Last week, the Albanese government’s budget update had some surprises in it.
One of the biggest involved big upward revisions to the size of Australia’s superannuation tax concessions.
Let’s take a look at them.
Earlier this year, the economist Chris Richardson said our super system was already acting like “a reverse Robin Hood” because it was taking money from poorer Australians and giving it to the rich.
Will higher tax concessions make that problem worse?
How much do they cost?
You can find Treasury’s latest estimates of Australia’s super tax concessions here: 2024-25 Tax Expenditures and Insights Statement.
In the document, Treasury officials explain what’s happening.
At the beginning of this year (January), Treasury officials were forecasting that Australia’s super tax concessions were going to cost the government $50.1 billion in forgone revenue in 2025-26.
But in their new estimates, published last week, they say those super tax concessions will now cost the government $59.5 billion in 2025-26, which is $9.4 billion more than they were forecasting in January.
And in 2026-27, they say Australia’s super tax concessions will now cost the government $62.8 billion, which is $9.5 billion more than they were forecasting.
You can see the difference between their two estimates in the table below:
Treasury officials say the upward revisions to the size of the government’s super tax concessions are being driven by a few things.
They’re forecasting higher-than-expected employee earnings over the next four years, which will flow into higher superannuation contributions, and they’re forecasting a stronger capital gains outlook, which will support higher earnings within superannuation balances.
Since super contributions and earnings are both taxed at a concessional rate (15 per cent), that means the “cost” to the government from its super tax concessions (via forgone revenue) will be $18 billion more than expected over the next two years.
Who will benefit most?
It’s worth thinking about who will benefit from those tax concessions.
In 2023, the Parliamentary Budget Office (PBO) published a great explainer: How is super taxed?
If you’re after an introduction to how our super system works, and how it’s taxed, it’s a great place to start.
As it shows, super systems can be taxed at three points:
- When contributions are made
- When super assets earn investment returns (earnings)
- When withdrawals are made
Australia’s super system is taxed concessionally, which means it is generally taxed at a lower rate than other forms of taxable income (e.g. it’s taxed at a lower rate than an individual’s marginal tax rate).
Australia’s government taxes most super contributions and earnings at a flat rate of 15 per cent, and it generally doesn’t tax withdrawals from super in retirement.
If those three taxing points are denoted as either T for taxed or E for exempt, Australia is said to have a “TTE” super tax model.
That’s because we tax contributions, we tax earnings, but withdrawals are mostly exempt from taxes.
Australia is unusual in this regard.
The most common retirement scheme for OECD countries is the EET taxing model, which means their contributions and earnings are exempt from taxes, but their withdrawals are taxed.
See the graphic below.
Australia’s ‘TTE’ tax model for its super system is uncommon among OECD countries. (Source: Parliamentary Budget Office budget explainer, 27 April 2023, “How is super taxed?” page 18.)
Why does Australia have a TTE model?
As the PBO explains, when Australia’s compulsory super guarantee was introduced in 1992, the decision to tax contributions and earnings meant revenue would be raised sooner from the system.
Under an EET model, the government wouldn’t have raised any revenue from young individuals entering the workforce until they retired, potentially decades later.
But under a model that taxed contributions and earnings, even with relatively low tax rates, Australia’s government would collect revenue from an individual’s super income throughout their entire working life.
The top 10 per cent are big beneficiaries
The PBO says there are benefits and costs to Australia’s model.
But one of the biggest costs is that super taxes are less progressive than personal income taxes, so the benefits of our super tax concessions flow more towards higher-income earners.
Why is that? Because the difference between an individual’s marginal tax rate and the 15 per cent flat tax they pay on super gets bigger as their income increases.
The PBO says if Australia had an EET model, like other OECD countries, withdrawal taxes could be aligned with the personal income tax system to ensure consistency (Australia’s age pension is already progressive through means testing).
“Because the benefit that higher income earners receive is greater than the benefit that low-income earners receive (on average), super tax concessions are often said to be regressive,” the PBO paper said.
