Paul Keating casts a giant pall over Labor’s unrealised super gains tax

Paul Keating is warning that Labor’s super tax plan will capture thousands more Australians than Jim Chalmers and Anthony Albanese first expected, increasing pressure for a compromise deal.

Former prime minister Paul Keating. Picture: John Feder

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Paul Keating is warning that Labor’s superannuation tax plan will capture thousands more Australians than Jim Chalmers and Anthony Albanese first expected, increasing pressure for a compromise deal on the controversial revenue grab.

As the father of superannuation celebrated the increase of compulsory retirement fund contributions to 12 per cent from Tuesday, Mr Keating noted that the change would lead to many Australians entering the workforce ending up in the savings bracket being targeted by the Treasurer’s tax.

“This level of contributions and compound earnings will guarantee personal super accumulations in excess of $3 million at retirement, reducing the call by the age pension on the Australian budget to per cent of GDP in the 2050s,” the former Labor prime minister said in a statement.

Mr Keating’s comments come as a new super tax proposal is unveiled, which would raise $1bn more than Labor’s policy without taxing unrealised gains and which has garnered support from economists.

Jim Chalmers. Picture: Dan Peled / NewsWire

The plan – from former Westpac official Kerry Gore – would be a flat 20 per cent tax on all super earnings, with a 5 per cent rebate for people with less than $3m in their accounts, similar to former Treasury boss Ken Henry’s recommendation in his tax review, which was overlooked by the previous ALP government and Treasury. The alternative proposal would also make calculations simpler for superannuation funds and prevent unrealised capital gains from being taxed, appealing to industry super funds.

“This proposal satisfies the super fairness test and the test as to whether it is neutral or positive to the budget,” said Mr Gore, who does not have a self-managed super fund.

Economists such as Stephen Anthony, who was appointed by Labor to chair a review into the NDIS, said the Treasurer and the Prime Minister would look like a “laughing stock” for not considering a policy that excluded unrealised gains. He Mr Gore’s was “a sensible compromise”.

“But this is the problem with Labor now … that they don’t consider compromise,” Mr Anthony said. “It’s unbelievable that some of these things aren’t considered. I’m not surprised. People like (former ACTU secretary) Bill Kelty said no to unrealised gains tax, Paul Keating is against it but (Labor) won’t listen. It will cost them. It’s the fundamental principle of it that's wrong. It’s probably fourth or fifth rate policy.”

Mr Anthony, the former chief economist at Industry Super Australia, said that while much was made of the $3m threshold at which the new tax would start, it would “really be the thin end of the wedge”.

“If you play around with one set of taxpayers, you end up playing around with others,” Mr Anthony said.

Anthony Albanese speaks with Mr Keating in 2023. Picture: Lyndon Mechielsen / Courier Mail

Mr Keating, who has been privately critical of Labor’s proposed tax hike on high balance superannuation accounts, specifically mentioned the $3m threshold in a statement on Monday.

In doing so, he created awareness that more Australians would end up in the firing line of Labor’s proposed tax on unrealised gains – a measure Mr Albanese insists will affect just 0.5 per cent of savers, or five out of every 1000.

Modelling from the Financial Services Council last month showed that, under four different scenarios of the unrealised gains tax policy, anywhere between 500,000 and 1.8 million Australians currently in the workforce would be stung by the time they reached retirement.

Mr Gore, who does not have $3m in superannuation or a self-managed super fund, said in his comprehensive 34-page proposal sent to the offices of both the Prime Minister and the Treasurer, that indexation should be considered and that his alternative design “supports future indexation”.

While Mr Albanese has been more receptive of potential changes on the tax plan with suggestions from the Coalition, Dr Chalmers has been far less enthusiastic, firmly ruling out any changes to the unrealised tax plan.

The Treasurer has said that “nobody could propose to us a better way of making this calculation” and that the only alternatives would impose costs on those with less than $3m in their accounts.

Labor wants to introduce an unrealised gains tax on superannuation accounts of more than $3m without indexation, but has faced strong resistance from business leaders, academics, financial planners and economists.

Economist Saul Eslake said that while he thought current superannuation settings were “far too generous” he also thought there were “far better ways to address super and they don’t include unrealised gains”.

“I do think taxing unrealised gains is just wrong,” Mr Eslake said.

He said Mr Gore’s plan “sounded good” but he thought it might be “excessively generous”.

Mr Albanese. Picture: NewsWire / Martin Ollman

Among the alternatives not considered by Treasury in a key piece of advice provided in 2023 to Mr Albanese and Dr Chalmers was a recommendation from the Henry tax review that made the concessional tax rates on super contributions more equitable between richer and poorer superannuants.

Dr Henry, who was Treasury secretary during the Rudd government and proposed the resource super-profits tax, told The Australian he was puzzled why such an important alternative approach to make the system more equitable was not adopted nor considered.

Mr Anthony, who has worked at Treasury, said he was surprised the department had not considered the alternative approach.

“It’s just so insane. It’s an anathema of the Treasury that I worked for under (former Treasury secretary) Ted Evans,” Mr Anthony said.

One of the excuses given by Treasury and industry super funds for not going down the alternative route was that they did not have the computer systems and calculation sophistication required to treat super taxes on a more equitable bases without taxing unrealised gains.

Mr Gore’s plan would address this shortfall.

“It also resolves the problem that industry super funds can’t calculate different tax rates based on individuals total superannuation balances, that many hold multiple accounts, and the tax is only at one rate at the fund level,” Mr Gore said.