The federal government has proposed an additional tax of 15% on the earnings made on super balances of over A$3 million, the so-called Division 296 tax. This has set off a highly politicised debate that has often shed more heat than light.

Yet back in 2009, the wide-ranging Henry Review of the tax system cogently identified the three main problems with the super tax system and recommended reforms to fix them. The Henry Review recommendations, after some updating, are a better, more comprehensive solution than the controversial Division 296 tax.

The three problems are:

tax concessions for contributions are heavily skewed to high income earners

with an ageing population, it is unsustainable to keep the retirement phase tax-free

the system is so complex that most people do not fully understand it.

It is critical to properly address these problems with how super is taxed because Australians now have a massive $4.1 trillion in superannuation savings.

Let us look at the main Henry Review recommendations and then see how the proposed Division 296 tax stacks up. Unlike some super tax systems, our system does not tax super pension payments, so the two key issues are how we tax contributions and earnings.

Employers pay workers in two ways.

First, they........

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