Australian Greens' Dissenting Report

1.1Australia’s superannuation system is no longer about ensuring a dignified retirement for workers. Successive parliaments have contorted its purpose so that it is now Australia’s premiere tax haven for wealth accumulation and estate planning. This legislation will not change this trajectory in any meaningful way.

1.2As the co-architects of compulsory superannuation system, the ACTU submitted to the inquiry:

Superannuation was not designed as, and should not be, a tax haven for the wealthy nor a way for the wealthy to receive tax handouts. Instead, superannuation tax concessions should provide assistance to those who need it, to save sufficient income for their retirement.

Current superannuation tax concessions are unfairly targeted, regressive and unsustainable.[1]

1.3As a result, superannuation is using public funds that should be properly funding aged care and lifting people on the aged pension and income support out of grinding, demoralising poverty.

1.4The scale of the inequity in the superannuation system is highlighted by the latest ATO data, which shows that 0.6 per cent of individuals (104,141 super accounts) have a super balance greater than $2 million. This 0.6 per cent of the population owns 14 per cent of the total value of super balances in this country.[2]

1.5The bill as presented doesn’t even cover all of this tiny, bloated cohort, with only the proportion of balances above $3 million subject to an additional 15 per cent capital appreciation tax.

1.6As the Grattan Institute submission stated:

There is no rationale for generous earnings tax breaks on balances between $2 million and $3 million, certainly not one that is consistent with the proposed objective for superannuation to ‘deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way’. People with that much in super will have a very comfortable retirement without taxpayer support.[3]

1.7On 14 March the below question on notice to Treasury was issued and reiterated with Treasury in the lead up to the hearing on 18 April and again in the lead up to the publication of this report in early May:

When announcing the 30% tax rate on superannuation earnings above $3 million, the Government stated this will apply to 80,000 Australians and 0.5% of superannuation accounts in 2025-26, what is the total number and percentage of superannuation accounts in 2025-26 that are expected to have balances above $2 million.[4]

1.8It can be assumed the answer has not been provided because the proportion of people with super balances above $2 million is similarly small as with balances above $3 million. There is no defensible reason why the wealthiest 0.5 – 1 per cent of super balances shouldn’t also be brought into the scheme.

1.9The threshold should be lowered from $3 million so that super balances over $2 million are liable for the 30 per cent tax rate, indexed in line with inflation.

1.10Not only is the legislation narrowly applied to not even cover all of the highest one-hundredth of asset owners in the country, it fails to address the multitude of ways that the current superannuation system delivers for high income and high wealth individuals at the expense of everyday working Australians.

1.11A non-exhaustive list of the ways in which superannuation tax structures are skewed towards higher income earners and asset owners is:

Unlike our income tax system, the contributions tax system is regressive;

people earning up to $45 000 get a 0–4 cent tax benefit per dollar into their super balances, while people earning $180–250k get a 30 cent benefit;

Treasury has calculated that 90 per cent of contribution tax benefits go to people with above median income, and 30 per cent of the benefit goes to people in the top income decile.[5]

Earnings tax breaks benefit high income earners. The bigger the super balance, the larger the earnings on that balance through compounding growth. The tax discount on those earnings means:

The wealthiest 10 per cent currently receive 40 per cent of these tax breaks, with men receiving 61 per cent of the benefit, while women only get 39 per cent.[6]

This 10 per cent would never have had to rely on the aged pension in retirement, so the 40 per cent of the cost of this tax break will not lower government spending on the aged pension – one of the main purposes for introducing compulsory superannuation.

Retirement accounts pay no earnings tax at all. During the rivers of revenue from the first mining boom, Howard and Costello turbocharged the inequality of capital earnings taxes by making capital earnings completely tax free when someone retires. The Turnbull Government capped the tax free component, currently at $1.9 million, but this still costs the budget around $5.3 billion a year.[7] This is currently having inflationary effects in the broader economy that monetary policy cannot contain.[8]

Contributions caps are set very high. This enables high income earners (particularly those close to retirement) to divert income or assets into their super to enjoy high tax advantages.

