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TLAW 303 Taxation Law- Superannuation System

Choose just one  of these topics

1) “Taxing the Australian Dream”: Property taxes as a way to improve tax revenue. In a report by John Daley and Brendan Coates, ‘Property Taxes’, the authors argue for the introduction of a $2 levy for every $1000 of unimproved land value held. Their findings suggest that this would raise $7 billion a year in tax revenue. (See: https://grattan.edu.au/report/property-taxes/). In an academic paper:
 
a. Outline some of the major findings in Daley and Coates Report;
b. Discuss and critique the idea of introducing a such a property tax; AND
c. Provide insight and recommendations about whether such a reform is good tax policy.
 
2) “My Fair Share of Tax? A fair share for large corporate tax payers?” The ATO released a report (known as the ‘Corporate tax transparency report for the 2014-15 income year’) which details the amount of tax paid by public and foreign entities (including foreign private companies) with total income of $100 million or more. The report is part of a much wider domestic and global focus on improved corporate transparency, and is intended to inform public debate about tax policy, particularly in relation to the corporate tax system. In an academic paper: 
 
a. Outline some of the major findings in the ATO’s Corporate Tax Transparency Report;
b. Discuss and critique some of the concerns about the amount of tax paid by large corporations (especially those with international transactions); and
c. Provide insight as to how the amendments to the law will ensure large corporations pay their ‘fair share’ of tax.
 
3) “Trusts – a viable business form for SMEs or just tax avoidance”. Australia is unique compared to other countries in terms of the use of trusts for commercial operations. In particular, a large percentage of trusts are used to conduct micro businesses (turnover less $2M). Some consider that the use of trusts in such operations is purely tax driven, while others point to valid commercial considerations (see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224405) . In an academic paper:
 
a.Provide data about the current utilisation of trusts for business operations in Australia – particularly small and medium enterprises (SMEs); 
b. Outline some of the issues that can face SMEs and consider whether the use of trusts assists or hinders in addressing these issues;
c. Consider if there is any evidence to support either contention (tax avoidance or valid commercial reasons) for the use of trusts by Australian SMEs;
d. Provide conclusions and recommendations about the commercial use of trusts by Australian SMEs.
 
4) “Helping the rich save for retirement”: Does Australia’s superannuation system favour the rich compared to the poor? There has been considerable public debate about both the quantum and equity of tax concessions for superannuation. This has been in the context of recent government budgets facing fiscal challenges and the Intergenerational Report which highlighted Australia’s ageing demographics and the likely impact on tax revenue. (For example see: http://www.superannuation.asn.au/policy/reports for “Superannuation and high account balances”). In an academic paper:
 
a. Outline the role and aim of Australia’s tax concessions for superannuation;
b. Outline how, and how much, past and current tax concessions have advantaged high wealth individuals; and
c. Provide insight and recommendations (focusing on the tax system) about what Australia should do to provide for its aging population’s retirement.
 
5) “Planning for tax: What is the motivation when choosing a business form?” The choice of business form (i.e. sole trader, partnership, trust or corporation) is an incredibly important decision but what is the motivation behind the choice, and later satisfaction? In an academic paper:
 
a. Outline to what extent different business forms are used in Australia (indicate any preferences in industry sector, regional location or time period)
b. Describe and critique research that has considered the underlying factors/motivations by advisors and/or business entrepreneurs with the choice of form.
c. Provide insight as to whether choice of business form is all about tax planning and what relationship this has (if any) with later commercial satisfaction with the initial choice.

Answer

The Australian Superannuation System

Helping the rich save for retirement”: Does Australia’s superannuation system favour the rich compared to the poor?

Through the years, there have been constant public debates about the quantum and equity of tax concessions for superannuation. The primary arguments that surround this have been embedded on recent government budgets in the face of fiscal challenges as well as the supernatural and high account balances. Given the nature of this intense debate, it is crucial for conversations and decision making to take place using an accurate information lens. Currently, Australia faces an aging population with the characteristics of escalating pension as well as aged care expenditure. A well-deformed debate on the case study will lay the foundation for community stakeholders and the government to reach a stable consensus on the potential ways through which the current superannuation system can be made equitable and sustainable. It is likely that the government will face challenges in its attempts to set a tax framework policy aiming at accommodating the expenditure involved in supporting older generations in their retirement years. In relation, it is important that the debate is accurate and is not based on myths that may be credited to inaccurate data or analysis and assertions that lack sufficient evidence.  

