Deloitte: Tax Reform in Desperate Need of a 'Circuit Breaker'

28 October 2015
Superannuation tax breaks cost the government billions in lost revenue each year. Deloitte has suggested a superannuation tax “circuit-breaker” to both increase government revenue and increase national retirement wealth. Is it a win/win?

According to Deloitte Australia, Australia’s tax reform debate is in desperate need of a circuit breaker. Deloitte has attempted to provide that breaker via its most recent report on the superannuation environment, reintroducing a former suggestion from the 2009 Henry Review that the superannuation contributions tax rate be graduated rather than a flat 15% for all.

Specifically, Deloitte has recommended that everyone should get the same tax benefit of money going into super, with a concession of 15 cents in the dollar for all.

Current State of Super Contributions

Currently, before-tax superannuation contributions are taxed at a flat rate of 15% (with reduced tax concessions for very high income earners).  Because income tax is a graduated tax system though (meaning that the more you earn, the higher the tax rate you pay), paying a flat 15% on superannuation represents a higher benefit for higher income earners. For example:

Taxable income Marginal tax rate Superannuation contributions tax Saving on marginal tax rate
0 – $18,200 Nil 15% Nil
$18,201 – $37,000 19% 15% 4%
$37,001 – $80,000 32.5% 15% 17.5%
$80,001 – $180,000 37% 15% 22%
$180,001 and over 45% 15% 30%

Deloitte’s Recommendations

As demonstrated, the taxation saving associated with putting before-tax money into superannuation is significantly higher for high income earners. Deloitte’s recommendation aims to turn this on its head, with all workers receiving a 15% tax rebate instead. This would result in the following tax savings.

Taxable income Marginal tax rate Superannuation contributions tax Saving on marginal tax rate
0 – $18,200 Nil -15% 15%
$18,201 – $37,000 19% 4% 15%
$37,001 – $80,000 32.5% 17.5% 15%
$80,001 – $180,000 37% 22% 15%
$180,001 and over 45% 30% 15%

“Making the tax incentives for contributing into super the same for everyone also comes with a pretty big silver lining. As current incentives are weighted towards the better off, there is a tax saving from making super better – a reform dividend of around $6 billion in 2016-17 alone,” said Deloitte.

“Even better, because this is a change to the taxation of contributions – when the money goes in – it avoids the need for any additional grandfathering. Nor does it add extra taxes to either earnings or benefits.

And because the incentives are simpler and fairer, the current caps on concessional (pre-tax) contributions can also be simpler and fairer. They could be abolished completely for everyone under 50, and the cap could be raised for everyone else (subject only to a safety net of a lifetime cap). That would put super on a simpler, fairer and more sustainable basis.”

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