Update: Treasurer Jim Chalmers announced this afternoon that Labor has dumped its unrealised superannuation tax proposal, as well as made several other worthwhile changes. A full breakdown of these changes is available here.
Original article below:
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The head of Treasury’s revenue group, Diane Brown, has told Senate estimates that the Prime Minister’s office had asked for a briefing regarding stakeholder criticism of proposed superannuation tax changes.
“Stakeholders have raised concerns with us”, Dr Brown told senators. “In order for us to understand it better, we might have done some modelling, and that is for us to provide good advice to government”.
Announced by Treasurer Jim Chalmers in February 2023 but yet to be implemented, the proposed changes would raise the income tax on super balances of $3 million or more from 15% to 30%. It would also begin taxing “paper gains” that haven’t been realised at a rate of 30%. These thresholds would not be adjusted for inflation or wage growth.
The proposed changes reportedly received more than 20,000 petition signatures against the policy in the seven weeks following the election.
The Coalition, most teal independents, business leaders, the superannuation industry, renowned economists like Ken Henry (the main author of the 2010 Henry Tax Review) and Phil Lowe (the former governor of the Reserve Bank of Australia), and even Bill Kelty, the former secretary of the ACTU and one of the people who helped create Australia’s compulsory super system, are against taxing unrealised gains.
Greens senator Nick McKim asked Dr Brown whether Treasury was preparing any amendments to the new tax. She responded that there had been “no decision to amend the bill”.
Treasury also revealed last month that the new tax could be hit with a legal challenge and that policy considerations around large superannuation balances “remain under active development by government”.
Dr Brown’s testimony heightened speculation that the government was open to potential tweaks to the policy, such as abolishing the taxation of unrealised gains.
However, Prime Minister Anthony Albanese downplayed the significance of his office becoming directly involved, claiming there was “nothing unusual” about Treasury briefing his team on the contentious proposal.
“Our policy is as it stands”, Albanese told reporters. “No, there are no policy changes that we have not made. Our policy stands”, he repeated.
Below are four proposals that are superior and simpler than taxing unrealised superannuation gains.
Option 1: Reduce the threshold to $2 million and tax realised gains at 30%.
I suggest that the government lower the $2 million threshold for large superannuation accounts, link it to wage growth, and increase the tax rate on actual (realised) gains from 15% to 30%.
The second 15% of tax would be calculated in the same manner as the first, making the reform simple to execute. It would also make superannuation tax benefits more equitable while bringing in billions of dollars in extra budget revenue.
Option 2: Tax 15% of income earned while in retirement:
People over the age of 60 with less than $2 million in retirement savings are currently exempt from paying income taxes, whereas Australian workers must pay the full marginal tax rate.
John Kehoe of The AFR reported recently that “This is arguably more scandalous than the 15% rate faced by super savers with more than $3 million, who are at least contributing some tax and Chalmers wants to tax more, including on unrealised capital gains”.
The standard 15% superannuation tax should be applied to realised earnings on superannuation accounts during the retirement phase.
This would make superannuation concessions fairer and more consistent while also increasing budget income.
Option 3: Change the 15% flat tax on superannuation contributions to a standard 15% deduction:
The government should replace the 15% flat tax with a 15% reduction in one’s marginal tax rate.
This minor modification would make superannuation concessions on contributions progressive.
If a superannuant earns $220,000, they will pay 32% in taxes on their superannuation contributions, 15% less than their marginal tax rate of 47%.
If a superannuant earning $30,000 contributed, their marginal tax rate would be 18% minus 15%, resulting in a tax rate of 3%.
Option 4: Tax realised earnings on large super balances progressively:
Wilson Asset Management’s submission to the Economic Reform Roundtable outlined “a logical approach to superannuation tax reform that is budget positive, supports long-term investment, and avoids the taxing of unrealised gains”.
Wilson proposed a Progressive Super Surcharge, which is an additional tax paid on realised profits on superannuation accounts above $3 million, namely:
- Balances of $3 million – $6 million: an additional 15% tax on realised gains;
- Balances of $6 million – $10 million: an additional 17.5% tax on realised gains;
- Balances of $10 million – $20 million: an additional 20% tax on realised gains; and
- Balances more than $20 million: an additional 25% tax on realised gains.
Personally, I believe this is a sound suggestion by Wilson, albeit progressive tax rates should apply to balances beyond $2 million, adjusted for inflation or wage growth.
Regardless, the proposals presented above are superior to taxing unrealised gains and would improve the system’s equity and sustainability.