The role and aim of Australia’s tax concessions for superannuation

One primary argument that research findings suggest is that superannuation saves the government approximately $7 billion


regarding age pension expenditure yearly/annually. Also, the savings are expected to increase as the system matures. Subsequently, this is contrary to the widespread myth that superannuation does not help in reducing the government spending with particular regards to the age pension. Superannuation has proved to be a complementary technique to age pension since it boosts incomes and provides a lifestyle in retirement. Statistics point out that 32% of individual aged 65 in 2013 were comprehensively fully self-funded in retirement in retirement up from the 22 per cent in 2000. It is projected that the number will rise to 43% by the year 2023. According to this year’s report released by an Intergenerational report (IGR), the reliance of younger retirees on a scale of full age pension is quickly dropping. However, this statistics is not a reflection of the reliance on the age pension falling. Technically, this is because the Intergenerational Report examines all retirees and not just those that turn 65. It is likely that the tightening of the asset test will reduce the percentage of retirees that receive the age pension. One particular challenge that is encompassed in the system is ensuring retirees have sufficient adequate superannuation in retirement. This is in particular regards to the later years of the retirement of the retirees. Reforms like increasing the superannuation guarantee from 9.2 to 12% as well as the development of longevity products will automatically add the pressure to the age pension.

  • As a result of people having superannuation savings, approximately $7 billion annually is cut from the age pension. The figures, however, are expected to increase in the future years as more Australians continue to retire with superannuation balances. Subsequently, this includes:
  • Approximately $1 billion in savings from 150000 people an inclusive of many defined benefits schemes.
  • Over $3 billion in yearly savings from 160000 people with super balances who are eligibly fully self-funded.
  • Around $3 billion in the form of savings from 500000 individuals that receive $5000 on average    

Current tax concessions advantage on high wealth individuals

Although there some counter arguments that argue that its majorly high-income earners that benefit from government support regarding retirement. On the contrary, it is true to say that financial assistance for retirement that is provided by the government can be considered broadly comparable across the personal income tax brackets. The nature on the ground is that all Australians get access to financial support for their retirement through either tax concessions to fund their retirement through superannuation or age pension. At times, individuals use a combination of both. True to say, all Australians receive approximately $300000 across all tax brackets. Subsequently, this is a direct contribution of the government to their retirement. The main difference, however, is embedded in the timing and vehicles through which it is delivered. A relevant example is that the full age pension for a single person is technically at $22,542 annually.

Tax concessions for superannuation technically are for smaller annual amounts that are spread over some years. Simply put, all individuals receive the same government assistance regarding retirement benefits. The only difference is that the timing and vehicle through which the same is delivered comprehensively differs. To extensively explain this further, a lower income person will receive the compensation in the form of age pension, low-income superannuation contribution and confessional taxed contribution. On the other hand, an individual in the top income tax bracket receives the compensation as tax concessions for super. Most of the times, many individuals receive a set combination of all of these. Also, it is important to point out that government assistance that is set aside for very high-income levels has been reduced through what has been referred to as lower caps for concessional tax contributions to super.

Regarding current tax concessions being advantageous for high wealth individuals, in contrary to the common myth that a bulk of tax concessions for superannuation is directed to high-income earners, the authentic scenario is that the bulk of tax concessions contributions benefit middle-income earners most. Usually, the tax concessions in connection to superannuation concessional contributions are skewed towards the bulk of the community in the working category to save for their retirement. According to an analysis by ASFA, approximately 73% of tax concessions was directed to those paying either middle-income marginal tax rates stretching across 30-38% as well as those who earned between $37000-$180,000 annually in the years from 2011-2012. Relatively, this is an indication that the contribution gaps have substantially lowered and is also working to enhance the reduction of concessional contributions which is comprised of upper-income earners. Subsequently, this continuously will provide support to many Australians through helping them save for retirement. Another important aspect to analyse however that is some individuals accumulated high superannuation balances as a result of contributions and the transfers effected before the contribution caps was legalized . In relation, ASFA recommends that the tax treatment of those more than $2.5 million in the pension phrase should be examined as the starting point for discussions on the future sustainability and equity of the entire system.

Share of tax concessions (Percentage)

Taxable income range in dollars

Share of the total contribution in percentage

Contributions

Investment earnings- accumulation phase

Investment earnings- pension phase

0-6000

1

2

-0.4

0

6,001- 37,000

14

12

1

41

37,001- 80,000

43

38

35

29

80,001-180,000

33

35

42

22

180,000+

10

13

23

8

 
Also, it relatively important to point out that high-income earners receive the most benefit from concessional capital gains tax treatment. In this case, the bulk of the wealth of high net worth in the form of shareholdings or property, commercial real estate and both residential investment properties. Also, it is only just a slight over figure of 20% of the total $1.6 trillion investable assets that are held by technically high net worth individuals. Also, around $300 billion in an approximated total is held by individuals with more than $ 1 million in superannuation. Simply put, the highest net worth individuals are likely to have a tremendous impact on the achievement as well as maintenance of wealth than superannuation tax concessions through capital gains, family home, and negative gearing.  

