Superannuation tax: Albanese, Labor pay big price for small gain

Federal Treasurer Jim Chalmers this week. Picture: NCA NewsWire / Martin Ollman

Jim Chalmers and the Treasury have clearly been working on the changes to the taxation of superannuation for some time, well before Chalmers delivered his unwise speech about the purpose of superannuation a couple of weeks ago.

To be sure, there was some indecision about $3m or $5m as being the cut-off for the higher tax on earnings. The lower figure seemed more attractive because, in theory, it would generate more revenue so “what the heck” – 88,000 individuals directly affected is still a low number in relation to the millions of superannuation members.

The Treasurer no doubt was feeling pleased with himself when he declared that the $3m would not be indexed, meaning that in time many more individuals would be dragged into the higher tax net.

The trouble really begins because neither the Treasury nor Chalmers has a clue about how to operationalise the decision. Of course, there is no organisational memory within Treasury to recall the fact that the original decision to impose a flat 15 per cent tax on super earnings was the only option because the funds don’t know about the tax/income/other fund status of their members and it is the funds that pay the tax as funds.

Some genius in Treasury has now suggested handing over the role of deciding what tax should be paid by those larger account holders to the Tax Office. The Tax Office does have some information about individuals and their super accounts (which have to nominate their tax file numbers), but it is limited.

It knows about Total Superannuation Balances at the end of each financial year, but this includes both realised and unrealised capital gains.

Another “what the heck” moment clearly occurred and the suggestion was made that tax simply be levied on the difference between two consecutive TSBs. Now while this approach would be fully embraced by left-wing politicians like Bernie Sanders, who is keen to tax unrealised capital gains, it’s simply not done anywhere in the world, although there may be some despotic country in Africa that has it on its books.

While some large accounts hold mainly unitised, liquid securities that could be sold to pay the tax bill – although beware of the stockmarket impact at tax time – lumpy assets such as buildings, factories, land and farms are common assets in large super accounts. (They were created many years ago, pre-Costello.) These assets are indivisible and their sale to pay the tax bill would have all sorts of undesirable consequences. I’m not sure this is what Chalmers has in mind.

But here’s something to bear in mind: the $2bn of additional revenue that Treasury estimates will flow from the changed taxation of super will be mainly made up of this taxation of unrealised capital gains.

Get rid of it, which is the only sensible thing to do, and we are probably looking at additional revenue of $500m – tops.

It’s a high political price for Chalmers to pay for such a piddling sum of money.