Superannuation & tax

Below covers reform of superannuation regulation & tax, plus implications for income tax administration, further related reforms to corporation tax & GST, and supporting employment & reforming welfare.

1. Reform of Australian superannuation taxation and regulation

The current superannuation system is inflexible and complex, which explains why despite its very expensive tax concessions, the average Australian has as much in savings outside super as they do inside it.  It doesn't meet the needs of a modern, flexible and ageing population. It needs fundamental reform.

The "supertaxreform-final updated2012.pdf" attached below presents a vision for simple, flexible, customer-focused superannuation (to support flexible careers and retirement) that is fair and sustainable in its tax treatment.  The paper has evolved over the years through various submissions (initially to ASFA's 2005 competition).  Click here for an article about my longstanding campaign on this issue.  Also attached below is "AgeingSuperTaxReformJan2017", which is my latest one-page paper on the inevitable need for such tax reforms due to an ageing population, which is also here on Global Access Partners' Open Forum blog site.

The following are the key points of my proposed superannuation reforms:

  1. An initially voluntary new "flexi-super" scheme (voluntary for at least older workers, over, say 45), with the following features:

a) No tax on contributions (i.e. made from pre-tax income, or with tax credits granted for post-tax income contributions).

b) A small tax on earnings (I suggest about 15%) on funds up to a defined maximum balance (where the maximum provides for "comfortable" retirement).  

    This tax applies at all ages (including in “retirement”).  Earnings on funds above the maximum balance incur full income tax rates.

c) Full income tax rates on withdrawals.

d) Funds could be withdrawn at any age (e.g. for a mid-career break or unemployment period), as long as the balance exceeds a regulated minimum amount, which may rise with age (with this minimum based on the savings required to retire with a basic 'minimum' standard of living, i.e. less than "comfortable") - this flexibility addresses probably the biggest barrier to voluntary contributions under the current superannuation regime.

e) 10% of wages must only be contributed if the fund balance is below the regulated minimum (which would be specified by, and gradually rise with the person's age) - noting the arguments for more than 10% (made by the self-interested super industry) are not strong.

Besides being simple, having all tax benefits on earnings automatically rewards people for saving longer and thus avoids the need for complex regulations limiting annual contributions and withdrawals.  The more that's withdrawn in any single year, the higher the % rate of income tax that will apply - so there's an incentive to withdraw funds gradually (see "Broader tax reform" ideas below for setting % rates).

The proposed tax treatment would also benefit people taking a voluntary or forced career break, because the marginal tax on withdrawal could be at a lower rate than during prior high-income periods of their career. For example, the income tax paid by someone earning $100k in year 1, putting half this into superannuation then withdrawing $50k in year 2 would be taxed the same as someone who worked two years at $50k p.a. - unlike the current income tax system, which taxes you more for earning a given amount over one year rather than two, thus actively discouraging employment contracts that respond faster (more efficiently) to varying demand.  Hence these proposals could encourage greater job mobility - with more frequent vacancies and more opportunities for those looking for work - thus potentially reducing unemployment.
There may also be 
other 'externality' (society-wide) benefits arising from people taking more career breaks to focus on their families or other aspects of life.

  1. Pragmatic implementation could be assisted by:

    a)  An extended phased implementation, with voluntary participation from people currently over, say, age 45 or 50.  Those people that valued the flexibility (especially younger people) would voluntarily switch to the new scheme, even if it had somewhat lower tax benefits.  Over time, the current Australian superannuation scheme would be phased out.

    b)  Pre-paying of withdrawal tax credits (perhaps encouraged by incentives) in order to manage short-term Commonwealth budget constraints.

    c)   The Australian Superannuation Funds Association (ASFA) should support it as it's based on a concept that they awarded first prize to in their 2005 "Simply Super" competition.

