This appendix provides an overview of the various modelling techniques used in this statement to estimate the value of tax expenditures.
The methods used to calculate the estimates of individual tax expenditures in this statement vary between tax expenditures. The approach taken depends on the nature of the tax benchmark, the particular tax concession examined and the availability of data. Data availability is also a major factor in determining the reliability of the estimates, and in many cases estimates are not provided due to data limitations.
The approaches used to estimate tax expenditures include aggregate modelling, distributional modelling and microsimulation. The most commonly used approach is distributional modelling, utilising data derived from microsimulation analysis.
This approach involves using information on the aggregate volume of transactions to calculate the value of a particular tax concession. This is appropriate for a concession with a simple proportional value of the total transactions concerned and for tax exemptions. Data sources suitable for aggregate modelling include national accounts data, aggregates derived from administrative databases (such as taxation records), and trade and production statistics.
Aggregate modelling typically is used to estimate tax expenditures in fuel excise, where exemptions or reduced rates of excise for particular fuels can be estimated from statistics on the volume of those fuels produced.
This approach involves using discrete aggregate data to calculate the impact of tax concessions on particular segments of the economy. It is appropriate for concessions directed towards a particular group of taxpayers and for assistance that changes according to the variables used to analyse the data. Data sources suitable for distributional modelling include survey data and data derived from administrative databases.
Distributional modelling is used to estimate tax expenditures in personal income tax concessions when the cost is related to a taxpayer’s taxable income. For these concessions, data on income distribution and tax concessions by grade of taxable income can be used to estimate the cost of tax expenditures on those concessions.
This approach involves examining detailed datasets, such as taxpayer records, to determine the value of taxable transactions for each taxpayer and the amount of tax paid on them. This information then is used to calculate how much tax would apply to those transactions under the benchmark tax treatment, calculating the value of the tax expenditure by subtracting the actual tax collected from the benchmark amount. This approach requires either a comprehensive database for all taxpayers or a detailed sample that can represent the population. It must sufficiently detail the value of transactions affecting the calculation of tax liabilities to allow the required calculations.
Microsimulation modelling is especially useful for calculating concessions that closely target particular taxpayer groups (for instance benefits subject to detailed eligibility tests) and for which the payment rate varies considerably according to taxpayer behaviour or circumstance.
Microsimulation modelling also can be used to derive data for use as an input to calculating tax expenditures using an aggregate or distributional modelling approach. This approach uses the microsimulation model to derive key information, such as the average effective tax rates to use in other models. It is suitable for situations where detailed datasets are not available for all data items.
This appendix sets out the estimated tax expenditures related to the superannuation system for 2000-01 to 2003-04 and forward projections for the following four years. It also briefly examines some conceptual issues relating to the interpretation of these estimates.
The key features of the taxation of superannuation relate to the treatment of contributions, earnings and benefits. As outlined in the retirement benefits benchmark, funded superannuation in Australia is taxed at three stages:
- when contributions are made to a superannuation fund;
- when investments in superannuation funds earn income; and
- when superannuation benefits are paid out.
The benchmark treatment of superannuation is that contributions are taxed like any other income in the hands of the employee, earnings are taxed like any other investments in the hands of the investor and benefits from superannuation are untaxed. Any costs associated with superannuation investments are deductible under the benchmark.
Australia’s taxation treatment of funded superannuation varies from the benchmark. Contributions and earnings are taxed concessionally relative to the benchmark but partially offsetting these concessions is the taxation of superannuation benefits. Consequently, the tax concessions identified individually in Table B1 should be understood as part of an integrated system. This system is significantly concessional taken as a whole. This concessional treatment reflects the requirement to preserve superannuation until retirement and encourages individuals to undertake private savings in order to secure a higher standard of living in retirement than would be possible from the age pension alone.
The calculation of the estimates requires projections of contributions, earnings and eligible termination payments (ETPs). The estimates use Australian Taxation Office and RIMGROUP9 projections of contributions, earnings and payouts. They also assume that tax is collected from superannuation funds in the year in which the contributions and earnings occur.
