Jim Chalmers is no fool, so he must know the plan to tax unrealised capital gains in superannuation using a non-indexed $3m trigger point is a looming national disaster that the government does not need in a tight election year.
The government wants to encourage venture capital but the tax shreds future VC investments. It hits very hard for smaller enterprises and farmers who have their property in superannuation.
And arguably it represents a great long-term danger to Australia’s superannuation industry.
Commentators normally stop at that point, but this matter is so serious that I would like to put on the table an alternative tax which will not be liked in many parts of the superannuation movement, but it will do far less harm to the nation than the current proposal.
This alternative tax has a drawback, but it can be moulded so that farmers and small businesses can hold onto their properties. Venture capital will continue to have support.
Chalmers will be reluctant to consider such a scheme because it will look like a backdown. But to be fair to him, he fell into this mess by accident.
The government announced it was imposing an extra tax on superannuation balances above $3m, but then found the industry funds had antiquated accounting systems which couldn’t provide the data.
Subject to parliamentary approval, the hideous tax on unrealised gains was imposed from July 1, 2025 to enable the industry funds to get out of a jam.
One or two of the Senate crossbenchers are tentatively canvassing this alternative way of imposing an additional tax on assets in superannuation funds above $3m. Given the alternative, I believe the scheme has merit. It does not impact assets below $3m.
The plan is to replace the proposed calculation of earnings on funds over $3m (which under the government’s plan requires complex adjustments to be made for contributions and withdrawals and the introduction of a complex new system of carried forward tax losses) with a so-called “deemed earning rate”.
For the purposes of calculating this new tax, a member’s super balance would be deemed to have earnt the average 90-day bank bill rate for the income year.
The “deemed earning rate” would be applied to the member’s super balance at the beginning of the income year to derive an earnings figure.
You then determine the proportion of those earnings which relate to the member’s balance above $3m.
The resulting figure is then first taxed at the standard 15 per cent to derive the Division 296 tax figure.
Because the deemed rate is the 90-day bank bill rate (often referred to as the official cash rate) it is a close proxy for actual taxable earnings (which excludes unrealised capital gains).
This means you substantially remove the taxation of unrealised capital gains, although some of the deemed rate is being applied to an opening balance may include unrealised capital gains. It is also possible the fund may have had a negative year.
I know my readers will shout that they may be taxed on returns that were not achieved. On the other hand, the cash rate is not over the top. Those subject to the tax may delay the impact a few years by adding an option to be charged a slightly higher rate and be able to delay payment – it is akin to a government loan.
Critics of deeming (including Treasury) say deeming is unfair because in negative investment return years, members will still be deemed to have earnt the cash rate. The Government’s proposed approach addresses this by not requiring members to pay Division 296 tax if, after allowing for contributions and withdrawals, your super balance at the end of the income year is less than your balance at the start of the income year. Under the government’s approach, tax losses can also be carried forward and used in a future income year to reduce your Division 296 tax liability.
But the catch is if your super balance drops below the $3m threshold, you can’t use these carried forward tax losses in a future income year. Proponents of the scheme say back-testing shows that even after factoring in several negative investment return years, and the ability to carry forward tax losses, members over most time periods would still end up paying substantially less tax under the 90-day bank bill deeming approach
For most people, this will be better than what is proposed, and for the Treasury it means predictable income rather than the gyrations that will take place under the current proposal.
Some might argue that it is better to punt that the Coalition will win the next election and throw out the tax. But they would need to gain control of the Senate.
Others may say that common sense among the crossbenchers will see the total legislation thrown out. But as we saw with the industrial relations act, disaster gambling on common sense in parliament is a high risk exercise.
If a less dangerous onerous tax can replace the current mess, then it would be a better option. That’s why I am putting forward the deeming alternative and I look forward to my readers comments, realising many will legitimately disagree.
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