Tax Breaks

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GUEST OBSERVER
The federal government could save about A$1 billion a year by winding back three tax breaks for older Australians that are unduly generous and have no sensible policy rationale, according to our new Grattan Institute report. 
Many seniors pay less than younger workers on the same income as a result of the Seniors and Pensioners Tax Offset (SAPTO) and a higher Medicare levy income threshold. They also get a higher rebate on their private health insurance than younger workers on the same income.
The tax-free thresholds for seniors and for younger people have diverged over the last 20 years. Seniors do not pay tax until they earn A$32,279 a year, whereas younger households have an effective tax-free threshold of A$20,542. 
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These outcomes are hard to justify. A retired couple pay about A$4000 a year in tax on earnings of A$70,000 a year from their assets (assuming assets outside of super worth A$1.4 million). Any extra income they draw from a super account is tax free. 
By contrast a working couple with both people earning the minimum wage would have the same income of $70,000 a year but pay tax of about A$7000. Unlike the retired couple, they probably don’t own their own home and have little chance of accumulating $1.4 million in assets, or much super savings, or owning their home before they retire. 
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These age-based tax breaks help to explain why the proportion of seniors paying tax has almost halved in the last 20 years. Those over 65 pay less tax per household in real terms than seniors did 20 years ago, despite their rising incomes and workforce participation rates. 
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Age-based tax breaks are badly designed to any justifiable purposes such as increasing workforce participation or preserving adequate retirement incomes for poorer Australians. Tapers that withdraw the offsets for those with higher incomes lead to the tax breaks effectively increase marginal tax rates for many people. And of seniors who lodge a tax return, none of the benefits go to the bottom 40%. 
Some may argue that the tax breaks are a fair reward for a lifetime of paying tax. But large tax breaks for seniors are in fact a relatively new invention not provided to previous generations. 
And the current generation of seniors also receive much more than their predecessors from government spending, particularly on health. Senior households on average receive A$32,000 a year from government more than they contribute in income and sales taxes. In 2004 they only took out about A$22,000 a year. For now, federal budget deficits are funding the difference. 
Very little justification was provided for these tax breaks when they were introduced. But they correlate with electoral dynamics shifting decisively in favour of older voters. From 1995 to 2015, the proportion of eligible voters aged 55 and over grew from 27% to 34%. Because younger Australians enrol less, those aged 55 and over are now 38% of enrolled voters. 
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These tax breaks might have been affordable when they were introduced 15 years ago, and budgets moved into surplus. But the federal government has been running large budget deficits for 8 years in a row. It must make tough saving and spending decisions to avoid handing an unsustainable bill to future generations. Our report proposes winding back SAPTO and the higher Medicare levy threshold. Self-funded retirees should not qualify for SAPTO. Seniors with enough private income that they do not qualify for a full Age Pension should pay some income tax.
The proposed changes are fair. Seniors would pay either the same or less tax than younger Australians. They would have little effect on the 40% of seniors who receive a full Age Pension. They would mostly affect seniors who are wealthy enough to receive no pension or just a part pension. 
These changes would save the federal budget about A$700 million a year. Reducing the private health insurance rebate so that seniors get the same rebate as younger Australians would save another A$250 million.
To put that A$1 billion of budget repair in context, the government’s recent omnibus bill improved the bottom line by A$2 billion a year, and the super package by less than A$1 billion. With deficits running at about A$40 billion a year, there is a long way to go, and reforming age-based tax breaks would help.
John Daley is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Brendan Coates is fellow, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
William Young is associate, Grattan Institute, and can be contacted <a href="https://theconversation.com/profiles/william-young-260984" target="_blank">here</a>.
All are authors for The Conversation.
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Why special tax breaks for seniors should go

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Treasurer Scott Morrison has slammed critics of the government’s recent move to restrict managed investment trusts to buying affordable residential property.
Reacting to Labor’s criticism and the property industry’s negative reactions,  Morrison said they are effectively demanding for developers a tax concession that is out of reach for most other Australian investors.
"You cannot currently put residential properties in a MIT," Morrison told The Australian Financial Review.
"The sector is asking for a tax concession not available for Australian investors,” he added, while speaking from China.
<a href="https://www.urban.com.au/news/76023-scott-morrison-announces-limits-on-managed-investment-trusts" target="_blank">Morrison's decision</a> was announced on September 14 with immediate effect.
It triggered a strong reaction from the property industry which sees opportunity in the build-to-rent sector.
According to them, the federal government’s recent move risks killing off build-to-rent development before it even starts, and will affect the industry's ability to deliver more low-cost rental accommodation.
Managed investment trusts are defined by the Australian Tax Office as a type of unit trust that invests in passive income assets such as shares, property or fixed-interest. Tax on the income from the trusts is paid directly by individual beneficiaries at their top marginal tax rates.
Property Council of Australia chief executive Ken Morrison said until the government’s  announcement, property companies have been able to lodge applications to the ATO for tax rulings that build-to-rent would satisfy MIT arrangements as they are primarily about income and not capital gains.
"We have seen the ATO issue individual rulings" to that effect, he added.
"We look forward to working with the government on this issue as we believe build-to-rent offers enormous possibilities for Australia.
Earlier, Shadow treasury spokesman Chris Bowen slammed the move to restrict MITs, saying the Treasurer's announcement had ambushed the property and construction sector over a potential billion dollar addition to the real estate market.
The treasurer hit back over the weekend, criticising Labor's approach to housing affordability, which he said amounted to increasing taxes "on mum and dads investing in real estate while giving foreign investors a new 50 per cent tax cut."
The government said last week the MIT restriction was an "integrity measure" that would prevent trusts from investing in houses, units and apartments to hold for long-term rent.
"This change provides legislative clarification of the long-standing convention that the primary purpose of the MIT concessional tax treatment is to apply to passive investment income," the Treasurer said in a statement on Thursday.
"This change is crucial to maintaining the integrity of the tax base and will help direct foreign investment to where it's needed most."
Meanwhile, developers such as Mirvac are already planning big build-to-rent projects.
Earlier this year, <a href="https://www.urban.com.au/expert-insights/buying/75157-sydney-s-olympic-park-to-kick-off-mirvac-s-rent-to-build-venture" target="_blank">Mirvac appointed investment bank UBS</a> to seek off-market expressions of interest from institutional groups to form a club to develop and own build-to-rent housing in Australia.
The model has been successful in the US. 
While the model promises to help address one of the greatest complaints of renters – the lack of stable long-term professional landlords and too many "cottage-industry" players – the build-to-rent model is uncertain due to the collapse in rental yields in cities around the nation, especially Sydney.
But declining commercial property yields has made the prospect of build-to-rent more attractive. 
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Tax Breaks

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