Will Young Workers Be Left Behind by Superannuation Tax Reforms?

There has rightly been a big fuss made about the recently elected Labor government’s plan to introduce an extra 15% tax on all superannuation account balances above $3 million.

While the proposed new tax will initially only hit around 80,000 people, there are genuine concerns around issues such as the lack of indexation of the $3 million threshold and the proposal to tax unrealised gains.

Most of these issues relate to situations that will only arise after many decades as more super balances grow; however, there are other issues within superannuation that affect many more people right now.

Importantly, they apply to workers on much lower incomes than those with millions of dollars in their superannuation accounts who are likely to lobby hard to get their complaints heard.

Young workers need protection from super taxes too

One such issue particularly strikes young people on lower salaries and relates to the lack of indexation on what is known as the Low-Income Super Tax Offset (LISTO).

That is a long and complex title, but the basic idea behind LISTO is to compensate often young workers who would otherwise be paying the 15% earnings tax on their superannuation fund at a higher rate than their pay.

This lack of indexation means that many young apprentices, tradies and construction workers are missing out on some early support that would greatly boost their later retirement savings.

CBUS pushes for indexation and higher payments

Construction industry superannuation fund Cbus said the number of its members receiving LISTO has declined over the past five years because the income threshold has remained unchanged since its introduction in 2017.

Under LISTO, the government adds up to $500 a year to eligible superannuation accounts for those workers who are on incomes taxed at a lower level than the 15% superannuation earnings tax.

At the moment the annual LISTO payment of $500 is only applied if you earn up to $37,000 a year, with Cbus saying this amount should be increased to $45,000 to make up for the lack of indexation since 2017.

The issue which Cbus has outlined is that with no indexation many workers who are still on quite low effective incomes are missing out on the full benefit of getting LISTO payments over many years.

Cbus has argued that the LISTO threshold should be permanently aligned with the lowest tax bracket, and that the annual payment cap should be increased to $810 to ensure that the value of the benefit is retained even after rising living costs have pushed up pay rates.

Mandatory super shouldn’t result in a tax rise

There are some genuine equity reasons why the Cbus approach should be adopted given that superannuation is mandated for workers, who see 12% of their pay diverted into their fund.

It seems counter intuitive for them to pay a 15% earnings tax on the amount within that fund given that is a higher rate of tax than they would pay if it was earned outside superannuation.

The LISTO is set at 15% of the before-tax super contributions paid into a super fund up to a maximum of $500.

The payment is specifically designed to ensure that low-income earners generally don’t pay more tax on their super contributions than on their take-home pay.

LISTO being paid less often

Cbus deputy chief executive and chief member officer Marianne Walker said the freeze was affecting many members.

“Many young tradies, apprentices, and women in construction start their careers on low pay while learning their trade, yet the system isn’t keeping up,” Walker said.

“Raising the LISTO threshold to $45,000 makes sense. It’s a direct investment in their financial security, setting them up for the long term by boosting their super savings.”

Under the current settings, an apprentice earning $27,778 per year would reach their maximum LISTO entitlement early, long before they receive what was the full benefit back in 2017.

“Boosting the cap to $810 would ensure workers aren’t penalised simply because super contributions are rising as intended,” Walker said.

Cbus figures show that 45% of its members under 18 received a LISTO payment last year, with women making up 18% of recipients – higher than their share of fund membership.