What does that look like in numbers?
In last week’s Tax Expenditures and Insights Statement from Treasury, figures showed the top 10 per cent of Australia’s income earners received 32 per cent of the $24.5 billion in tax concessions on super contributions in 2021-22 (up from 30 per cent in 2019-20).
See the graphic below.
The top 10 per cent of income earners received 32 per cent of the benefit of the tax concessions on superannuation contributions in 2021-22. (Source: Australian Treasury, 2024-25 Tax Expenditures and Insights Statement, December 2024, page. 13.)
And it’s starker for the tax concessions for super earnings.
The top 10 per cent of income earners received 43 per cent of the $24.3 billion in tax concessions on super earnings in 2021-22 (up from 39 per cent in 2019-20).
See the graphic below.
The top 10 per cent of income earners received 43 per cent of the $24.3 billion in tax concessions on super earnings in 2021-22. (Source: Australian Treasury, 2024-25 Tax Expenditures and Insights Statement, December 2024, page. 16.)
A reverse Robin Hood?
The tax treatment of super is a contested policy area.
Every country does things differently.
And the more you look into the details of each country’s system, the more complicated it becomes trying to compare them.
For example, the PBO says in terms of the overall impact of taxes on final retirement balances across someone’s working life, Australia’s TTE scheme is broadly equivalent to an EET scheme.
It says for an individual making regular contributions over a 45-year working life, where all contributions and earnings are taxed at 15 per cent, their retirement balance would be 34 per cent lower than it would be in a scheme that did not tax contributions and earnings.
For this person, Australia’s TTE scheme is equivalent to an EET scheme with a 34 per cent tax on withdrawals (or a TEE scheme with a 34 per cent tax on contributions). And this effective tax rate will be higher or lower depending on the tax rate paid on contributions.
That’s a simple comparison of two systems.
When you start considering things like different income tax brackets, the timing and size of everyone’s super contributions, how withdrawals are treated in different scenarios, and how governments often tweak their taxation parameters over time, it becomes much harder to compare different systems.
But it doesn’t mean policy experts don’t argue about ways to improve Australia’s system.
Earlier this year, the independent economist Chris Richardson said the different elements of Australia’s concessional taxation of super made sense in isolation but they collided in “silly ways” inside the system.
“The super system is best thought of as a trucking company,” he 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,” he wrote.
Chris Richardson says Australia’s overly large super tax concessions are benefiting the wealthy. (ABC News: Daniel Irvine)
Last year, researchers at the Grattan Institute think tank also argued that our super system had become a taxpayer-funded inheritance scheme for the rich, with 68 per cent of super tax breaks flowing to the top 20 per cent of income earners.
“Super tax breaks are also unsustainable,” they wrote.
“They are the largest and fastest-growing leaks from our income tax system, growing faster than the economy. By 2036, super tax breaks will cost the budget more than the Age Pension.”
However, Andrew Podger, a professor of public policy at ANU, questioned elements of the Grattan Institute’s paper in this article: Super tax concessions don’t cost $45 billion a year and won’t cost more than the pension.
Professor Podger said the Grattan Institute was right to highlight that too much of Australians’ superannuation savings were being passed on in inheritances rather than used in retirement, “with the real risk of exacerbating inequality amongst future generations”.
But he said what Australia desperately needed to focus on was developing a system that helped older people convert their accumulated super savings into secure incomes that maintained living standards and met the risks of old age.
“It is very likely that the government will need to simplify the means tests and consider ways to encourage the provision of indexed annuities including the option of selling government-created annuities,” he wrote.
These are all things to think about.
Because if Treasury’s latest estimates prove correct, our super tax concessions will cost Australia’s government $59.5 billion in forgone revenue in 2025-26 and $62.8 billion in 2026-27.
Meanwhile, the federal government’s underlying budget deficit is forecast to be $26.9 billion for 2024-25 (not that they’re directly comparable).
Are our huge super tax concessions providing value for money?
