A shell-shocked opposition needs to scour history to see how to rebuild. Though Gough Whitlam is no natural blueprint for the Liberal Party, the smart ones might learn something from the way he pulled the ALP from the blue funk of its disastrous 1966 election result back to electoral acceptability. Famously, Whitlam challenged the 1967 annual conference of the Victorian ALP to skip the ideology. “Certainly, the impotent are pure,” he told them. Whitlam certainly led a shambles of a government, but he did lead an opposition out of the wilderness.
The Coalition faces one of those litmus tests about ideological purity in dealing with the Albanese government’s proposed new tax on superannuation accounts over $3m.
Right now, the Coalition seems set on opposing the new tax in the Senate in every respect. It is a matter of principle that the Libs hate new taxes so it will offer this new tax no support.
Principle is, of course, a fine thing, but here all it will do is ensure that the tax will be enacted by Labor with support from Greens senators. That means any amendments conceded by the government to win Greens support (for example, lowering the threshold to $2m) will make the tax even more objectionable to the Coalition and its supporters than the government’s original proposal.
Cynics fear that is the Coalition’s intention. They speculate that the worse the tax is, the more reviled it will be, and that this will improve the opposition’s political fortunes. If so, this is a classic example of the opposition sacrificing policy outcomes, and the financial welfare of those they say they exist to help, on the altar of their own political ambitions.
There is a simple and obvious compromise the opposition could offer the Albanese government that would remove the most pernicious, and irreversible, effect of the government’s proposal while preserving the Coalition’s ability to reverse all the other parts of the proposal if and when it regains power.
The opposition could offer to vote in the Senate to accept the doubling of existing tax rates on superannuation accounts over $3m without indexation, but without the tax on unrealised capital gains. A simple swap; the government gets a new higher tax rate on large super balances, but calculated in the traditional way on realised income, dividends and capital gains – not on unrealised gains.
There is a strong argument that this would be welcomed not only by Coalition supporters, but by the community at large, which is only now realising the full horror of the Chalmers proposal.
The logic behind this is to recognise that of the three key elements of the new tax, two of them (the tax rate and the thresholds) are reversible, while one element (taxing unrealised gains) is effectively not reversible. In the first year in which a self-managed super fund with illiquid assets, such as a farm, a business or a house, makes a material unrealised gain on that asset, it may well have to sell the asset to pay the tax. Once sold the damage is forever done. A family’s ongoing livelihood may well disappear on the sale, replaced by cash (minus tax). It would be most unlikely, indeed imprudent, for the SMSF to ever put illiquid assets into the fund again.
Treasury boffins and class warriors, of course, say that it was always imprudent to permit illiquid assets inside super, but this is hotly contested. Industry super funds are stuffed full of illiquid assets but have the scale and liquidity to meet the claims of their members, who may be forced to withdraw super to pay the new tax.
In any case, it’s beside the point for Jim Chalmers to now say SMSFs should have set aside liquid assets to fund this new tax. The real point is that SMSFs have been permitted, indeed encouraged, to invest in illiquid assets by past policy and could not possibly have anticipated this new tax.
In short, the taxation of unrealised gains inside super is a change in kind in our tax regime, whereas changes in the tax rate or in thresholds are merely changes of degree.
If the Coalition were to offer to back changes in the tax rate and thresholds in return for the government dropping the taxation of unrealised gains, it could, hand on heart, say it is doing so grudgingly to avoid a permanent structural change to our tax system and will, if re-elected, reverse the changes to the tax rate and thresholds.
The Albanese government has sent mixed signals as to whether it would accept such an offer of compromise by the Coalition, but that’s no reason for the Coalition not to offer it. The mere offer is a win-win proposition for the Coalition. If the government rejects it, it deflates its default line about an obstructionist No-alition. And the government would be exposed, not only as intransigent and inflexible, but its real motive – to cripple SMSFs – would be made plain.
There have been hints that the government cannot implement this compromise proposal because big super funds have some unspecified practical problems in calculating tax at different rates above and below a threshold. This beggars belief as a single superannuant is already taxed differentially depending on whether they have a balance above or below $1.9m (the so-called transfer balance cap). If the government sticks to this argument, it had better do so clearly and publicly without subterfuge.
Finally, a response to those who say we should simply chill out about taxing unrealised capital gains. The usually diligent Graeme Samuel, who made the “chill out” argument last week, said: “Interestingly, we have all endured taxes on unrealised gains of our property holdings with land taxes and local government rates. We have learned to just accept this as part of our taxpaying obligations. And I am forecasting we will do the same with Chalmers’s superannuation reforms.”
Samuel’s failure to mention even the most obvious flaws to the “relax, it’s just like land tax” argument is disappointing. He is normally better than this. Let me make just two points. First, the amount and impact of land tax is deliberately small, so as not to cause tax avoidance behaviour or distort markets. In NSW, for example, land with a value of less than $1.075m is exempt from tax. Above that, tax is charged at 1.6 per cent per annum of the unimproved value up to $6.571m when a 2 per cent rate cuts in.
Chalmers’s new tax rate, by contrast, is a whopping 15 per cent per annum on any unrealised gain. Whereas land tax rates are deliberately minuscule, to stop owners being forced to sell in order to pay tax, Chalmers’s big new super tax on unrealised gains seems deliberately designed, for ideological reasons, to force SMSFs to sell illiquid assets.
Second, no one could have planned for Chalmers’s big new super tax on unrealised gains. By contrast, Australian states have had land tax for well over a century. South Australia introduced it in 1884 and NSW in 1895. No Australian in over a century has ever bought land for investment purposes without knowing it would be subject to land tax.
By contrast, no Australian SMSF has ever bought an illiquid asset knowing in advance that it would be subject to Chalmers’s sudden, and completely unforeseen, tax ambush.
It defies reason that the tax-hating Liberals were so incompetently quiet about this misguided proposal at the last election. Now, perhaps, the Liberals can demonstrate some competence.
Offering to improve a bad tax policy and simultaneously behaving like the political grown-up in the room is a start. Over to you, Sussan Ley.
Merz steps up, crunch point near
New German Chancellor Friedrich Merz’s frank assertion at the G7 summit – that in attacking Iran, ‘Israel is doing the dirty work for all of us’ – provided a welcome reality check.
Chalmers’ ambitious drive to boost living standards
Jim Chalmers’ admission that Labor’s budget ‘is not sustainable’ has raised hopes that the productivity roundtable will be part of significant reforms to boost growth and strengthen the economy and defend living standards.