Higher Super Tax Concessions: Who Benefits And At What Cost?

Economist Chris Richardson sparked debate earlier this year by describing Australia's superannuation system as "a reverse Robin Hood," arguing that it took money from poorer Australians and gives it to the rich.

"The super system is best thought of as a trucking company," Richardson wrote. "It collects cash from the less well-off and dumps those dollars on the rich. And it charges almost as much in fees for doing that as the nation collects in taxes from super. The official figures already show that super is an intergenerational blight, and it's eating away at the budget as it takes from the poor to give to the rich."

Researchers at the Grattan Institute think tank also argued that Australia's super system had turned into a taxpayer-funded inheritance scheme for the wealthy, with 68% of super tax breaks benefiting the top 20% of income earners, reported ABC.

According to Andrew Podger, a professor of public policy at ANU, Australia needed to shift its focus towards creating a system that helps older Australians turn their accumulated super savings into reliable incomes, ensuring they can maintain their living standards and manage the financial challenges of old age.

With higher tax concessions on the horizon, will this problem get worse?

Growing super tax concessions cost to government

At the beginning of 2024, the Treasury had forecast that Australia's super tax concessions would cost the government AU$50.1 billion in forgone revenue in 2025-26. However, new estimates published last week show a higher figure. According to Treasury, the cost will now be AU$59.5 billion in 2025-26, AU$9.4 billion more than previously expected.

Treasury's latest estimates of Australia's super tax concessions are listed in the 2024-25 Tax Expenditures and Insights Statement.

In 2026-27, the cost is projected to reach AU$62.8 billion, which is an increase of AU$9.5 billion.

Treasury officials attribute these upward revisions to a few factors. First, they're forecasting higher-than-expected employee earnings, which will lead to higher superannuation contributions.

Second, a stronger capital gains outlook will support higher earnings within superannuation balances. Since both contributions and earnings are taxed at a concessional rate of 15%, the "cost" of super tax concessions will be AU$18 billion more than expected over the next two years.

Who stands to gain the most?

It's important to consider who stands to benefit the most from these super tax concessions. In 2023, the Parliamentary Budget Office (PBO) published an explainer on how super is taxed, offering valuable insight into how the system works.

Australia's super system is taxed at three points:

• When contributions are made.
• When super assets earn investment returns (earnings).
• When withdrawals are made.

Super is taxed concessionally, meaning it is generally taxed at a lower rate than other taxable income.

Why does Australia use a TTE model?

As the PBO explains, when the superannuation guarantee was introduced in 1992, the government chose to tax both contributions and earnings. This approach ensured that revenue would be raised sooner, as opposed to an EET model (taxed only at withdrawal) where the government wouldn't collect any revenue until an individual retired, potentially decades later.

By taxing contributions and earnings, the government collects revenue throughout an individual's working life, even with relatively low tax rates.

Top 10% are the biggest beneficiaries

The PBO points out that while the system has its benefits, there are costs too. One of the major drawbacks is that super taxes are less progressive than personal income taxes. As a result, the benefits of super tax concessions tend to flow more toward higher-income earners.

The difference between an individual's marginal tax rate and the 15% flat tax on super grows larger as income increases. In other words, the wealthier you are, the greater the benefit from these concessional tax rates.

The PBO also points out that if Australia switched to an EET model, like many OECD countries, taxes on withdrawals could be aligned with personal income taxes, making the system more consistent. It could help make the system more progressive, especially since Australia's age pension is already progressive through means testing.

Numbers tell the story

Treasury's Tax Expenditures and Insights Statement from last week revealed some telling numbers. In 2021-22, the top 10% of income earners received 32% of the AU$24.5 billion in tax concessions on super contributions, up from 30% in 2019-20. While, top 10% of income earners received 43% of the $24.3 billion in tax concessions on super earnings, up from 39% in 2019-20.

The disparity is even more pronounced when it comes to tax concessions for super earnings.

The numbers paint a clear picture: the wealthiest Australians continue to reap the largest rewards from the superannuation system's tax concessions.