The spiralling cost of tax breaks on superannuation is unsustainable and will force the federal government to rein in financial support for the retirements of wealthy Australians.

That’s the view of one of the country’s leading superannuation researchers, David Ingles of The Australia Institute.

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Mr Ingles believes that the soon-to-be-released tax white paper is likely to provide the government with sufficient “political cover” to begin reducing the tax concessions on super contributions and drawdowns.

“Governments will be forced to do something in the superannuation area – I can’t see how that can be avoided,” he said.

“The tax review may give this government the cover to address the problem.”

According to figures published by the Australian Tax Office, around 38 per cent of all tax concession dollars derived from superannuation are collected by the top 10 per cent of income earners.

In other words, the concession arrangements stoke the retirement incomes of the wealthy at a cost to workers on average to low incomes.

Treasury estimates published as part of last year’s budget papers show that the government will forego more than $170 billion in tax revenue over the next three years from tax concessions on super and capital gains tax.

Many leading economists, including AMP’s Shane Oliver and Bank of America’s Saul Eslake, are warning that the tax concession arrangements are looming as the biggest threat to the government’s aspiration of balancing the budget.

Current rules see 38 per cent of concessions going to the wealthiest 10 per cent. Photo: Shutterstock

Freezing the super guarantee – a stop gap

Mr Ingles said Treasurer Joe Hockey’s decision to freeze the super guarantee payment at 9.5 per cent would help to slow the drain on the Federal Budget, but the cost of funding the concessions would still continue to rise.

Unless the tax breaks were reduced, the annual depletion of government tax revenue could reach up to $80 billion by the end of the decade.

“If something is not sustainable, it isn’t sustained,” Mr Ingles said of the likelihood of the tax breaks being removed.

While the recommendations of the tax white paper are still shrouded in secrecy, Prime Minister Tony Abbott has promised that the government would not implement wide-ranging tax reform before putting up a set of proposals at the next election.

So far, Mr Hockey has kept silent on the government’s plans for reining in the concessions.

However, Mr Ingles suggested that the government might start unwinding some concessions in the forthcoming budget, including a possible freezing of contribution limits.

Under the existing arrangements, high-income earners can salary sacrifice up to $35,000 a year at the concessional tax rate of 15 per cent.

Nothing more than a ‘tax minimisation scheme’

Mr Ingles said the effect of the taxation arrangements on super since 2006 was to re-engineer the retirement savings system as the premier tax planning vehicle for wealthy Australians.

“It has legitimated tax minimisation and that now needs to be unravelled,” he said.

He highlighted the so-called transition-to-retirement-pensions as the “biggest rort in the country” that had enabled wealthy Australians to draw down on superannuation balances of up to $70 million without paying tax.

The Rudd and Gillard administrations missed an opportunity to fix the situation.

The transition-to-retirement arrangement enables older Australians to draw down on their super balance while still also getting tax breaks on contributions.

Gillard and Rudd governments dropped the ball as well

Mr Ingles said the Rudd and Gillard governments had missed an opportunity to fix many of the tax distortions after the Henry Tax Review recommended in 2009 that the super concessions be curtailed.

“I think that the previous government failed to think through its response to the Henry Review carefully,” he said.

“The Gillard government didn’t respond to the Henry Report particularly effectively. It was a great opportunity missed.”

Like Mr Hockey, the current Labor leader Bill Shorten has been reluctant to articulate a clear policy stance on the tax breaks.

In 2013, when he was superannuation and financial services minister, Mr Shorten was asked whether he thought the tax concessions for wealthy Australians were too generous. He told The Age: “What I do think as a general principle is we need to make sure that everything we do is sustainable.”

Scrap tax concessions, reintroduce universal age pension

The present government’s tax review is likely to recycle many of the recommendations contained in the Henry Report, including a widened Goods & Services Tax and reduced tax breaks on super.

Mr Ingles believes the tax concessions should be scrapped altogether and replaced by a universal aged pension.

“A universal pension would create a level playing field amongst income groups and reduce the inequality in Australia’s retirement system,” he said.

“Superannuation could then act as a top-up for those who can afford it.”

While acknowledging that his proposal was probably “too radical” for the major parties, Mr Ingles also said that it was always a political challenge for governments that sought to withdraw benefits from electors.