‘I hate the principle, but …’: Labor MPs privately concede flaws of super tax model

Labor MPs are privately concerned about Jim Chalmers’ controversial proposed tax on unrealised gains in its current form but claim they can see no alternative to fix the budget’s revenue crisis.

Jim Chalmers listens to Anthony Albanese during question time in the House of Representatives in Canberra on Wednesday. Picture: AAP

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Labor MPs are privately concerned about Jim Chalmers’ controversial proposed tax on unrealised gains in its current form but claim they can see no alternative to fix the budget’s revenue crisis and say the Treasurer has no choice but to push through growing opposition.

In the first question time of the new parliament the government batted away six questions from the Coalition on unrealised capital gains tax, including two from oppos­ition Treasury spokesman Ted O’Brien on whether Labor would use it on family trusts and property.

“I’ll give a big tip to (Mr O’Brien), the time to run a scare campaign is just before an election not after one,” Anthony Albanese said.

The Treasurer cast the debate as class warfare, saying the Coalition refused Labor’s tax cut at the last election for 14 million Australians while pushing back on the new unrealised gains tax that hit a sliver of people in its first year.

“This side of the house (Labor) is cutting taxes for 14 million Australians (while) that side of the house (are) going to the wall for 0.5 per cent of people in the superannuation system who already have more than $3m in super,” Dr Chalmers said.

He said if there was one defining feature of the government it was “cutting taxes in the context of a more responsible budget”.

The government expects to raise $2.3bn in its first full year from the super tax plan and more than $40bn across the next decade to help fill a budget hole with a forecast deficit of $42bn for this financial year. Following the questions, one senior Labor MP said they “hated” the principle of taxing unrealised capital gains but that some kind of dramatic revenue-raising measure such as what Dr Chalmers had proposed was simply “necessary”.

“I hate the principle of taxing unrealised capital gains,” the Labor MP said. “But there’s a necessity to it, and caucus broadly doesn’t have a problem with what Jim (Chalmers) is doing.”

Another Labor MP noted there was not “unanimous support” in caucus but it was not unusual for there to be some difference of view, particularly on such challenging legislation.

One Labor source urged for Dr Chalmers to “hold the line” on the super legislation, alleging that changing tack now would be a sign of weakness.

“If we can’t do this, what can we do?” the person said. “It’s really not that radical. We need to deal with at least part of the revenue challenge … with super changes.”

Alternative proposals have been put to Labor including some similar to former Treasury boss Ken Henry’s recommendation in his tax review, which was overlooked by the previous ALP government and Treasury.

On Wednesday, Wilson Asset Management made a submission to the Albanese government’s economic reform roundtable proposing a progressively higher rate on capital gains tax on super accounts, raising more revenue for the government in the first year while still avoiding the need to tax unrealised gains.

Wilson Asset Management’s Geoff Wilson, who campaigned against Labor’s 2019 franking credit policy, said his progressive super surcharge and tax offset proposal provided to the economic reform roundtable would tax realised gains in super more equitably, with rates ranging from 15 per cent to 25 per cent, and the tax offset covering all costs involved in calculating and reporting realised gains.

“This proposed progressive tax will raise more funds without breaching the realisation principle of the tax act, providing long-term patient capital that is paramount for improvement in Australia’s productivity,” Mr Wilson said.

Another Labor MP said the measure was needed to “reduce reliance on personal income tax”. “Everything should be on the table to do that,” they said.

However, the senior MP said there would likely be a need to index the threshold in the future to ensure it didn’t end up affecting young people today by the time they retired. “I do understand the concerns regarding unrealised capital gains. But it’s mostly older people (affected),” the MP said.

“We need to look at how we support young people. I’m sure it will be indexed in the future.”

On Wednesday, industry super fund Hostplus, where the average age of their 1.86 million members is 30, spoke out against the unrealised tax. Its chief executive and chairman called for better consultation and for the tax to be indexed to avoid thousands of superannuants being caught by it as their account value grew.

The Financial Services Council expects that without indexation 500,000 people would end up being caught by the tax.

Dr Chalmers said Hostplus’s expectations was for just 57 members to be netted by the tax in the first year. It’s understood Hostplus members affected would pay about $1.19m in tax in the first year.

Self Managed Super Funds Association chief executive Peter Burgess said the SMSF sector would do the heavier lifting than industry funds.

“Despite this tax being designed to appease the needs of industry super funds, it will be the SMSF sector that will bear the brunt of this tax,” he said.

“We have never subscribed to the view that this tax is a deliberate attack on the SMSF sector but given the government’s blatant refusal to make changes and see common sense, it’s becoming increasingly difficult to come to any other conclusion.”

Mr Burgess said the industry funds were “ill-equipped to support a member level tax on super earnings”, so to compensate the government would have to use unrealised capital gains “which will hit the SMSF sector the hardest”.