The simple fix to the proposed unrealised gains tax

Opposition to the government’s plan to tax unrealised superannuation capital gains is gathering momentum. And in the debate, readers of The Australian, via their remarks on my recent commentary, have come up with a solution to the obvious unfairness of taxing unrealised capital gains. Plus, my readers’ solution requires only simple changes to the bill.

But, first to Parliament. The Coalition has firmly promised to abolish the entire ALP plan to impose a 30 per cent tax on those who save larger sums in superannuation if it gains office at the next election.

It can deliver on this promise because the ALP‘s new super tax legislation, if passed, does not impact superannuation funds until after July 1 2025.

In the lower house, the Teals are fighting the plan to tax unrealised gains while in the Senate cross benchers David Pocock and Jacqui Lambie say they will block the bill if unrealised gains are taxed.

The government needs two supporting votes in the Senate, and if both Pocock and Lambie hold their ground a majority will be difficult to achieve.

All three opposition groups know the government’s plan will be very severe on farmers and smaller enterprises. Venture capital will come to a halt.

But, the government does not seem to care because it believes the numbers of people unfairly impacted are not sufficiently high to cost seats.

One of the best debates on the issue came from my readers following a commentary canvassing the possibility of introducing an income deeming system instead of taxing unrealised gains.

Readers did not like the deeming idea because the whole exercise introduced further layers of complexity into superannuation.

Then, from a number of readers came a suggestion which would enable the government to return to its original policy intention — to tax realised gains at 30 per cent on superannuation balances above $3m.

The original policy did not detail indexation, but few in the superannuation industry believed treasurer Jim Chalmers and his assistant Stephen Jones would be foolish enough to succumb to the anti-superannuation movement in Treasury and not index the $3m base figure.

A large number of my readers were adamant the right thing to do was to go back to the original ALP policy, which did not require taxing of unrealised gains. And, a number of them worked out a way it could be done.

Minister for Financial Affairs Stephen Jones. Picture: Jacquelin Magnay

If the government embraced my readers’ simple solution then there is a good chance Lambie and Pocock plus the other Senate crossbenchers would embrace it.

The government was forced into taxing unrealised gains when it discovered industry funds had antiquated accounting systems and couldn’t undertake the calculations required for the original ALP policy.

One reader, David, put forward the proposal this way: “The industry funds can work out the value of a person’s superannuation account but can’t seem to figure out how much of any increase is income and how much is capital growth.

“Why not let those (with funds over $3m) who can work out their income to declare it and those that can’t use the increase in value as per the current proposal.”

That simple solution was advocated by a great many other readers. The industry funds naturally oppose such a simple solution because it might swing a vast number of fund members into self managed funds or to big funds with modern accounting systems who can make this calculation.

But, surely the industry funds can set up a separate fund with accounting systems which can calculate income and realised capital gains for those who find their total superannuation is approaching $3m? They can be switched to the different fund, which will have the same sort of asset mix choices and investment policies as normal funds.

The key to this simple solution is the onus of registering as a person with balances over $3m rests with the superannuation fund member, not with the large funds.

Accordingly, this takes a huge accounting burden away from the funds. All that is required is for the money to be set aside in a separate fund with modern accounting.

Given it’s such a simple solution, one wonders whether if, in the morass of industry fund taxation, there are methods being used which were put in place before the enormous growth in superannuation.

I don’t think that the superannuation fund movement and the government fully understand the growing community antagonism to having their money set aside in a superannuation fund when it is desperately needed to cover living expenses and investing in the best retirement asset — a dwelling.

Australians now see the government treating a segment of the superannuation community unfairly and this multiplies superannuation unhappiness. By introducing bad legislation, which everybody knows is bad, the government is starting the process of intensifying an anti-superannuation movement which may get out of control.

This is why sensible and justifiable policy is required, rather than policy which protects antiquated accounting systems.