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Robert Gottliebsen

Tax on unrealised capital gains on unindexed super balances over $3m will have a big impact

Robert Gottliebsen
Prime Minister Anthony Albanese, Minister for Defence Industry Pat Conroy and Treasurer Jim Chalmers during a visit to the Rheinmetall factory in Ipswich. Picture: NCA NewsWire/Tertius Pickard
Prime Minister Anthony Albanese, Minister for Defence Industry Pat Conroy and Treasurer Jim Chalmers during a visit to the Rheinmetall factory in Ipswich. Picture: NCA NewsWire/Tertius Pickard

A week or two after the upcoming 2024 Budget, the Albanese government will provide the details of a tax far more damaging to the nation than anything likely to be announced in the Budget.

The tax on unrealised capital gains on unindexed superannuation balances over $3m starts on July 1, 2025. It is going to have implications far beyond anything envisaged when it was announced.

Ironically it was introduced because of a “mistake”, and correcting the mistake will make it theoretically possible for the Coalition to reverse the tax before implementation, should they win the next election by a clear margin.

Without indexation, this is a tax which will really hit middle Australia – especially those already struggling to enter the housing market

But, today I will focus on just one of the unintended consequences of the tax, plus detail the “mistake”.

The Albanese government is pressing to follow the US and have more goods made in Australia. As the US has shown, a healthy venture capital market is essential for any country seeking to make innovative products on home soil.

Indeed, the government is linking with two US venture capital funds in its Australian quantum computing venture.

Australia’s venture capital market is nowhere near as strong as the US, but it is able to fund a large number of enterprises.

After July 1 2025 it will be virtually shut down because a major source of local funds — large self-managed funds — will withdraw.

(I have already documented how a threatened re-classification of wholesaling investor criteria, not just super funds, threatened about 60 per cent of ASX stocks plus Australian venture capital.)

To his great credit, Assistant Treasurer Stephan Jones responded to the threat and directed the Parliamentary Joint Committee on Corporations & Financial Services to conduct an inquiry and examine the issue more closely.

Thanks to Jones, at this stage, the government is not planning any changes to the wholesale investing category, so venture capital funding is intact on this front.

The current participants in the venture capital market raise high risk money from a variety of sources, but one of the largest is big self-managed superannuation funds.

But, if the government is returned at the 2025 election, the proposed taxing of unrealised capital gains on superannuation balances above $3m will begin on July 1 2025

That tax is clearly unfair and goes against all principles of Australian and global taxation. But, when applied to unlisted venture capital investments it is a disaster.

Many large self-managed superannuation funds run a low risk base portfolio but attach a limited number of high risk investments, which add extra interest for people in or close to retirement.

In a venture capital investment the initial subscribers (who take the most risk) might take up units at, say, 10 cents per share. Then, if the venture is looking good the next issue may be at 20 cents — lifting the valuation.

This would automatically cause a tax to be levied on an illiquid security with no open market. Worse still, if a venture continues to progress it might make a limited issue to a US company at 50 cents per share, meaning the value of the base investment is again increased and tax is payable. But, there is not necessarily a market for those units at 50 cents, so cash has to be raised by selling other securities.

And there is always the possibility of a reverse causing the stock to be eventually worthless.

This is high risk, high reward country. No one in their right mind will invest at high risk where your arbitrary paper profits are taxed along the way.

If you invest in venture capital, you will need to have a cash pool alongside you — which is crazy.

The withdrawal of large self-managed superannuation funds from the market will destroy a huge slab of venture capital support in Australia. Those who need VC support must instead go to the US.

I emphasise the issue of taxing superannuation funds’ realised income on superannuation investments above $3m at 30 per cent is quite separate. Providing the $3m is indexed I think it’s fair.

The taxing of unrealized capital gains is separate and came about by accident.

Originally, the government sought to tax funds in superannuation above $3m at 30 per cent instead of 15 per cent and it was supported by industry and many retail superannuation funds.

In a self managed fund it is an easy calculation. But, after the decision was made, the big industry funds suddenly realised they did not have accounting systems which would enable them to make the calculations.

Using their current antiquated accounting systems, the only figures reliably available to make a 30 per cent tax calculation was the market value of a person’s superannuation holdings compared to the previous year. Naturally, this figure included unrealised gains which suddenly became taxed.

I have no idea what a Coalition government will do if it is ever returned. But, before the election they will need to consider forcing both industry and retail funds to get their accounting systems up to 21st century standards in the interests of the nation.

We are talking about Australia in 2025, where we can use artificial intelligence and conceivably even quantum computing to work out how to calculate unrealised capital gains and make sure they are not taxed.

Robert Gottliebsen
Robert GottliebsenBusiness Columnist

Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an Order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.

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Original URL: https://www.theaustralian.com.au/commentary/tax-on-unrealised-capital-gains-on-unindexed-super-balances-over-3m-will-have-a-big-impact/news-story/a10f8e43bd1200d6faf1ef9ac04fa7a8