The estimate of the tax expenditure in the forward projections is not necessarily indicative of the cost of the superannuation concessions over the long term:
- the taxes on superannuation pensions and lump sums could be expected to provide a greater offset to the cost of the under-taxation of contributions in future years, when there are larger numbers of taxpayers drawing down their superannuation savings relative to the numbers in the accumulation phase; and
- the current superannuation tax concessions will have an (intended) impact on certain direct budgetary expenses in future years, particularly age pension payments.
Further, the estimates in Table B1 cannot be interpreted as a time series of the ongoing revenue savings that could be obtained if the superannuation concessions were eliminated. This is because the increase in tax revenue arising from the elimination of the tax expenditures with respect to a particular year would cause the superannuation tax base to be smaller for the next year. For example, if contributions and fund earnings in 2003-04 had been taxed according to the retirement benefits benchmark, superannuation fund assets, and hence fund earnings, would be lower in 2004-05 than if the concessional tax treatment had applied in the previous year. The increase in tax due to taxation under the benchmark in 2004-05 would, in these circumstances, be lower than if the superannuation concessions had applied in 2003-04
In addition, the estimated cost of the superannuation tax expenditure assumes no behavioural change involving either the portfolio composition or the saving rate. To the extent that this is an unrealistic assumption, the budgetary cost of these concessions will be overestimated.
The separate components of the overall superannuation tax expenditure which are listed in Table B1 are explained further below.
1 Concessional taxation of employer contributions
The benchmark treatment for contributions by employers to superannuation funds is that they are taxed like any other income in the hands of the employee (that is, contributions are taxed at the employee’s marginal tax rate) and are deductible to the employer. However, employer contributions after certain costs of the superannuation fund are deducted, are taxed at a concessional rate of 15 per cent. The superannuation surcharge for higher income earners also applies to some contributions.
The application of the benchmark treatment rather than the concessional tax rates to these contributions would increase tax revenue by the amounts indicated.
2 Deduction for contributions by the self-employed
Contributions to complying superannuation funds are fully tax deductible to employers up to the employee’s age-based deduction limit. Self-employed persons receive a full tax deduction for the first $5,000 of contributions plus 75 per cent of any remaining contributions up to their age-based deduction limit. Under the benchmark, contributions by the self-employed to superannuation funds are not deductible on the basis that the contributions are not outgoings.
If the level of contributions made by the self-employed was maintained, but the contributions were not deductible, revenue would be higher by the amounts indicated.
3 Concessional taxation of fund earnings
The benchmark treatment for the earnings of superannuation funds is that they are taxed like any other income in the hands of an investor (that is, earnings are taxed at the investor’s marginal tax rate). However, the earnings of complying superannuation funds, after certain costs of the funds are deducted, are taxed at a concessional rate. The tax rate is 15 per cent, however earnings on investments that are supporting pensions or annuities are not taxed. Complying superannuation funds are also entitled to refunds of excess imputation credits attached to dividends payable to the fund.
Item three reflects the extra tax that would be collected if superannuation earnings were held constant, but were taxed at members’ personal tax rates rather than fund rates.
4 Measures for low-income earners
Low-income earners receiving superannuation support were eligible for a tax rebate on personal superannuation contributions made to a superannuation fund before 1 July 2003. The low-income earners rebate was based on the annual contribution made by the low-income earner. Specifically, the rebate was 10 per cent of the lesser of:
- the annual contribution made; and
- $1,000 (where the taxpayer’s income is $27,000 or less, phasing out at $31,000).
This rebate has been repealed and replaced with a much more extensive government superannuation co-contribution applying to eligible personal superannuation contributions made on or after 1 July 2003.
For 2003-04, the maximum co-contribution of $1,000 is payable for qualifying low-income earners on incomes10 of $27,500 or less making eligible personal superannuation contributions of $1,000. The maximum co-contribution reduces by 8 cents for each dollar of income over $27,500, phasing out completely at an income of $40,000.
From 2004-05, the maximum co-contribution of $1,500 is payable for qualifying low-income earners on incomes2 of $28,000 or less making eligible personal superannuation contributions of $1,000. The maximum co-contribution reduces by 5 cents for each dollar of income over $28,000, phasing out completely at an income of $58,000. This taper range will be indexed from 2007-08 onwards. The matching rate for co-contribution payments has also been increased to 150 per cent.
