align superannuation tax breaks with their policy purpose, as a substitute for the Age Pension, by reducing breaks for those who don’t need them.shorten1_600px

Going further

The ALP proposes to tighten superannuation more than the government, contributing more overall to budget repair, without substantially reducing income in retirement that would substitute or supplement the Age Pension. Over four years, the ALP’s proposals would raise up to A$1.7 billion more than the government’s plan.

The ALP proposes to tax super contributions at 30% instead of 15%, if a taxpayer’s income is more than A$200,000. In the federal budget, the Coalition set this threshold for the higher tax rate at A$250,000.

Labor’s proposed change is worthwhile. The threshold is calculated by adding taxable income and pre-tax super contributions. So it would be close to the threshold for paying the top marginal rate of personal income tax – A$180,000 – added to compulsory super contributions of A$17,100.

The ALP also sensibly rejects parts of the Coalition’s super package that would increase the generosity of super tax breaks to high-income earners.

For instance, allowing people to contribute more to their super when they have not reached their pre-tax contributions cap in previous years, as the government proposes, will do little to help women and carers to catch up. The evidence shows that few middle-income earners, and even fewer women, make large catch-up contributions to their super funds. Most people who contribute more than A$25,000 to super from pre-tax income have high incomes, and probably have continuous work history.

Similarly, the ALP is right to oppose government moves to abolish the work test that prevents older Australians from contributing to super unless they are working. This change would risk making the system even more generous to high-income earners by enabling them to funnel existing savings into super, while doing little to boost genuine retirement savings.

Lifetime cap on post-tax contributions

While it supports much of the package, the ALP’s rejection of the proposed A$500,000 lifetime cap on pre-tax contributions is disappointing.

This cap is not retrospective, as it does not affect post-tax contributions made before budget night, even where they exceed A$500,000. From a legal perspective, a measure is only “retrospective” if it means that actions in the past make a person liable for criminal penalties, additional tax, or the like. That is not the case here.

Those who have already put in more than A$500,000 before the cap was introduced would simply be prevented from putting in any more. Given the size of the superannuation savings these people have already accumulated, they are unlikely to qualify for an Age Pension even if they make no further contributions.

The ALP’s counter-proposal to only count post-tax contributions made from budget night towards the A$500,000 cap may only cost A$500 million in foregone revenue over the next four years. But younger generations, on the wrong side of the drawbridge after the policies change, will lose again when they pay for benefits for older generations that they will not receive themselves.

A worthwhile increase to super tax breaks

The government plans to make it easier for people to make voluntary pre-tax contributions directly to their superannuation fund. The ALP is wrong to oppose this.

The government wants to enable all taxpayers to contribute directly to their super funds and claim a tax deduction on their personal income tax return. At present, only people who earn most of their income from non-employment activities, or those who are self-employed, can contribute directly. Employees can only make pre-tax voluntary contributions if their employer provides a facility for salary sacrifice payments. If pre-tax voluntary contributions are allowed at all, there is no rational basis for limiting this to employees with more sophisticated employers

A test of political maturity

Reforms to super tax breaks represent a rare opportunity to make much-needed progress on budget repair, while better aligning super tax breaks with their policy purpose. They would trim the generous super tax breaks received by the top 20% of income earners – people wealthy enough to be saving for retirement anyway and unlikely to be eligible for the Age Pension. Both major parties have made substantial proposals in this direction. They agree on many measures.

The parties disagree over some of the details. The danger is that these disagreements derail reform. But good politics is always the art of compromise. If a sensible deal cannot be done when the parties are so close together, then our political system really is in trouble.

The ConversationJohn Daley, Chief Executive Officer, Grattan Institute and Brendan Coates, Fellow, Grattan Institute

This article was originally published on The Conversation. Read the original article.

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