Voluntary contributions help high income households. For example, carry forward contributions were sold politically at the time to benefit women temporarily out of the workforce, whereas in reality 42 per cent of individuals who utilise it are in the top income decile.[9]

1.12This bill addresses only a slither of one aspect of the components leaking revenue that has turned our superannuation system into a tax shelter. That component is the earnings tax. Treasury’s latest Tax Expenditure and Insights Statement calculated growth rates of 17.7 per cent over the past three years for capital earnings tax breaks within super, so reining this in is a worthwhile goal.[10]

1.13At the public hearing on Thursday, 18 April 2024, Senator McKim asked Treasury officials the following question on notice regarding the breakdown of earnings tax concessions:

Treasury’s latest tax expenditure statement says in relation to earnings tax concessions that the wealthiest 10 per cent get 40 per cent of the tax benefits and men get 61 per cent of the benefit, women get 39 per cent. Does Treasury expect these proportions to change if this legislation was enacted? What would be the expected changes in these figures as forecast by Treasury?[11]

1.14Treasury provided the following response on Tuesday 7 May 2024:

The 2023-24 Tax Expenditures and Insights Statement (TEIS) provides distributional analysis of superannuation earnings for the 2020-21 financial year, while the Better Targeted Superannuation Concessions measure will not commence until 2025-26, by which time the distribution of beneficiaries may have shifted.[12]

1.15This legislation is a lost opportunity to address growing economic inequality in Australia. Taxes enable us to reinvest in society and shave off the excesses of both wealth and poverty. To quote the Assistant Minister for Competition, Charities and Treasury, Dr Andrew Leigh from his book The Shortest History of Economics:

While money continues to buy more happiness, the principle of diminishing marginal utility still holds. Increases in happiness seem roughly proportional to the percentage increase in income - meaning that a 10 per cent increase in income buys the same happiness boost to a homeless person as it does to a socialite. Yet that 10 per cent increase equates to many more dollars for someone who is rich than for someone who is poor. Consequently, the increase in inequality that has occurred in many nations over the past generation might have had an adverse impact on happiness. One of the best arguments for a redistributive welfare state and progressive taxation is that a dollar brings more pleasure to someone who does not have many dollars to begin with.[13]

1.16The considerable diversion of resources to the wealthiest through the super system should be redirected to lift income support payments, which are currently the lowest in the OECD when measured against average incomes.[14] As the Assistant Minister’s argument makes clear, our society will be happier, fairer and more prosperous.

1.17In this financial year, $9 billion will go to the highest income decile from superannuation contributions tax breaks and $8.5 billion in earnings tax breaks.[15] This largesse driving economic and generational inequality should not be permitted to continue.

1.18This money should be used to lift the aged pension above the poverty line and ensure people have earlier access to the pension. A universal and adequate pension, paid for by removing excessive and untargeted tax breaks within superannuation is a far superior policy approach to ensure that no one falls through the cracks once they retire from working life.

1.19The Government prepare comprehensive legislation to restore superannuation’s purpose to support working people’s dignified retirement by removing and reducing all the tax settings that disproportionately benefit the highest income earners and asset owners.

1.20The gendered impact on savings in superannuation is well documented and can be improved by removing the excesses mentioned above, which largely flow to men. Welcome announcements such as providing super payments on paid parental leave are also important improvements to close the gender pay gap in retirement.

1.21Other changes can also close the gender retirement gap, such as making the contributions tax progressive, for instance by ensuring that the Low Income Superannuation Contribution Offset (LISTO) delivers an actual tax benefit to lower income workers, rather than just netting out the negative tax impact, as it currently operates.

1.22Evidence was provided to the committee by several witnesses that the actuarial formula for calculating the tax impost on defined benefit schemes may result in female beneficiaries being taxed at higher rates than men, due to the fact that life expectancy data shows that women live longer than men.[16] This would increase the value of the defined benefit and therefore tax a higher proportion of the defined benefit.

1.23Superannuation urgently needs to be reformed to improve financial outcomes for women, but at the very least, the Parliament should not permit new regulations that would make the retirement pay gap worse for women.

1.24To ensure the regulations for taxing defined benefit schemes are not disallowed in the Senate, the government must ensure the actuarial formula does not result in women being taxed higher than men as a result of their longer life expectancy.

1.25The operation of this proposed tax increase is unique in that it doesn’t tax capital gains at the time an asset within a super fund is sold, but is applied on an accrual basis as the value of the assets increase over a yearly time period.

