David Murray says it’s time to tackle superannuation concessions for rich

Financial system inquiry chair David Murray’s report to the government said tax breaks on super and housing needed to be looked at closely in the tax white paper. Photo: SuppliedThe man who the Abbott government tasked with fixing the financial system says political leaders have failed to end Australians’ sense of entitlement when it comes to superannuation concessions and the aged pension.

While there was an economic case to cap large balances from getting preferential tax treatment, and possibly include the family home in the assets that are taken into account when determining a person’s eligibility for the aged pension, the community wasn’t ready for such massive changes to the superannuation system, says David Murray, the head of the financial systems inquiry.

“There is not a belief set in the community that we have an issue to address,” Mr Murray told Fairfax Media after an SMSF Association conference in Melbourne about the retirement income system.

Mr Murray, a former chairman of the Future Fund, said after 25 years of continuous growth, and generous handouts by various federal governments, the community had gained a sense of entitlement.

And despite comments by Treasurer Joe Hockey and others about ending the “age of entitlement”, politicians had not managed to convince the public why it was necessary to change.

“Until that [voter] belief set changes, it becomes harder for the political system and the politicians to deal with that adjustment that we need,” he said.

Mr Murray’s report to government said tax breaks on super and housing needed to be looked at closely in the tax white paper, as they were distorting behaviour and posing a risk to the financial system and entire economy.

As Mr Murray’s report and a host of other economists and think tanks have noted, overly generous tax concessions applied to superannuation investment earnings have been primarily benefiting the rich.

Mr Murray’s report also took issue with the fact that super earnings are taxed at 15 per cent in the accumulation phase, but are untaxed in retirement. His report suggested “aligning the earnings tax rate between accumulation and retirement would reduce costs for funds” and “facilitate a seamless transition to retirement and reduce opportunities for tax arbitrage”.

A recent report by the Association of Superannuation Funds of Australia suggested removing the concessional tax treatment for balances of more than $2.5 million. It also said superannuation should not be used as a wealth accumulation or estate planning tool.

Tax Office statistics show almost 300,000 self-managed superannuation funds eliminated or reduced their tax bills through exemptions on super and $2.5 billion in franking credits in 2011-12.

Mr Murray did not advocate a cap level for concessional tax treatment – saying that was best left to experts to model when the cap should apply to super balances – but said one was needed.

He said lower-income taxpayers were missing out on the benefits of superannuation concessions, thereby “subsidising” a tax break for higher-income earners.

“There’s very generous tax concessions in the system, there are very generous voluntary contribution arrangements, and there is no cap on the system,” Mr Murray said.

“So that drives those inequities and the tax arrangements drive distortions across the financial system that affects the economy. Depending on your political persuasion, one or other of our alternative governments in Australia is going to keep picking that up … It’s not a sustainable system. The tax has to be sorted out and the objectives have to be clear.”

Also speaking at the SMSF Association event was Don Russell, once senior adviser to former Prime Minister Paul Keating and one of the architects of compulsory superannuation.

He said there were issues with the concessions being “excessively generous” and there was a need to look at those. But compulsory superannuation was never set up as a mechanism to channel income to lower income earners.

“It’s based around compulsion and you can only do that with a good deal,” Mr Russell said. “You’ve got to have a tax preference to help savings. That’s always going to benefit higher income people because higher income people can save; lower income people can’t save.”

Former Reserve Bank board member and chair of public policy at ANU, Warwick McKibbin, told Fairfax Media after the event that while “there’s a very clear argument” for getting some of the distortions out of the super system which are leading to excesses”, bringing the family home into the assets test, and raising the GST and broadening the base, neither the government nor the opposition had the courage to tackle these issues.

“Every time we see an election result like we did in Queensland or Victoria, we draw the wrong conclusions,” Professor McKibbin said.

“We say, ‘the public voted against this particular policy; that they voted against asset sales in Queensland’. My view is, no, they didn’t vote against that. They voted against the [Queensland] government. I think until that [conversation] changes, politicians will continue to go down this road of not being able to do anything.”

Professor McKibbin said most policies designed to improve economic efficiency and raise money, were by their nature inequitable. “My view is that you need to implement the most efficient ways of generating revenue at the lowest cost, so there are more resources for people to share, and then you do the equity adjustments,” he said.

“It may be that you never get to do some equity adjustments, and that at an individual level the system is not fair. But the system as a whole has to be fair.”

The other issue now being debated is whether the family home should be included in the assets test for the aged pension.

On Monday, the parliamentary secretary to the Treasurer, Kelly O’Dwyer, said the issue should be debated following the upcoming release of Treasury’s intergenerational report, which forecasts major government spending over 40 years. But Social Services Minister Scott Morrison has ruled out including the family home in the assets test.

Shadow treasurer Chris Bowen said there was a need to ensure high-income earners “pay a fair share of their tax on superannuation”.

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