Living in Canberra on big salaries, wielding power and enjoying defined benefit pension schemes, being insulated from productive hard-scrabble Australia will do that to you. Add in virtually permanent public service tenure and more or less unlimited work-from-home rights for the Treasury boffins who helped dream up this stuff, and you start to understand the cocoon that spawned a tax on unrealised gains.
Ignorance is the charitable explanation for this tax. More likely there are ignoble reasons behind it, ranging from Labor’s standard class war against the rich to a desire to enrich industry super funds. To be clear, the vice of this tax is what it taxes, not the rate of tax. It taxes profits you haven’t yet made and may never make. If Labor had decided to tax realised profits at a rate higher than current rates, people would grumble, but at least that would be a tax on money you actually have.
The federal government already taxes realised profits (including dividends and interest income) inside super accounts. And it already permits differential tax rates on realised gains depending on how much super you have. For those over 60, there is zero tax on realised gains inside pension accounts up to what is known as your transfer balance cap (currently $1.9m) and rates starting at 10 per cent on gains if you have super accounts above $1.9m. It would have been easy for the government to simply apply the new higher rate of tax of 30 per cent only on realised gains and calculated in the traditional way inside accounts over $3m. That the Albanese government took a different path is cause for suspicion. That the Prime Minister and the Treasurer have never explained why they picked a new tax on unrealised gains over the more logical increased rates on real gains should be cause for outrage.
First, though, let’s look at why politicians and Treasury boffins who designed the tax are so blasé about it. Many long-termers in parliament and the bureaucracy are in defined benefit pension funds.
Though the Treasurer, with that disarming smile and Peter Beattie-like Queensland charm, says the tax will apply to defined benefit super funds using some actuarial calculation dreamt up by previous Coalition governments, nobody really believes him.
As Clime Investment Management founder John Abernethy said last week: “This (tax) was put up by the government three years ago and Treasury have had all that time to explain how it will apply to defined benefit schemes. For the Treasurer to come out this week and say it will apply but he can’t say how shows it’s a dog’s breakfast.”
Wilson Asset Management chairman Geoff Wilson pointed out how valuable the exemption from these new laws would be to someone such as Anthony Albanese. “Albanese’s pension of, say, $350,000 each year would have a capital value above $3m. He will not be impacted by the tax on unrealised gains (because) he can never be exposed to an asset that rises and falls in value.
“That’s not how defined benefit schemes work. He receives a guaranteed pension that rises in line with inflation.”
Wayne Swan is another who, as an ex-politician, enjoys the defined benefits lurk. It was no surprise that Swan was vigorously defending the tax. Was he speaking in his capacity as former treasurer, or ALP grandee, or Cbus chairman? Some are asking if he is the Svengali behind taxing profits that haven’t been realised.
It’s good news for industry super funds, like Swan’s Cbus, as extra money will almost certainly flow to them from self-managed super funds. While both industry funds and SMSFs hold illiquid assets, the size and diversity of industry funds mean their members can easily get liquidity to cover the new tax by selling units in the fund. The poor schmucks who put their hard-earned money into an SMSF, on the other hand, will more likely need to sell underlying assets, say a house or a farm, in the fund to get cash to pay the tax.
Swan has superhuman levels of chutzpah. He justified the new tax on unrealised gains by pointing to “millionaire retirees” using superannuation to avoid taxes. He didn’t mention he is a member of a parliamentary defined benefits pension scheme estimated to give him an annual pension, indexed to inflation, of more than $300,000. Is Swan saying superannuation of more than $3m is too much or is a tax rort?
We ask this because the capital value of a pension that gives Swan a government-guaranteed (risk free) amount over $300,000 a year, indexed to inflation, would be vastly more than $3m. Indeed, as far back as 2013, when the then treasurer Swan’s pension was estimated at only $166,400 a year, Nathan Bonarius of Rice Warner Actuaries said that to match Swan’s retirement income (indexed at 3 per cent a year and payable monthly) would require an ordinary worker to invest $5.6m in a CommInsure lifetime annuity at then current rates.
We are curious. If Jim Chalmers insists the new tax will apply to his old mate and mentor, what about producing figures showing what Swan’s take-home pay was before the new tax and how much it will be after the new tax?
The devastating impacts of the new tax, forcing the sale of illiquid assets to fund tax on unrealised profits, will likely force some farming families to sell their homes. It will effectively stop SMSFs investing in long-term venture capital proposals because these investments have volatile valuations – which will drive tax bills on those notional gains – but are not liquid.
Indeed, the fact the baseline date for measuring opening capital values of assets will be the date the tax begins means capital losses suffered before that date will not be able to be recovered. Here’s an example. Let’s assume Lisa, who has total super assets worth more than $3m, bought an investment apartment for $1m using her SMSF in 2021. The investment has gone backwards – on paper. As at July 1 this year, when the new unrealised super tax hits, the property is worth $800,000. A year later, on June 30, 2026, it’s worth $900,000. Lisa is still behind on her original investment but Chalmers reckons she should cough up 15 per cent of $100,000 being the difference between the value of her property on July 1, 2025, and the value of her property on June 30, 2026. Lisa hasn’t made a profit.
Again, Chalmers says capital losses suffered before the tax start date in July can be carried forward but hasn’t explained how. How far is he planning to go back? Five years? Ten years? What does that do to his tax? Again, nobody has untangled that can of worms. This is not just a rich man’s problem. The lack of indexing means it will eventually affect millions of Australians in decades to come.
So why this tax? Simple class war explains some of it, as does the need for revenue. Killing SMSFs and driving money into industry funds is no doubt a big driver. But the worst part is the shocking precedent of the tax. Once unrealised profits can be taxed, a greedy Treasury may see it as open slather. Next stop, the family home?
The proposed tax on unrealised gains inside superannuation accounts could only have been invented in Canberra. Taxing profits people haven’t made is a testament to the dismal disconnect between the political and bureaucratic class from the productive parts of Australia.