1.26The Greens are not opposed to novel solutions to tax excessive wealth, but we do acknowledge that this will lead to liquidity problems for self managed super funds (SMSF). The motivation for someone to establish an SMSF is overwhelmingly so that investment properties can be held or transferred within a tax sheltered superannuation framework.

1.27This is borne out by the Taxation Statistics which show that 97 per cent of SMSFs using limited recourse borrowing arrangements (LRBA) hold real estate. 86 per cent hold one property, 9 per cent hold two properties and 2 per cent hold three or more.[17]

1.28SMSFs are holding illiquid assets that are increasing in value at obscene rates (as is the defining feature of Australia’s property market since 2000 when capital gains taxes were reduced to only half the tax rate of income derived from working).

1.29In this situation, the SMSF (or the beneficiary in a personal capacity) may not have the liquid resources to cover the leaps in asset growth. These liquidity challenges in turn increase the financial risk of the super fund.

1.30As Mr Tony Greco from the Institute of Public Accountants told the inquiry:

Our modelling indicates that it is very difficult to predict when the tax will be payable from one year to the next, and cash flow management is often practically impossible. It will force some funds to sell assets because they are unable to defer the payment of the tax.[18]

1.31This problem will also arise in economic downturns, as was highlighted by Mr Jesse Hamilton from Wilson Asset Management:

Senator BRAGG: … in relation to unrealised gains, how will it work? Are you expecting that people will just have to sell assets at a time when it may not be in their best interests? How do you think it will work in practice?

Mr Hamilton: You can take the GFC as an example. In 2007 I think the equity markets were up 30 per cent, and then they fell 50 per cent in the two subsequent years. So, in 2007, people would have been forced to sell assets to pay the tax liability—that they would be addressed—and then, in the subsequent years, suffered significant unrealised and potentially realised losses. So people will be forced sellers of assets today to fund that tax liability if they do not have the available cash sitting there on the sidelines.[19]

1.32The impact that this bill would have on liquidity risks had not been analysed by Treasury:

Senator McKim: Has Treasury done any modelling looking at or any assessment of any risk that this bill would amplify SMSFs being forced to sell assets to pay this tax?

Mr Hawkins: No, we haven't undertaken any analysis or modelling of, I guess, the liquidity arrangements within funds, noting that there is a legislative requirement that funds manage their liquidity such that they are able to meet their obligations, including their tax obligations.[20]

1.33Given the heavy reliance by SMSFs on high growth illiquid assets that will require regular liquidation of other assets to keep profitable real estate in their portfolio, this will inevitably lead to less diversification and higher risk within SMSFs.

1.34These risks will be further exacerbated by the existing exemption that SMSFs enjoy from the general prohibition of super funds being able to borrow to finance their investments. In the Financial Systems Inquiry, David Murray warned against limited recourse borrowing arrangements and recommended that the exemption be removed on a prospective basis.[21]

1.35The objectives in recommending the end of limited resource borrowing arrangements were articulated so as to:

(a)prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly; and

(b)fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle.[22]

1.36The reasoning of the Financial Systems Inquiry was as follows:

[Allowing borrowing in SMSFs] magnifies the gains and losses from fluctuations in the prices of assets held in funds and increases the probability of large losses within a fund. Because of the higher risks associated with limited recourse lending, lenders can charge higher interest rates and frequently require personal guarantees from trustees. In a scenario where there has been a significant reduction in the valuation of an asset that was purchased using a loan, trustees are likely to sell other assets of the fund to repay a lender, particularly if a personal guarantee is involved. As a result, LRBAs are generally unlikely to be effective in limiting losses on one asset from flowing through to other assets, either inside or outside the fund. In addition, borrowing by superannuation funds implicitly transfers some of the downside risk to taxpayers, who underwrite adverse outcomes in the superannuation system through the provision of the Age Pension.

The GFC highlighted the benefits of Australia’s largely unleveraged superannuation system. The absence of leverage in superannuation funds meant that rapid falls in asset prices and losses in funds were neither amplified nor forced to be realised. The absence of borrowing benefited superannuation fund members and enabled the superannuation system to have a stabilising influence on the broader financial system and the economy during the GFC.[23]

1.37Combining this proposed accrual-based tax with the existing exemption for SMSFs to leverage for property investments will magnify the risks that the Financial Systems Inquiry warned against, particularly in light of the continued expansion of SMSFs borrowing to finance asset purchases.

