The federal government has proposed an additional tax of 15 per cent on the earnings made on super balances of over $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. Its recommendations, after some updating, are a better, more comprehensive solution than the controversial Division 296 tax.

The three problems are:

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 systems, ours 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 directly pay a cash salary that is taxed under a progressive income tax scale. The effective marginal tax rates, including the Medicare levy, rise in steps with income from 18 per cent through to 32 per cent (for the average wage-earner), 39 per cent and 47 per cent.

Second, employers pay a contribution........

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