Reinterpreting the cost of tax concessions - Round Table

A senior Federal Treasury official has made clear that commentators should not read too much into Treasury's Tax Expenditure Statements and the cost of superannuation tax concessions, but a roundtable of senior financial services executives believes this will not stop the critics.

MT: I thought we'd start off with what the Treasury official had to say yesterday, which I found most reassuring, which was that we have a situation where we shouldn't read too much into the expenditure statements and the references to the superannuation tax concessions, because they're there, because they have to be there, not because it's a policy statement. Do we nonetheless think that there is a risk that out of the tax white paper and all the talk about the cost of super, that the tax concessions might go? And I'll kick off with you Andea.

AS: We at the SMSF Association have actually been talking for a long time that there needs to be more appropriate measurement at the Tax Expenditure Statement (TES) around the tax concessions, because the [TES] is actually part of a series of tax expenditure statements in different policy areas and they have the same methodology in each of the areas.

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And they were only ever meant to be something for the Government to have a standardised idea of what a spending pattern would look like. So the $32 billion that has always been touted as being the cost of super is actually misleading in the way in which it's been interpreted in the market. So the [TES] is genuinely only what he [the Treasury official] said it was yesterday and it should not be relied on, for any reason for the revenue avenue.

That's not going to stop people continuing to use it as a buffer zone to project what they would like to see in the budget and find a way of saying this super pot, this super pool of money that's costing us so much (in actual fact it's not), is actually a way they think that they'll be able to cover the things that they would like.

So when you talk about social security, when Rob said yesterday it's $20 billion per annum automatically, that's not looking at a range of other things that interact directly with social security. These measures [the TES] are actually to help Government make consistent decisions across the entire range of decision-making they have to make. So picking something out in isolation is very poor and it would be great to get the message out that that it is not a reasonable measurement at all and never has been.

PH: Well I agree, I think unfortunately picking single pieces of data out and misusing it has been a common tactic. And if you only listen to the radio and I listen to commentators across all aspects of superannuation, it always frustrates me how they've latched on to one piece of information and then completely misused it or misunderstood it, because it was out of its context.

So I agree it [the Treasury official's comment] was reassuring, but I think then I'd like to see them do a lot more of it and do it in a forum where a reasonable number of people in the room might have had some understanding of that. Unlike say the broad media; they need to send that message out a lot more.

MH: Well he did mention apparently in bold print that it's only to use for a particular purpose, but it's what others will use the information [for] and that's the danger that others will latch onto these headline figures and use it as a policy argument to say that it's too expensive and it should be curtailed.

AG: A couple of comments, first of all even if Treasury is obliged to produce these treasury estimates for the purpose as he stated, there does need to be a realisation that whatever they produce will be used and sometimes misused in various circles. So that's point number one.

Secondly that if you're producing treasury estimates I think there's an obligation to have as robust a set of assumptions in producing that estimate as possible. And some of the assumptions there about, for example, concessions in investment earnings, there's sort of an implicit assumption that if those earnings were being earnt elsewhere, that they'd be almost attracting tax at full margin tax rates. Now the reality is that that's unrealistic, if it wasn't in superannuation that investment would be elsewhere and for example shares with imputation credits. There isn't allowance for longitudinal effects and the offsets with social security. So there's a whole range of reasons why the $32 billion is a significant over-estimate.

PL: Well I think the issue is it is unfortunate that it's a number that's out there, but probably the issue is how do we make sure that people don't incorrectly use it and that's probably the hardest part of the mechanism I suppose.

And we need to hammer the points about [being] an estimate, [and that] there are assumptions that are questionable in terms of whether they would be particularly in the behavioural change. So that's probably one of the big assumptions that is certainly in there that I would suggest is definitely the case. We're not even sure, the assumption they'd actually even invest it, not consume it.

So you have those sorts of major assumptions that are probably shall we say from a government view point looking at the worst case scenario in a sense, but the realities are nowhere near that. So that's definitely part of the problem. But we do have to acknowledge that people will use those numbers and we have to have the right messaging to make sure that people understand it is a government number, it's not an industry number and it's just there for their purposes and not for everyone else's.

AS: And I think that's a good point, it's a Government number and very many other areas do not use the Government number to highlight the same result. But when you're talking about the assumptions it doesn't have the assumption of actually looking at the reduction or the pressure on the aged pension. It doesn't have the assumptions about all the behavioural changes.

Some of our research has shown that if you don't save into super then you're only going to save 70 per cent approximately elsewhere, because the saving patterns are different, the spending patterns are different, the investment patterns are different. So I think the message must be that if there's going to be a Government number for super, there has to be a Government number for everything else or people need to not use the Government number for super and actually re-measure or use more realistic values about exactly what it is. It is a future savings vehicle providing future retirement which is going to pull pressure off social security in the long run, provide an investment pool and allow people to have incomes, especially incomes in retirement. How else are we going to cover it?

For more from this round table meeting, see part two - Is policy stability achievable? - Round table - part three - Speaking with one voice - Round table - and part four - Spruikers, not LRBAs the problem - Round table.