1.38The Financial Systems Inquiry cautioned:

Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system…Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014.[24]

1.39Of the 31 recommendations from the Murray Review, this was the only one that Treasurer Scott Morrison rejected.[25] Since then, debt financed investments in SMSFs have ballooned again to $22.6 billion in loans in SMSFs in 2021-22.[26] This unsustainable growth in tax-sheltered borrowing is fuelling property speculation and pushing aspiring first home owners out of the market.

1.40The Turnbull Government’s rejection of the recommendation was accompanied with asking the Council of Financial Regulators to report back to Government after three years. They said “The agencies’ analysis will be used to inform any consideration of whether changes to the borrowing regulations might be appropriate”.[27]

1.41In 2019, the Council of Financial regulators duly reported back, recommending LRBAs no longer be allowed:

The regulator members of CFR and the ATO note that no longer allowing limited recourse borrowing will address a number of significant risks which could be detrimental to individuals retirement incomes due to shifts in the property market, particularly for those with high levels of leverage and low diversification of assets.[28]

1.42No action was taken by Treasurer Frydenberg, even despite the support from the Labor opposition to end borrowing arrangements within super funds.[29]

1.43In September 2022, the Council of Financial Regulators again nudged the new Treasurer after a change of Government:

[There is] evidence LRBAs are used in inappropriate ways by some individuals and can be a high risk to their retirement savings and, by extension, increase the risk of higher fiscal outlays through the Age Pension.

Further, noting the evidence that LRBAs represent a significant risk to some individuals’ retirement savings, the Government may wish to further consider current policy settings, particularly in light of the FSI’s recommendation to prohibit LRBAs.[30]

1.44This continuous series of recommendations to end borrowing by SMSFs should not have been ignored for a decade. The proposed taxation of unrealised capital gains in this legislation has again brought this issue to the surface.

1.45Taken together, the combination of accrual taxation and the 156 per cent increase in limited recourse borrowing by SMSFs since the Murray Review presents a very real risk to individual super funds as well as to the financial stability of the superannuation system as a whole.

1.46To ensure financial risks in the superannuation system aren’t amplified by combining taxes on unrealised capital gains with borrowing by super funds, this bill should only pass the Senate if the government addresses the concerns regarding the exemption on the prohibition for super funds to borrow to finance investments in section 67A of the Superannuation Industry (Supervision) Act 1992 on a prospective basis, as recommended in the Murray Review and subsequent reviews by the Council of Financial Regulators.

Senator Nick McKim

Senator for Tasmania

Footnotes

[1]Australian Council of Trade Unions, Submission 18, p. 3.

[2]Taxation statistics 2020–21. Table 22: Individuals. Superannuation contributions, by total super member accounts balance range, taxable income range and age range, 2020–21 financial year.

[3]Grattan Institute, Submission 9, pp. 2–3.

[4]Question on Notice 3135, Senator Nick McKim to the Minister representing the Treasurer, asked on 14 March 2024, https://parlwork.aph.gov.au/senate/questions/3135 (accessed 9 May 2024).

[5]Department of the Treasury, Tax Expenditures and Insights Statement, January 2024, p. 13.

[6]Department of the Treasury, Tax Expenditures and Insights Statement, January 2024, p. 16.

[7]Grattan Institute, Submission 9, p. 4.

[8]Jacob Greber, ‘Cash splash as Boomers hit the jackpot’, Australian Financial Review, 4 May 2024, https://www.afr.com/politics/federal/cash-splash-as-boomers-hit-the-jackpot-20240502-p5fogo (accessed 9 May 2024).

[9]See, for example, Parliamentary Budget Office analysis based on Australian Taxation Office’s data on superannuation account balances of members, fund-level SMSF and APRA and personal income tax for 2020-21.

[10]Department of the Treasury, Tax Expenditures and Insights Statement, January 2024, p. 5.

[11]Department of the Treasury, answers to questions on notice IQ24-000050, 18 April 2024 (received 7 May 2024).

[12]Department of the Treasury, answers to questions on notice IQ24-000050, 18 April 2024 (received 7 May 2024).

