The federal government should introduce a 15 per cent tax on superannuation earnings in the ‘pension’ phase to better fund aged care, according to the nation’s peak welfare group.

As it stands, the investment income of a superannuation fund is exempt from tax once it pays a pension to a fund member.

But the Australian Council of Social Service (ACOSS) has argued in a pre-budget submission that the current system is “not sustainable”, as only 16 per cent of people aged over 64 pay income tax despite many having the capacity to do so.

ACOSS said superannuation earnings should be taxed at the same rate in retirement as they are during the accumulation phase (15 per cent), so the government can raise extra revenue to “guarantee affordable access to quality aged care services”.

“Despite welcome reforms in 2016, the tax treatment of superannuation after retirement remains extraordinarily generous, especially for people with substantial wealth,” the submission says.

“As well as undermining public revenue, the non-taxation of fund earnings in the so-called pension phase opens up tax avoidance opportunities that have little to do with saving for retirement.

“People can avoid paying tax on capital gains accrued through working life by transferring or retaining assets in a self-managed superannuation fund until they reach the age of 60 and the fund pays them a pension, at which point the fund’s earnings, including capital gains, are tax free.”

ACOSS CEO Cassandra Goldie says the government needs to do more on public health, unemployment, climate change, housing, and aged care. Photo: AAP

Elsewhere in the submission, ACOSS says the next increase in the superannuation guarantee (SG) from 9.5 to 10 per cent of wages should proceed as planned, “since collective pay agreements may have already taken this increase into account when setting wages”.

But it argues that further increases should only go ahead once the benefits of higher contributions for median and lower-income earners have been demonstrated and tax concessions for contributions have been reformed.

Among other things, ACOSS wants all tax concessions for superannuation contributions to be scrapped and replaced with a two-tier annual refundable rebate, which refunds members 100 cents per dollar contributed from any source up to $500 per year, and 20 per cents per additional dollar contributed from any source up to an annual cap of $15,000.

At the moment, the cap for concessional contributions, which are taxed at 15 per cent, is $15,000 and the cap for non-concessional contributions is $300,000 over a three-year period for members under the age of 65.

ACOSS disagreed with Senator Andrew Bragg’s proposal to make super voluntary for low-income workers. Photo: AAP

In stark opposition to Coalition backbencher Senator Andrew Bragg, ACOSS also said it opposed proposals to make superannuation contributions voluntary for lower-income earners.

“Compulsory superannuation has improved retirement incomes and living standards for many people who would otherwise rely on the Age Pension alone,” ACOSS wrote in the submission.

It should continue as a universal system since universal systems benefit all, including those with the least resources.”

The pre-budget submission comes at a time of heightened scrutiny into the superannuation sector.

Following the release of Treasury’s much-awaited Retirement Income Review in November, Coalition backbenchers have ramped up calls to abandon the scheduled hikes to the SG while others have drawn attention to high fees and tax concessions skewed to the rich.

Treasury’s review found that the top 5 per cent of wage earners received an average of $640,000 worth of tax concessions over their lifetime.

Australian Institute of Superannuation Trustees (AIST) head of advocacy Melissa Birks said this was more than double the support given to an age pensioner – adding that “more needs to be done to ensure that our super system is sustainable over the long term and fair to future generations”. 

When asked whether she agreed with ACOSS’s proposal, Mr Birks avoided passing judgement on specific policies but said more broadly that “inequity in the super tax concessions needs to be addressed in a targeted and appropriate manner”.

“Limiting the amount that can be held tax free in the retirement phase to $1.6 million was a good first step but more needs to be done to address super accounts which have multi-millions of dollars in them, all being taxed at a concessional rate,” she told The New Daily. 

“AIST’s pre-budget submission argues that reducing tax concessions on high super balances (such as those over $10 million) would raise government revenue that could be re-directed to improving retirement outcomes for less well-off Australians.”

Meanwhile, National Seniors chief advocate Ian Henschke said the royal commission into aged care was investigating solutions to the sector’s funding shortfall and industry participants should “really wait to see what the RC advises”.

“Older people won’t cop a tax on superannuation if the government doesn’t fix the aged care system first,” he told The New Daily.

“For example, the issue of home care providers extracting high administration fees of up to 45 per cent needs to be rectified if you are going to ask people to pay higher taxes to address the cost of aged care.”

Shadow financial services minister Stephen Jones declined to comment on ACOSS’s proposal.

Minister for Superannuation, Financial Services and the Digital Economy Jane Hume said “we have no intention of burdening Australians with a retiree tax”.

The New Daily is owned by Industry Super Holdings