Super tax shake-up to hit federal budget, surplus hopes

Labor’s overhaul of its planned superannuation tax for high-balance accounts is set to blow a multibillion-dollar hole in the federal budget, with economists warning the revisions could delay Australia’s return to surplus.

Jim Chalmers announces the changes to Labor’s superannuation tax in Canberra on Monday. Picture: NewsWire / Martin Ollman

The sweeping overhaul of Labor’s proposed tax on high-value superannuation balances, the government’s only significant revenue-raising measure, is expected to blow a multibillion-dollar hole in the federal budget that could delay its return to surplus.

Jim Chalmers on Monday unveiled major revisions to the policy, revealing that its $3m threshold would now be indexed and that it would apply only to realised gains such as dividends and interest – addressing two of the policy’s most controversial elements.

Under the original proposal, which applied to unrealised gains, the tax’s $3m threshold was fixed, meaning more Australians would have been gradually drawn into its net via bracket creep. But that effect – and the extra revenue it would have generated – has now been eliminated.

AMP chief economist Shane Oliver told The Australian that the revision, coupled with the move to scrap the tax on paper profits, would “expose a hole” in the budget that may spur the government to reach for other revenue-raising alternatives.

AMP chief economist Shane Oliver says Treasury could expected less revenue from the overhauled super tax. Picture: NewsWire / John Appleyard

“This decision, while being the right one, does put pressure on the budget,” Dr Oliver said, warning the loss of revenue would continue to compound. “The right thing to do would be to rein in spending growth, but I suspect it will just put additional pressure on the government to find revenue from somewhere else.”

Dr Oliver added that Treasury’s forecast that the budget would not return to surplus until 2035, as projected revenue rose to meet spending, had now been “called into question” given the revisions to the tax.

Deloitte Access Economics partner Stephen Smith agreed the changes would “significantly reduce” the tax’s revenue over the next decade.

“These changes worsen the budget position and the chances of returning to a balanced budget over time,” he said, adding that the hit to Treasury coffers was coming at a time when demographic changes and past policy decisions were demanding additional spending.

Previous analysis by the Parliamentary Budget Office prior to the May election forecast the policy would raise $43.9bn over a decade, and more than $8bn a year from 2035.

But unveiling the revised tax plan at a press conference in Canberra, the Treasurer conceded the changes would slash the policy’s projected revenue to just $2bn over the four-year forward estimates, down from $6.2bn, which he attributed to the measure’s 12-month delay.

Further reducing this revenue are adjustments to superannuation tax concessions for low-income earners, which were simultaneously announced by Dr Chalmers. These are forecast to cost an additional $435m over the forward estimates.

Asked by this masthead what the impact of the changes would be over the decade, and how that compared to the original proposal, Dr Chalmers declined to say, instead insisting the measure would still deliver significant revenue.

“We will still raise a substantial amount even as we make these tweaks,” he told reporters.

Facing a hit to the federal tax take, former Treasury official turned Outlook Economics director Peter Downes encouraged the government to look at new tax bases, nominating Labor’s much-vaunted plans to introduce a road user charge.

“There’s very limited revenue-raising possibilities left in superannuation – they’ve already closed down most options to put large amounts of money in – so they’ll need to look elsewhere,” he said.

But veteran budget watcher Chris Richardson lamented that the overhaul, prompted by the strong backlash, underscored how “spectacularly hard” tax reform remained, even when Labor had received a clear mandate and thumping majority at the recent May election.

“Given that Australia increasingly does need to change – much of our taxing is terrible, much of our spending is stupid, and for decades our national housing policy has been the word ‘No’ – today’s timidity worries me,” he said.