[13]The Hon Dr Andrew Leigh MP, The Shortest History of Economics, Black Inc, Melbourne, 2024, p. 185.

[14]Greg Jericho, ‘Australia has the lowest unemployment benefits in the OECD’, 1 May 2024, https://twitter.com/GrogsGamut/status/1785559990771789824/photo/1 (accessed 9 May 2024).

[15]Department of the Treasury, Tax Expenditures and Insights Statement, January 2024, pp. 13–15; Page 13 shows contributions total cost this financial year of $30,030m with 30 per cent going to highest decile. Page 15 shows earnings total cost this financial year of $21,350 with 40 per cent going to highest decile.

[16]Australian Bureau of Statistics, Life Expectancy, 8 November 2023, https://www.abs.gov.au/statistics/people/population/life-expectancy/latest-release#:~:text=Life%20expectancy%20at%20birth%2C%201992%20to%202020%2D2022&text=Data%20ranges%20from%2074.5%20to%2085.4 (accessed 9 May 2024).

[17]Australian Taxation Office, Self Managed Superannuation Funds, 22 February 2024, https://view.officeapps.live.com/op/view.aspx?src=httpsper cent3Aper cent2Fper cent2Fdata.gov.auper cent2Fdataper cent2Fdatasetper cent2F2fd970ec-984e-4593-bbad-2e69a5fa7a89per cent2Fresourceper cent2Fd96e78e6-cc3a-473e-b43b-0237004573d7per cent2Fdownloadper cent2Fsmsf-annual-statistical-report-june-2022.xlsx&wdOrigin=BROWSELINK (accessed 9 May 2024).

[18]Mr Tony Greco, General Manager, Technical Policy, Institute of Public Accountants, Proof Committee Hansard, 18 April 2024, p. 7.

[19]Dialogue between Senator Bragg and Mr Jesse Hamilton, Chief Financial Officer, Wilson Asset Management, Proof Committee Hansard, 18 April 2024, p. 4.

[20]Dialogue between Senator McKim and Mr Adam Hawkins, Acting First Assistant Secretary, Retirement, Advice and Investment Division, Department of the Treasury, Proof Committee Hansard, 18 April 2024, pp. 45–46.

[21]Department of the Treasury, Financial System Inquiry Final Report, November 2014, pp. 86–88.

[22]Department of the Treasury, Financial System Inquiry Final Report, November 2014.

[23]Department of the Treasury, Financial System Inquiry Final Report, November 2014, pp. 87–88.

[24]Department of the Treasury, Financial System Inquiry Final Report, November 2014, p. 87.

[25]Australian Government, Improving Australia’s financial system: Government response to the Financial System Inquiry, 2015, https://treasury.gov.au/sites/default/files/2019-03/Government_response_ to_FSI_2015.pdf (accessed 9 May 2024).

[26]Australian Taxation Office, Self Managed Superannuation Funds, 22 February 2024, https://view.officeapps.live.com/op/view.aspx?src=httpsper cent3Aper cent2Fper cent2Fdata.gov.auper cent2Fdataper cent2Fdatasetper cent2F2fd970ec-984e-4593-bbad-2e69a5fa7a89per cent2Fresourceper cent2Fd96e78e6-cc3a-473e-b43b-0237004573d7per cent2Fdownloadper cent2Fsmsf-annual-statistical-report-june-2022.xlsx&wdOrigin=BROWSELINK (accessed 9 May 2024).

[27]Australian Government, Improving Australia’s financial system: Government response to the Financial System Inquiry, 2015, https://treasury.gov.au/sites/default/files/2019-03/Government_response _to_FSI_2015.pdf (accessed 9 May 2024).

[28]Council of Financial Regulators and Australia Taxation Office, Report to Government: Leverage and Risk in the Superannuation System, February 2019, p. 4.

[29]The Hon Chris Bowen MP, Minister for Climate Change and Energy, Address to the AFR Wealth and Banking Summit, 26 March 2019, https://www.chrisbowen.net/media/transcripts-speeches/address-to-the-afr-wealth-banking-summit/ (accessed 9 May 2024).

[30]Council of Financial Regulators and Australia Taxation Office, Report to Government: Leverage and Risk in the Superannuation System, February 2019, p. 5.