Super tax changes the real test of Albanese’s election victory

A plan to hit some of the nation’s wealthiest retirees with higher taxes on their superannuation nest eggs is shaping as the first test of the political power behind Anthony Albanese’s thumping election victory.

Announced more than two years ago, the tax change – to double the tax rate on super accounts with at least $3 million in them – is due to start from July 1.

The true extent of Anthony Albanese’s victory will be tested by Jim Chalmers’ proposed superannuation changes.Credit: Alex Ellinghausen

It has failed to get through the Senate, where independents such as David Pocock and Jacqui Lambie have yet to be convinced of the merits of two key elements of the change, estimated to raise $2.7 billion a year and initially affect just 80,000 people.

Those elements, the taxation of unrealised capital gains and indexing the $3 million threshold, are now front and centre in the political debate as the Coalition, which suffered its own pain when reforming superannuation in 2016, seeks to hurt Albanese and Treasurer Jim Chalmers.

While Chalmers has couched his changes as reducing some of the concessional treatment of super for a small group of people to help fund Medicare and other government priorities, there’s another issue at play.

When compulsory super was put in place by the Keating government, the aim was to give ordinary people a much better quality of life in retirement. But wealthy individuals are now clearly using super for estate planning.

Data released by the Australian Tax Office last year revealed there are 42 self-managed super funds with at least $100 million in assets. The tax breaks alone on those 42 funds are about $142 million a year.

These funds have far, far more in them than needed for a comfortable retirement. They are being used to deliver children and grandchildren large inheritances, with the tax cost passed to other taxpayers.

The concessional way super is taxed costs the budget big time. Last financial year, that cost was more than $50 billion, with a large share of that benefit flowing to high-wealth people.

Chalmers’ plan imposes an additional 15 per cent tax on the share of a super fund’s earnings above the $3 million threshold. By doing so, it captures unrealised capital gains.

This is a big shift in tax theory, although not unprecedented either here or overseas. If you pay land tax or council rates, you are already being taxed on unrealised gains.

But it is a major departure from normal tax law and practice, prompting attacks from tax experts and investors.

Prominent critic Wilson Asset Management founder Geoff Wilson describes the change as “illogical and unfair” while warning it could cost the economy in deadweight tax losses of $94.5 billion a year.

Citing examples of overseas changes, some of which were similar but not the same as that proposed by Chalmers, Wilson reckons danger is ahead.

“These real-world experiences, from wealth taxes to capital gains adjustments, serve as cautionary tales, highlighting the potential for unforeseen secondary impacts that can undermine the intended benefits of taxation, leading to liquidity crises [as various assets have no liquidity], sovereign risks, capital flight, and economic stagnation,” he said in a research note he commissioned.

Geoff Wilson has labelled the taxation of unrealised capital gains as illogical and unfair.Credit: Ben Searcy Photography

While the extra tax can come out of the super account, there will be instances where people may not be able to readily come up with the cash. Farmers might have land holdings in their super but can’t sell them to pay a tax bill.

But self-managed funds are required by law to have a strategy in place to deal with liquidity issues or outstanding liabilities. The complaints from some investors suggest they had not been following the letter of the law around their fund.

On unrealised gains, it appears the government is not for moving. But the other issue – indexing the $3 million threshold – seems harder to resist.

The arguments not to index the threshold are weak. They effectively amount to “a future government will fix up this mess”.

Research by respected AMP senior economist Diana Mousina, who estimates a 22-year-old on an average wage will end up paying the extra tax once they get to 62, highlights the problem of not indexing the threshold in line with inflation or wage growth.

And holding static the $3 million threshold is just an incentive for creative tax planning.

That creativity is on display with the Division 293 retirement income contributions tax, which is an extra 15 per cent tax on concessional super contributions.

The extra tax kicks in at an annual income of $250,000. Australian National University research last year found there were 11 times as many people as should be declaring an income just under $250,000, with most using trusts to avoid the extra impost.

As more people are drawn into Chalmers’ tax net – as they surely will be – the incentive to move assets outside of super into other tax-advantaged investment areas (such as trusts) will grow.

The Greens, who in the post-July 1 Senate could deliver the votes necessary for the government to pass its legislation, have said they want a lower threshold of $2 million and indexation of that threshold in line with inflation.

It doesn’t appear the Greens will die in a ditch over the $2 million threshold.

But the indexation issue, which almost everyone who has examined it argues is beyond the pale, could be the point at which the Greens could exert some pressure.

That may be the real test of Anthony Albanese’s election victory.

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