‘Hundreds of thousands’ could be caught in Chalmers’ super tax

Jim Chalmers’ plan to raise extra tax out of superannuation funds with more than $3 million will hit hundreds of thousands of young people while enticing them to sink more cash into trusts, one of the country’s leading tax experts has warned.

As industry data undermines claims by some investors the changes will debilitate the venture capital sector, ANU tax expert Bob Breunig urged Chalmers to look at simpler ways to target the self-managed superannuation sector and also to index the $3 million threshold.

Treasurer Jim Chalmers is facing strong pushback for his long-standing plan to change tax arrangements.Credit: James Brickwood

The government is planning to double the concessional tax rate from 15 per cent to 30 per cent on earnings in superannuation accounts holding more than $3 million from July 1 in a move expected to raise $2.7 billion in its first full year of operation.

It has been strongly condemned by many investors and public policy experts concerned that unrealised gains will be taxed. The government maintains that only 80,000 accounts, some of which hold hundreds of millions of dollars, will be affected.

But Breunig, whose work has exposed how many high-income Australians exploit the tax system to reduce their overall tax payments, said the failure to index the $3 million threshold was a substantial problem that needed to be addressed.

“I’m not happy about the lack of indexation, even to inflation. It’s going to mean that hundreds of thousands of people are going to get caught up in this relatively quickly. It should be dealt with now,” he said.

Breunig’s research on the Division 293 retirement income contributions tax, under which people earning more than $250,000 pay an extra 15 per cent tax on concessional super contributions, revealed how people use financial instruments to avoid tax.

He said the government’s planned $3 million threshold would probably have a similar effect with people moving money into trusts, even though holding cash in super had substantial tax benefits.

A criticism from some sectors has been that the new tax system will reduce investment, particularly in volatile and risky areas such as venture capital and new businesses. But Breunig said that made little sense given the risk involved and the tax advantages of holding investments within a SMSF.

“That’s not what super is for. So I think going after SMSFs is OK but there has to be a simpler way to go about it,” he said.

“Taxing unrealised gains is ridiculous. There are other ways to tax these big SMSFs, ones that are simpler and harder to avoid.”

This week, newly re-elected independent MP Monique Ryan backed investor claims that the tax change would reduce investment in start-ups at a time when the country needed more innovation.

But official government data on venture capital investments compiled by the Industry Department backs Breunig’s argument there is little risk of start-ups being left short-changed.

Its latest data for the 2023-24 financial year showed that of the $34.7 billion invested in venture capital, from seed funding in emerging projects to full operation, just 5 per cent came from self-managed super.

Retail, industry and private super funds, which spreads these kinds of investments among hundreds of thousands of customers, invested almost twice as much as SMSFs, which some critics have claimed were critical to the venture capital sector.

ANU tax expert Bob Breunig says hundreds of thousands of people will be caught up relatively quickly in the government’s super changes.Credit: Rhett Wyman

The single largest investment source for venture capital is cash pushed through trusts. In the 2023-24 financial year, about a third of all individual investors used trusts while in value they accounted for 30 per cent of the $34.7 billion.

SMSFs accounted for $1.8 billion.

Even under Chalmers’ proposed changes, the tax treatment of SMSF investment in venture capital would be better than other possible tax structures.

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.

The Industry Department figures show individual investments across all possible financial structures are relatively modest.

The largest median amount invested by a venture capitalist in any sector of the economy is $500,000 in construction. In the most commonly invested area, information media and technology, the median investment is $350,000.

Chalmers told The Conversation podcast that he had yet to start talks with the Senate crossbench, where Labor will probably need support from the Greens to get the proposal turned into law.

Parliament is due to resume on July 22. Chalmers said he was not considering the Greens demand for a $2 million threshold but suggested there could be talks about indexing the $3 million threshold.

“They’ve talked about indexation as well,” he said. “We’ll see who we engage with. We’ve got a bit of time. They’ll have a view. They know our policy. But those conversations haven’t begun.”

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