Chalmers’ indexation refusal to trigger $8bn tax slug on super

Labor’s tax on unrealised capital gains is set to raise more than $8bn a year in a decade as more people are slugged, a Parliamentary Budget Office analysis indicates.

Treasurer Jim Chalmers speaks at the National Press Club during the week. ‘We’re not changing the policies we took to the election; we’ve got a mandate for that change,’ he said. Picture: NewsWire / Martin Ollman

You can now listen to The Australian's articles. Give us your feedback.

You can now listen to The Australian's articles.

Labor’s tax on unrealised capital gains is set to raise more than $8bn a year in a decade as more people are slugged due to Jim Chalmers’ refusal to index the hit on high-value superannuation balances.

An analysis of election costings released by the Parliamentary Budget Office also puts the final nail in the coffin on the credibility of Peter Dutton’s economic ­agenda, revealing the Coalition’s policies would have increased gross debt by $147.3bn over the next decade.

After the Treasurer this week ruled out major changes to his superannuation proposal despite pushing for a new era of consensus on tax reform, the PBO analysis revealed it had previously underestimated how much revenue would be raised from the ­policy.

The PBO forecasts it would raise $43.9bn over a decade, $4.3bn higher than the pre-election costing it provided to the ­Coalition.

This is despite the PBO taking into account “individuals who choose to remove excess balances from the superannuation system”, after the Australian Taxation ­Office revealed it was monitoring the financial movements of wealthy individuals to help judge how expected revenues might change.

The ATO probe came as tax experts warned wealthy superannuants were increasingly seeking advice on how they could shift assets to avoid the unrealised component of Labor’s super tax.

The policy doubles the tax rate for superannuation earnings to 30 per cent for balances above $3m, while controversially also taxing unrealised capital gains on those funds.

Dr Chalmers on Wednesday refused to reconsider the most contentious elements of the policy – the lack of indexation and the unrealised capital gains – as part of his push to build consensus for ­reform with business and union leaders.

“We’re not changing the policies we took to the election; we’ve got a mandate for that change,” he told the National Press Club in Canberra.

The PBO costings showed just how lucrative the lack of indexation is for the government.

In the first four years of the policy – a period where it captures the 0.5 per cent of people as claimed by Anthony Albanese and Dr Chalmers – it raises a total of $5.8bn. It is forecast to raise nearly $3.8bn in the first financial year of next decade, rising to $8.2bn in 2035-36.

Modelling by the Financial Services Council predicts more than 500,000 people who are currently of working age would be caught by Labor’s policy by the time they retire.

While the Coalition’s election policies would have improved the underlying cash balance over the forward estimates by $6.6bn compared to Labor’s, this would blow out over next decade driven by increases to defence spending, the tax-to-GDP cap and opposition to Labor’s super tax.

The Coalition’s 23.9 per cent tax-to-GDP cap would require $141.3bn in tax cuts between 2030-31 and 2035-36, driving gross debt to $1.7 trillion while deficits would have totalled $462.6bn over the decade.

Under the policies Labor took to the election, the PBO predicted gross debt would rose to $1.5 trillion in a decade with deficits totalling $322.6bn. Key among both party’s election promises were ­demand-side housing policies.

The Coalition wanted to introduce a mortgage interest deductibility program for first-home buyers, which was unpopular with economists. It would have allowed first-home buyers, who purchase a newly built home, the ability to deduct the interest paid on up to $650,000 of their mortgage from their assessable income up to $175,000, and joint applicants earning up to $250,000.

Once found eligible, participants would retain access to the deduction even if their income rises. The proposal, which would have started from July 1 this year, and could be claimed for up to five years if the home is the principal place of residence, would end up costing the Coalition $1.8bn over four years.