  2. Further policy options could include welfare system reforms to better support life-long employment as attached below & including:
    • Merging the pension with superannuation to form one integrated system, with the pension being replaced by government contributions to private super accounts that are below the minimum balance.
    • Mandating the purchase of lifetime annuities to provide an indefinite minimum income beyond "retirement age" (to the extent a specific "retirement age" has much meaning in future).
      • Note if lifetime annuities aren't compulsory then demand will be biased towards those that expect to have a higher than average life expectancy, which will cause premiums to rise and be poor value-for-money for a person with average life expectancy, thus causing a spiral of low demand and higher premiums.  This market failure justifies mandating minimum annuities.
    • Replacing most tax allowances and welfare payments with one, simpler "universal basic income" paid into super accounts:
      • Universal-Basic-Income (UBI) can provide a basic bare-minimum income to live, without complex & costly eligibility tests, and would be repaid through the progressive income tax system as people earn additional income.  A UBI has the potential to promote innovation by reducing the costs of failure and is supported by a number of high-profile entrepreneurs at least partly for this reason (although perhaps also out of guilt at their extreme wealth!).  Also, with a UBI in place there would be no need for a minimum wage (although whether that is socially acceptable depends very critically on how high the UBI is), which should then create new employment opportunities, as it would be less costly for businesses to employ someone.  In effect, it would introduce a more efficient form of "access pricing" for labour, analogous to utility bills, where the UBI forms the fixed component for the minimum cost of living and the variable component for voluntary labour just compensates for the marginal cost to the person of undertaking that labour.
      • In Australia, the level of universal-basic-income could be based on the cost of housing in regional areas and thus cost taxpayers significantly less than the rent support currently required for unemployed residents in urban Sydney struggling with unaffordable housing.  The implication is that Sydney's unemployed population may have to move to non-urban areas where they could afford rent, and although these areas may have few current job opportunities, a UBI makes this a feasible option as recipients would not have to provide evidence of job applications (as required with current welfare benefits).  Over time, the growing regional population (supported by a planning & transport strategy connecting regions to cities with fast rail links) would improve the economic viability of new local businesses and unemployed residents on UBI could contribute to increasing economic activity (as occurred in trials of a universal basic income in Uganda and as might be expected when people no longer have to worry about their most basic, immediate needs and can afford to take risks & innovate).
    • Supporting more affordable housing by, for example, allowing low-wealth first-home buyers to use superannuation funds for a deposit (subject to constraints).  This could be enabled if APRA helped manage excessive investor demand for housing through lending controls as suggested here (noting that as a matter of principle low-wealth households should be able to use their limited savings for a home deposit, but allowing the wider population to access superannuation for this purpose will simply bid up the price of housing).
      • Note the proposed uniformly low 15% tax on all superannuation investment earnings could also address the economy's current distortion towards housing investment, without requiring changes to negative gearing policy, which is mainly a problem because of its interaction with the discounted tax rate applying to capital gains (which that totally over-rated Treasurer Costello introduced along with unsustainable superannuation tax changes, although maybe I should blame his adviser).

2. Broader tax reform/rationalisation (draft - still needs more in-depth thought & analysis!)
The reforms proposed above for superannuation tax would largely replace income tax and also constitute a progressive consumption tax (GST or VAT), because tax would only apply to people's income when they withdrew funds to spend it.  It would be equivalent to (but administratively far more efficient than) applying a GST to every transaction with an increased % rate for wealthier people that spend more.  Hence there would then be no need for "luxury goods" taxes and even the GST itself would become administratively redundant and could be abolished, at least for domestic production (see below).  Philosophically it makes sense to tax consumption rather than income, because it is consumption choices that determine how society's limited human and natural resources are utilised.  Further major economic efficiencies would come from consolidation of banking & super industries (using blockchain) as people choose to bank almost all their savings in their super account - because why would you put money in the bank when you can leave it in super with a lower tax on earnings and still access most of it?

Tax avoidance could be minimised as current income tax administered by employers would be redundant and a fixed top tax rate (with no deductions) could be applied to all income not held in super accounts (current opportunities for income tax deductions should be much reduced anyway, as they are in most other countries).  Parents could effectively get an extra allowance for dependent children by donating from their pre-tax income (in their super fund) to their children's superannuation accounts, which they could then use to meet living expenses (thus effectively getting an extra tax-free spending allowance).  But aside from children, tax & welfare should not depend on whether an adult is sharing accommodation with another adult - whether they be friend, partner or otherwise - as it makes no sense for society to penalise people for sharing companionship, love and assets, and the state has no business prying into such things as it is increasingly doing (plus de facto laws deny people the right to choose whether or not to make a marriage commitment, and should be repealed once gay people are granted marriage equality).

For domestic investors & corporations, a superannuation earnings tax of, say 15%, would be equivalent to a 15% corporations tax, but applied one step beyond the corporation (on dividends paid to individual investors, rather than on the corporation's aggregate profit).  Hence it would seem to make sense to set Australian corporation tax at the same consistent level of 15%, which could be applied only on retained profits, or if on all profits then, as per existing practice, dividend imputation would enable individual investors to offset corporations tax paid against the 15% tax payable on their superannuation fund earnings (for funds below the regulated maximum super fund balance).

