The ANU Tax and Policy Institute paper, Tax Bunching of Very High Earners: Evidence from Australia’s Division 293 Retirement Contributions Tax, showed that, as with other features of the Australian personal income tax system, the Division 293 tax induced a strong tax planning response and that planning was strongly driven by those using trusts and those who have business income.
Tax bunching happens when clusters of incomes sit just below changes in tax thresholds and are used by individuals or households trying to minimise their tax bills.
The research from the ANU showed that when the income threshold for paying higher taxes on super under the “Division 293 tax” decreased in 2017, the number of people who had been earning above this mark fell to just below it.
The report stated that it found that in response to the introduction of the Div 293 tax, there was “extensive bunching by those with business or trust income” as there was some flexibility in the way they could report their taxable income.
It found that those who could use this strategy were more likely to be women, older workers, and those with trust incomes and the self-employed.
“Previous studies have shown that individuals who have more flexibility in how they report their income are more likely to bunch,” it said.
The report continued that individuals with trust income, or who meet the definition of self-employed, have a greater ability “to move themselves from the bunching area” in response to the Div 293 tax from just below $300,000 to the bunching area just below $250,000.
“Most of our ‘self-employed’ are also employees who receive at least some wages and are thus covered by the superannuation guarantee,” the research said.
“Small-business owners and sole traders who are not employees are not covered by the superannuation guarantee can create a self-managed superannuation fund to build retirement savings. These small-business owners often have low superannuation balances and may be using their businesses as vehicles for retirement savings instead of superannuation.”
It suggested the evidence of tax bunching in response to the Div 293 tax indicated that despite contrary belief, changes to the tax structure, like the proposed Division 296 tax, are “well understood by many taxpayers in the upper tail of the income distribution”.
The report added that its findings were “consistent with other studies” and confirmed that almost all of the bunching response is accounted for by those with substantial amounts of business, trust or investment income.
“Further, we see the value of trust income for tax planning purposes,” it said.
The study also confirmed there was no bunching at the relevant income thresholds in years before the introduction of the tax and then when the policy came into force, bunching appeared in the first year and increased in subsequent years.
Just as the proposed Div 296 tax is aimed at high-net-worth individuals, the report stated that the Div 293 tax was also targeted at high earners and employed a complicated income definition.
“The ability of some individuals to avoid the tax while others pay it undermines the tax system design principle of horizontal equity, given some groups are more able to bunch than others,” it said.
“Further, if the goal of the tax is to reduce the concessional treatment of superannuation contributions, the gap between the highest threshold in the tax schedule and the Division 293 income threshold is an odd feature. Aligning the Division 293 income threshold with the highest threshold in the tax schedule would seem more consistent.”