The co-contribution measure is aimed at encouraging low-income earners to make greater personal contributions into superannuation, thus achieving greater self-reliance in retirement.
The amounts indicated represent the impact of the government co-contribution not being taxed, and the value of the rebate in the past.
5 Spouse contributions and rebates
An 18 per cent rebate is available for post-tax contributions to the superannuation account of a spouse (where the total of assessable income and reportable fringe benefits for the spouse is less than $13,800). The rebate applies up to a maximum annual contribution of $3,000 where the spouse income is $10,800 or less, reducing dollar for dollar above that amount. The amounts reported are the value of the rebate.
The spouse contribution measure is intended to assist families to maximise the benefits available in superannuation and provide an avenue for spouses to share their superannuation benefits.
6 Capital gains tax discounts for funds
Capital gains on superannuation investments are taxed. However, only two-thirds of any nominal capital gain is included in the assessable income of a fund when it disposes of an asset that it has held for at least one year. This measure was introduced in 1999 together with the freezing of indexation in capital gains tax calculations. The effect of this item is in addition to the effect of lower tax rates for superannuation investments reported in item three. The amounts reported reflect the additional tax that would be raised at fund rates on the same investments if total nominal capital gains were taxed instead of discounted gains or gains with frozen indexation.
7 Tax on funded pensions
Pension and annuity payments received by a taxpayer are included in their assessable income and are subject to tax at marginal rates. However, annuities or pensions paid from a taxed fund to a taxpayer aged 55 or over generally attract a tax rebate of 15 per cent. The tax raised on pensions and annuities reduces the total superannuation tax expenditure, because under the benchmark withdrawals from superannuation are tax-free.
8 Tax on funded lump sums before 1 July 1983
The part of a lump sum benefit relating to service prior to July 1983 is taxed at a lower rate. Only 5 per cent of these amounts is included in a taxpayer’s assessable income and subject to tax at marginal rates. This more concessional treatment reflects the fact that the current regime for taxing eligible termination payments did not exist before this time and applying the current tax rates to these benefits would impose a tax retrospectively. The amounts reported are the tax raised on these lump sums.
9 Tax on funded lump sums from 1 July 1983
Funded lump sums are generally taxed at 20 per cent (plus Medicare levy) where the taxpayer is aged under 55 years. For taxpayers aged 55 or over, the elements of any lump sum benefit taxed during the accumulation stage are typically taxed at zero per cent up to the lump sum threshold and 15 per cent (plus Medicare levy) thereafter. Some superannuation benefits are not taxed during the accumulation phase, for example because the fund is protected from any taxation by the constitution. For elements untaxed during accumulation, the corresponding taxation rates are typically 15 per cent (plus Medicare levy) and 30 per cent (plus Medicare levy) respectively for taxpayers aged 55 or over, and 30 per cent (plus Medicare levy) where the taxpayer is under age 55. The amounts reported are the tax raised on these lump sums.
Comparability of estimates with those published previously
These estimates are comparable with those published in the 2003 Tax Expenditures Statement. To obtain a comprehensive number for superannuation (that is comparable to the estimates in the 2002 Tax Expenditures Statement and earlier), C1 and C2 should be added.
New policy measures, such as changes in the surcharge rate, have been incorporated into the estimates. Each year there are also variations arising from the revision of earnings estimates. The taxable earnings of superannuation funds are not readily predictable. A major reason is that it lies within the discretion of a fund manager to decide when any accrued capital gains of a fund are realised. In addition, the earnings series is intrinsically volatile, reflecting fluctuations in interest rates and dividends. Fund earnings have been ‘smoothed out’ for the forward projections.
(a) The concessional treatment of unfunded superannuation (C2) and the concessional
treatment of non-superannuation benefits (C3) are reported as separate tax expenditures
and are not included in this table.
(b) Totals may not sum due to rounding.
(c) Includes the revenue impact of the surcharge on superannuation contributions for high income earners.
(d) For years up to 2002-03 this line shows the level of the tax offset available to low income earners who made personal contributions. From 2003-04 the line shows the impact of the government co-contribution being untaxed.
(e) Indeterminate, but likely to be insignificant.
10 Income is defined as assessable income plus reportable fringe benefits.