The cost for squeezing super is about to hit us

A drop in government receipts from superannuation is merely a taste of things to come if the proposed wealth tax on super goes ahead in its current form.

Investors were left with slim pickings in this budget.

A drop in government receipts from superannuation is merely a taste of things to come if the proposed wealth tax on super goes ahead in its current form.

Investors were left with slim pickings in this budget and the significant measure for most retired independent investors was the decision to extend the deeming freeze for another year. This is, however, a social service measure; in many ways the opposite of an investor incentive.

Inside super, it is clear from the budget documents that returns from the big funds and from self-managed super funds were simply not as large as government officials had expected, some of this will be related to softer investment market returns but there is also the significant looming issue that super is quite simply becoming less attractive.

The implicit deal between the Australian government and investors is steadily breaking down – the original move by the Morrison government to tax super earnings started the ball rolling. However, the planned new super tax is the bigger concern.

At the time the new 15 per cent tax on amounts over $3m was announced, the government suggested receipts collection in the first full of year from this measure would bring in $2.3bn. This estimate – unchanged in this year’s papers – must have assumed few investors would move to get their money out of super if encountering new taxes.

Indeed there are widespread reports a shift out of super is already happening with so-called liquid assets; it will be much harder to move illiquid assets such as property out of super because the big-ticket nature of property investment means you sell the building or you don’t.

It’s not so much that investors recoil from higher taxes in super – of course they do. But the specific problem this time round is that the nature of the new tax – it is on unrealised gains, better known as “paper gains”.

On top of this we have the government disallowing inflation indexing on the measure, though inflation indexing exists in the same system for the same reason on taxes further down the scale.

At the top end there is going to be an effective 30 per cent rate of tax on super, which sends a clear message to investors that as an investment choice this is no longer competitive.

There are suggestions excess money could be held in super “accumulation” but why bother when you can simply move money out of super entirely and there is no tax to pay on any earnings for anyone up to $18,200 – as the budget outlined in its confirmation of the new personal tax income scales.

Originally published as The cost for squeezing super is about to hit us