Labor’s super tax crackdown risks exodus of growth assets

Labor’s crackdown on wealthy Australians’ nest eggs is policy on the run and could bring about a complete reversal in retirement savings strategy, experts say.

Labor’s crackdown on wealthy Australians’ nest eggs is policy on the run and could bring about a complete reversal in retirement savings strategy, including an exodus of growth assets from self-directed funds.

That’s the view of financial advisers and experts grappling with the federal government’s move to double the tax rate on earnings from super balances above $3m, with the proposal to tax unrealised gains and the lack of indexation particularly galling to both planners and their clients trying to get their heads around the details of the new policy.

Hamilton Wealth Partners managing partner Will Hamilton said the move to tax unrealised gains risked pushing growth assets out of the self-managed super system.

“In the past, you would put growth assets in super funds and income-bearing assets in family trusts. (With this change) you’d probably look to reverse that because income-producing assets don’t create realised and unrealised capital gains,” Mr Hamilton told The Australian.

“You can’t just go and sell assets (immediately) and realise capital gains. But over time you would put your income-producing assets in super and potentially look to put your growth assets outside of super.

“Without seeing the legislation, that’s the sort of thing that would probably mean a total reversal of strategies from what’s been deployed previously.”

The federal government last week outlined plans to target nest eggs of $3m-plus, with a concessional tax rate of 30 per cent to be applied to earnings for balances above this level from 2025.

The big shock was that under the proposal as it stands, tax will be liable on unrealised capital gains each year. The changes, due to come into effect after the next federal election, will initially affect about 80,000 Australians. But without indexation the tax hit will capture many more retirement savers in the years to come.

Treasurer Jim Chalmers on Monday said 10 per cent of Australians would be affected by the proposed super changes in 30 years’ time.

Mr Hamilton warned the new policy would hit self-managed funds particularly hard.

“There’s a lot of implications of this that I don’t think the government’s thought of … so we’re all scratching our heads – and we haven’t got the legislation yet – but this has been so poorly thought through.

“I think this is really worrying, I really do … and we’ve got very concerned clients because of it,” he said.

Olivia Maragna, co-founder of Aspire Retire Financial Services, said a lot of the details of the policy, including the tax on paper profits, didn’t make sense.

“It just seems like it’s policy on the run,” she said. “It’s like they haven’t thought through how it’s going to impact on different people. You can’t make this stuff up – it’s just crazy.”

Taxing unrealised gains was a means of bringing forward revenue, she added.

“They’re taking revenue from future governments. They’re collecting the revenue sooner; you wouldn’t usually collect that revenue until you realise the capital gains tax event.”

Labor’s blunt tool for assessing the earnings of a super fund – by simply noting the balance at the start and end of the financial year and not looking at the timing of contributions – was another issue identified by Ms Maragna.

“The formula is not time-weighted. It doesn’t cater for an average balance every day of the year. So someone who puts in contributions on July 1 and someone who puts in contributions on the last day of the financial year are treated the same.

“That’s not right. The person who’s put money in at the start of the year has the benefit of having that money work for them for the entire year, whereas the person who puts the money in on the last day should only get the benefit for the one day.”

Deloitte Australia partner Andrew Boal said taxing paper profits would, in a way, make self-managed funds look less attractive compared to the bigger funds. “It’s an interesting dilemma. You’ve got the really large, APRA-regulated funds on the one hand, and self-managed super funds on the other hand. The large funds have daily or regular unit pricing that allows for unrealised gains, whereas SMSFs handle it differently.

“It almost feels like we need two solutions, one for SMSFs and one for large funds. I’m not sure that’s likely, it’s something to be put forward in the consultation process. “So in order to keep them consistent you would tax the SMSF’s unrealised gains in the same way … but the cash flow issue is a real problem (for SMSFs). That’s not a problem for APRA-regulated funds.”

The move to make super less attractive could see a resurgence in family trusts, as flagged last week by GFM Wealth Advisory managing partner Paul Nicol.

“There could be some real trouble for those with lumpy assets in their super fund and I think possibly trusts might come back or be a consideration for those who might want some of their excess above $3m to exit the super system,” Mr Nicol said of the planned changes.

While retirees will be able to yank money out of super, savers below preservation age will be stuck with no option but to pay the higher rate on their savings.