Then, since the Australian government can't tax the earnings of foreign investors or corporations, a level playing field for local production and imports would seem to require a 15% GST on imports only.  Consequently, when an Australian consumer withdraws money from their super/bank account to spend it, they will pay:
  • 15% corporations tax or superannuation earnings tax on domestic production, or,
  • 15% GST on imports,
  • plus their income tax rate on funds spent on either domestic production or imports.
To cover any reduction in total tax revenue from the above changes, new highly efficient taxes could be introduced, including:
  • A corporate 'cash flow tax', which was an option suggested in the Henry Tax Review, and has a lot of attractions in terms of reduced administration cost and literally no disincentive for investment, even if levied at 30% or more for returns on investment above the 'risk-free' benchmark rate (so-called "super-profits", which don't just occur in mining industries). Conceptually it has similarities to the GST and the above superannuation tax proposals, and many of it's perceived problems could, I think, be addressed if also applied in combination with the above proposals for a 15% tax on corporation profits or superannuation investment earnings (Note also that the comprehensive tax reforms advocated here would compensate for corporation tax cuts, which in isolation would just be a gift to foreign Treasuries).
    • A cash-flow tax seems an appropriate approach for small businesses if one considers all such businesses as representing a diversified investment portfolio, similar to an R&D portfolio.  Many small businesses will fail to make decent returns (above the risk-free rate), and many will fail completely, but a minority will provide the innovation and dramatic growth to become the major corporations of the future.  From this perspective, a cash-flow tax would make the government a co-investor in this diversified portfolio, effectively helping to balance the super-profits and losses across the portfolio of all Australian businesses and supporting the "innovation economy" in a more efficient way than traditional grants and tax breaks.  Given that luck is also a factor in business success or failure, this also seems a socially equitable approach to taxation, as well as being economically efficient.
    • Once introduced, I recommend having a fixed tax-free interest rate benchmark (above which investments returns are taxed), to give certainty and simplicity for business and because this will provide an automatic macro-economic stabiliser - reducing the tax take and thereby stimulating the economy when business investment returns are low.  Thus the time to introduce this tax is now (i.e. 2017, at least from a Treasury perspective), whilst market interest rates are low and so a low benchmark rate can be more readily justified for the new tax and ensure significant ongoing tax receipts).
    • Preferably the cash-flow tax should also apply to own-home ownership, in order to correct current distortions favouring housing investment over more productive commercial investments (which increases house prices and reduces home affordability) and to curb current arrangements that have contributed to rising inequality.  The tax-free interest rate benchmark could ensure the affordability of moving house is not adversely affected by general economy-wide price increases, and would also promote a more equal geographic distribution of house price growth by applying higher tax to areas with higher price growth, thus improving social equity and inclusiveness (although of course this wouldn't be popular with people wanting to upgrade to a bigger or better house in an area of high price-growth - well, what do you expect; it is a tax!).
    • A competitive open-source technology delivery model could integrate tax collection systems with business cash-flow management, which could be a significant administration benefit to small businesses, who are more concerned with cash flows than accrual accounting.
    • I suspect a simpler cash-flow approach to corporate taxation may also reduce tax minimisation/avoidance opportunities, which may be why big business and accounting advisory firms aren't keen on it (see here for where the interests of the 'Big Four' lie!).
& finally,
  • allowing everyone to choose what services 1% (say) of their taxes should fund (e.g. health, education, defence, or a chosen mix?), would not only directly allocate a small fraction of funds directly in line with community wishes, it would also encourage service agencies to provide better public information to justify this funding and also provide guidance to government as to how they should allocate the other 99% of taxpayers funds.
And that's about it - get rid of all other taxes (except those designed to promote broad public benefits such as pollution reduction or moderation of alcohol consumption & corresponding public safety, crime & health system impacts) and replace them over 1-2 decades with just these five simplified, reformed taxes - on land, corporate profit & cash-flow, income/super/consumption, and import sales.
For consumption/withdrawals from super I suggest progressive tax rates of around 15%, 25%, 35% & 45% (rather than the virtually flat rate proposed by the 2018 Budget, which will seriously reduce the current system's contribution to reducing inequality), with the current zero-rate income-tax band replaced by a UBI (see above) and the higher thresholds set to raise enough revenue for decent public services and then automatically indexed annually (to remove the bracket-creep budget toy from politicians).

Sounds too easy doesn't it?  But I don't think these are especially tricky problems; they just need to be tackled by people who give a damn about people other than themselves.  Economists know that taxation affects economic trading activities, which involve the interaction of producers/employees, investors and consumers.  Applying multiple taxes to different parties in this trade (e.g. income tax and profit tax and GST) generally just adds administration costs compared to one simple tax on the trade.  But the world's taxation systems have grown over many, many years into the mess they are primarily on the advice of accountants (who make money from having complex tax & accounting systems) and wealthy, self-interested business leaders seeking loopholes under cover of proclaimed but generally non-existent economic expertise (there's a big difference between knowing how to run a business and understanding the economy)...

"Trickle-down" economic policies (tax cuts for businesses & rich executives/investors) started circa 1980 under Reagan & Thatcher.  
How long until it trickles down?:

David Thorp,
20 Jan 2017, 18:28
David Thorp,
12 Jun 2017, 00:39
David Thorp,
8 Mar 2016, 19:56