Chalmers’ new super tax is just the start of the assault on wealth
Property investors with self-managed super funds could be hit twice as hard under the government's new tax plan, with key questions still hanging over capital gains treatment.
As investors digest the harsh reality that many will now face taxes twice as high as before in super, the adjusted tax plan is set to hit property investors most severely, especially those who have concentrated their holdings inside self-managed superannuation funds.
The new deal also leaves questions unanswered around capital gains tax, along with highlighting new contradictions across the system with inflation indexing.
More important, perhaps, is a renewed sense that super has been confirmed once more as a lobster pot where politicians will always hunt for new revenue.
The new deal works like this. From July 1 next year, earnings on super in retirement (or accumulation) will be tax-free up to $2m, at this point onward it will be taxed at 15 per cent, then earnings from $3m upward will be taxed at 30 per cent and at $10m upward it will be taxed at 40 per cent.
There are only 8000 people who will be affected by the top-end 40 per cent tax, but there are at least 80,000 who will be hit by the effective doubling of tax on earnings on amounts above $3m and the bulk of those investments will relate to property.
Though property investment has traditionally been one of the key reasons why investors commence SMSFs, the attractions of non-business property are now seriously eroded.
SMSF investors who want to invest in property pay higher interest rates than almost anyone else in the banking system as lenders demand a premium and the major banks have exited the game.
What’s more, property investors using their super money to finance any transactions pay a lot more upfront costs, such as legal fees, than conventional investors.
No wonder financial adviser James O’Reilly from North East Wealth has openly questioned whether investors should even bother holding property in super.
As he told The Australian’s The Money Puzzle podcast recently, investors “may be making a million dollar mistake using SMSFs”.
“The thing that stood out to me is that you really need to hit it out of the park in terms of the asset that you buy to have any chance of outperforming your standard high-growth superannuation fund.”
On capital gains tax, everyone wants to know if the new super tax bands (those above $3m and above $10m) will be entitled to the same deal as all other money in super. In other words, if an asset is held for more than a year does it get the CGT discount of one third?
Separately, will the CGT rule kick in only for assets bought after July 1 next year?
Most advisers expect the new super tax bands will be treated just like the existing bands, but nobody knows.
Will Hamilton of Hamilton Wealth Partners warns: “It could be the sting in the tail; we will have to wait and see.”
The second issue is around inflation indexing. We now have an overhauled super system where the tax bands that apply to money already inside super in retirement are indexed. The Treasurer finally relented on this issue as part of the new solution.
But at the same time, tax thresholds concerning money going into super can be unindexed – Division 293, the extra tax anyone earning over $250,000 faces when making a concessionary contribution remains unindexed.
But back to the politics. The Greens have continued to threaten to block this final design because they want the taxes to kick in at lower levels. But the chances are the Treasurer will get the measure through parliament this time around because he has tied it to new welfare improvements.
Looking back, the ALP had the electorate onside in taxing high amounts in super. In fact, most in the investment industry were willing to accept higher taxes on high amounts in super too.
But the Treasurer almost blew it by holding fast to the original idea of taxing unrealised gains, which would have been not just daft but effectively impossible to administer.
As Chalmers said shortly after this week’s announcement: “What we’ve done here is we’ve found a way to deal with some of those issues that have been consistently raised with us over the course of the last couple of years, to deal with those couple of issues and to come up with a package which still makes the budget much stronger, still makes the superannuation system stronger and fairer and more sustainable.”
Yes, but that’s a couple of years down the drain and the biggest impact on the budget will relate to the one-year delay where money that might have been raised will be missing.
The wealth tax agenda for the government is only starting. They got it wrong with super and lost momentum in the process. The next time will it be family trusts, inheritance tax or something else. Whatever it is, they won’t fool around with daft ideas that hold up the process.
Widespread relief over the government’s new plan for super taxes is giving way rapidly to concerns over details left swinging in the wind by Jim Chalmers.