Super hit isn’t productivity revolution we are promised

Complaints about the wisdom and workability of Jim Chalmers’ proposed tax on unrealised capital gains in high-balance superannuation accounts are getting louder. The alarm has been raised across the business and political spectrum, and now is coming from what should be the inner sanctum of the ALP base.

The latest group to voice concern is Australia’s third largest industry superannuation fund, Hostplus. The chairman and chief executive of Hostplus have said there was no proper consultation and the tax on unrealised capital gains needs a rethink. They echo the concerns of former prime minister Paul Keating, former ACTU secretary Bill Kelty, former Treasury secretary Ken Henry, former Reserve Bank of Australia governor Philip Lowe, economists and business leaders across the board.

The Self Managed Super Fund Association makes the simple argument that “taxing someone on paper gains they haven’t received a cent from is not reform – it’s confiscation”. The industry coalition says it punishes aspiration, destroys liquidity and turns volatile market movements into tax bills. Hostplus has joined Wilson Asset Management chairman Geoff Wilson to warn of the dangers a tax on unrealised gains would have on investment in innovation in high-risk areas such as medicine and technology.

The longer the Treasurer ignores the advice he is getting, the more it looks as if he is untethered from the real-world impact of the economic decisions he champions. This sense of disconnect is weighted by a lack of easily identifiable core beliefs on economic philosophy or policy.

The danger is that Dr Chalmers’ lens does not extend beyond Labor’s usual failing when it comes to economic management: a determination to tax and spend. To defend his proposed changes, Dr Chalmers has argued they will affect only a small number of superannuants because they apply only to balances greater than $3m. But actuaries have demonstrated that without indexation it will quickly catch a much higher number of Australians.

Another argument is that a form of tax on unrealised gains already exists in the calculation of property rates, which are levied on the unimproved value of land as it is assessed periodically by the Valuer-General.

There is a vast difference between this and what has been proposed for superannuation. The difference is both the quantum of tax applied and the different way that investment markets behave. Most pernicious is the fact small business owners and farmers often have used superannuation to hold capital assets essential to their business.

More broadly, the changes as they are proposed have the potential to undermine confidence and the usefulness of superannuation for today’s working generation. As Wealth editor James Kirby explains, from this point onwards it’s not just wealthy investors who will reduce exposure to superannuation. Younger investors who aspire to be wealthy will be cut off from the system because topping up their super contributions will often no longer be worth the trouble.

This is the fault of proposed changes to the rate of tax on high-balance funds and the failure to index earlier tax measures introduced by Wayne Swan in 2012 that were promoted as a way to soak the rich. The Division 293 penalty tax for those earning more than $250,000 is catching many more people than was promised. These measures remove the incentive to invest in superannuation because there no longer is a tax advantage over more flexible investment options.

The Chalmers proposals represent a dead hand of bureaucracy with a side of unintended consequences. This is all a long way from the productivity revolution we have been promised.