Recommendations focusing on the tax system about what Australia should do to provide for its aging population’s retirement

The following section will comprehensively discuss insights and recommendations about what Australia should adopt to provide for its aging population retirement. Superannuation is a vital component that will play and will continue to play a fundamental role in providing the foundations of the economic activities as well as prosperity. One of its primary advantages is that it lifts household savings by around two points regarding GDP with the increase in compulsory SG from 9-12%. In relation, this helps the government and Australian business to finance investment and infrastructure without particularly relying on aspects such as foreign savings and investment. One of the central suggestion that can be employed by the state to provide for its aging population is advocating for higher levels of domestic savings which will in return reduce the cost of capital in the country. As a result, this will influence and lead to stronger economic growth for the country as a whole. As people move into retirement, supernatural benefits such as insurance payouts and pension payments demand over a total of $50 billion annually; this is expected to quadruple by the time 2040 approaches. Relatively, the aging population is most likely to be the cause of a slower rate of GDP growth. Technically this is where the concept of superannuation joins the conversation. This is because, without the availability of superannuation, the reduction is likely to be much intense. The primary ideology behind this is that superannuation provides business with the consumers of the future. As a result, this is expected to deliver a boost which in return will benefit all Australians.  

Another important aspect that Australia needs to work on revolves around improving the system to better align with its principles and goals ideology. Policies need to be adjusted to ensure the operational system delivers for the targeted groups of Australians. Although this is a general recommendation, more specific recommendations include:

  • Setting superannuation preservation age at five years younger than the normal age pension age which is at a maximum of 62.
  • Applying the SG to substantiate income replacement payments.
  • Building a review mechanism concerning SG rate into the Inter-Generational Report.  
  • Allowing access to the income stream from ages such as 55-60 specifically to those who have been unemployed for a specified duration.

Policy principles intervention is also an important aspect that needs to be comprehensively examined. In the past decades, superannuation systems have been subject to a degree of policy inconsistency. As a result, this has led to reduced confidence in the reliability of the system. Technically, the position of superannuation as a long term investment, it is critical to maintaining consumer confidence. To create such an environment, it is vital to have the underlying policies defined on which the system is expected to be based. One primary argument by ASFA on the same is that principles such as adequacy should underpin retirement income policy decisions.  

In this case, the primary purpose of having a retirement income policy should be embedded on ensuring many people have an adequate income in their retirement. Subsequently, the underlying goal is to minimize the number of retirees that live in relative poverty or poverty and alternatively maximize the number of the retirees that live in comfort and dignity.

Bibliography

Austen, Siobhan, Rhonda Sharp, and Helen Hodgson. "Gender impact analysis and the taxation of retirement savings in Australia." (2015).

Brook, Anne-Marie. Options to narrow New Zealand's saving-investment imbalance. No. 14/17. New Zealand Treasury, 2014.

Donald, Scott, Hazel Bateman, Ross Buckley, Kevin Liu, and Rob Nicholls. "Too Connected to Fail: The Regulation of Systemic Risk within Australia's Superannuation System." Journal of Financial Regulation 2, no. 1 (2015): 56-78.

Ghilarducci, Teresa, and Hamilton James. A Comprehensive Plan to Confront the Retirement Savings Crisis. No. 2016-01. Schwartz Center for Economic Policy Analysis (SCEPA), The New School, 2016.

Heng, Panha, Scott J. Niblock, and Jennifer L. Harrison. "Retirement policy: a review of the role, characteristics, and contribution of the Australian superannuation system." Asian?Pacific Economic Literature 29, no. 2 (2015): 1-17.

Hulley, Hardy, Rebecca Mckibbin, Andreas Pedersen, and Susan Thorp. "Means?Tested Public Pensions, Portfolio Choice and Decumulation in Retirement." Economic Record 89, no. 284 (2013): 31-51.

Ingles, David, and Miranda Stewart. "Superannuation tax concessions and the age pension: a principled approach to savings taxation." (2015).

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Ingles, David. "Pensions and superannuation: the need for change." The Australia Institute (2014).

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Long, Brendan, Jon Campbell, and Carolyn Kelshaw. "The justice lens on taxation policy in Australia." St Mark's Review 235 (2016): 94.

Mathur, Virad. "Time to rethink superannuation." Quadrant 58, no. 7/8 (2014): 95.

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Nicholls, Rob, M. Scott Donald, and Kevin Liu. "It's a Small World after All: Using Social Network Analysis to Investigate Systemic Risk in the Australian Superannuation Sector." (2015).

Nisbet, Elise Torunn. "Influence of Board Structure on the Performance and Governance Framework of Australia’s Superannuation Funds." (2013).

Rayner, Jennifer. Generation less: How Australia is cheating the young. Vol. 9. Black Inc., 2016.

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