Fund managers slam Labor’s tax on unrealised capital gains over $3m and defined benefit ‘loophole’

Money managers say politicians on defined benefit schemes won’t be hit by the ‘reprehensible’ new tax and dispute the Treasurer’s claim because MPs’ and judges’ pensions aren’t designed that way.

Fund managers have questioned Federal Treasurer Jim Chalmers’s claim that the controversial new tax will apply to defined benefit schemes. Picture: Dan Peled

Labor’s proposed tax on super balances above $3m is a reprehensible attack on retirement savings and there is little chance the Prime Minister and other politicians on defined benefit schemes will ever have to pay it, leading fund managers say.

Federal Treasurer Jim Chalmers intends to tax super balances above $3m and will specifically target unrealised capital gains, in effect, paper profits. The government is relying on the new tax for an estimated $40bn to be collected over the next decade.

Clime Investment Management founder John Abernethy slammed the proposal, and asked the re-elected Labor government to come clean and admit workers in defined benefit schemes won’t be captured.

“It’s a shocking policy because it’s introducing a tax that is abhorrent to the Australian taxing system. If you start unrealised tax gains on super it’s not a big kangaroo hop to have it apply to property and other asset classes. [Jim Chalmers] has opened up this hornets nest,” Mr Abernethy said.

“If the government thinks $3m is enough to have in super then they should say it. And the reason they’re not saying it is because there’s a whole lot of people on defined benefit schemes above $3m.”

Clime founder John Abernethy. Picture: Sam Mooy

Mr Chalmers this week said the new tax would apply to only a fraction of the population and that it would capture pensions such as those owed to politicians and judges with super balances above $3m. Mr Abernethy and others dispute this.

How many Australians are on defined benefits?

“This was put up by the government three years ago and Treasury have had all that time to explain how it will apply to defined benefit schemes. For the Treasurer to come out this week and say it will apply but he can’t say how, shows it’s a dog’s breakfast,” Mr Abernethy said.

“They had no intention of it applying to defined benefit schemes, they were hoping no one would ask the question.”

The Clime founder added that Defence’s defined benefit liability will not peak until 2060, according to the budget papers, implying “exponential growth in the number of people going onto these schemes”.

Anyone on a defined benefit scheme with $185,000 or more in pension entitlements is part of the cohort with a $3m balance, and the government should be able to disclose how many people on such schemes will be hit by the new tax, Mr Abernethy said.

Wilson Asset Management chair and franking credit activist Geoff Wilson also thinks high-balance defined benefit pensions will be spared the new tax.

“Anthony Albanese’s pension of, say, $350,000 each year would have a capital value above $3m. He will not be impacted by the tax on unrealised gains (because) he can never be exposed to an asset that rises and falls in value.

“That’s not how defined benefit schemes work. He receives a guaranteed pension that rises in line with inflation,” Mr Wilson said.

The plan to tax unrealised capital gains has already prompted some investors to take drastic action.

Will the new super tax capture property?

Lee Iafrate, chair of boutique investment firm Armytage Private, has put his property portfolio in his self-managed fund up for sale rather than risk being caught out by the tax, which is set to kick in from July 1.

“It’s a reprehensible policy,” he said. “It eliminates the objective of trying to get ahead in life. It just kills aspiration and send a message that you shouldn’t try to get ahead,” Mr Iafrate said.

“When the Treasurer says it’s only a small portion of the population affected, that’s today. Once these things are in, they grow a life of their own. Labor thinks this is a tax on the rich Liberal voters … just bash the liberal bastards.

“What will happen is people with SMSFs will just wind them up. They’ll get rid of them. They’ll become a thing of the past and people’s savings will be in non-risk assets. The market the investor will skew toward is non-risk assets in this country,” Mr Iafrate said.

Platinum Asset Management co-founder and billionaire Kerr Neilson predicted it would create problems for retirees with illiquid investments in their super such as farms or buildings.

“I hope the government thinks more carefully about creating cash flow problems for people,” he said.

“I do agree with the idea that the rich have been the principal beneficiaries of all this money printing. But what you’ve got here is a different form of impost which is incurred for doing nothing,” he said, adding the rules for super were “written wrongly in the first place”.

Mr Wilson said wealthy Australians were not concerned about being taxed “if it’s good policy”.

“Let the younger people have a chance. Index it and index it to the annual performance of the average super fund so young people don’t get left behind,” he said. Indexation is not part of the Treasurer’s proposed tax.

“I’m a boomer, I’ve had a great run. No one is taking issue with the increase in tax, it’s the taxing of the unrealised gains is the issue, it’s a bad idea, it’s illogical and it won’t work.”

Originally published as Fund managers slam Labor’s tax on unrealised capital gains over $3m and defined benefit ‘loophole’