The Australian Financial Review.
The government's super tax change has been hugely divisive. Jim Chalmers insists it's prudent policy that affects only the richest Australians.
This is a change which is modest and it makes a meaningful difference to the budget.
Opponents say it's confusing, unfair and will eventually capture those in their early twenties just starting out in the workforce. Today, after a resounding election victory, Labor together with the Greens, has the numbers to get the change through Parliament and those Australians with large superbalances are already preparing. But ahead of the vote, critics are becoming louder, warning there may be more taxes on wealth to come.
The reality is that we do have a problem in our tax system. There is an overreliance on income taxes and young people pay very great proportion of the taxes and that problem is going to get more acute.
Welcome to the Finn. I'm Lisa Murray. Today, Wealth editor jo Animes and reporter Michelle bows on how the new tax will work, why it's so controversial, and what people are doing to get ready for it. It's Thursday, June five, Hi Joe, Hi Michelle, thanks for coming on the podcast.
Hi there, thanks for having us Joe.
This super tax change was proposed just over two years ago, back in early twenty twenty three. At the time, Jim Chalmers and Anthony Albanizi said it would make the superannuation system more equitable, and they made a point of noting that seventeen people had superbalances worth more than one hundred million dollars. How did they pitch land.
The language was really direct and incendjury. They challenged mister Dutton to take to the next election opposition to this policy and sort of in which case he would be standing on the side of millionaires. So in late February twenty twenty three, Gin Chalmers and Anthony Albanezi called a press conference. They were there to commemorate a year since the devastating floods in the Northern Rivers. But then came this surprise announcement.
The Cabinet has met this morning and had a discussion about superannuation.
They talked about the idea that this was really necessary because the government had inherited a trillion dollars worth of debt and you know, they had no choice but to try and find money from somewhere.
And today I'm announcing the earnings on superbalances above three million dollars will have a concessional rate of thirty percent rather than fifteen percent.
And straight away they made the point that it wasn't going to affect many people. They stressed that point a lot.
This proposal does not changed the fundamentals of our superannuation system. Ninety nine point five percent of people with superannuation are unaffected by this reform.
It was only going to be zero point five percent of zuper account holders, the wealthiest Austraians. And they made a real point of noting how some of the big account balances in the system were worth many hundreds of millions of dollars and that super had kind of gone beyond the remit of retirement savings for a dignified retirement and all this sort of language we use.
And with seventeen people having over one hundred million dollars in their superannuation accounts, the individual who has over four hundred million dollars in heesel or her account, most Australians would agree that that's not what superannuation was for.
Straight Away, the proposed tax change became a political issue and the Coalition said the government was leaving retirees in the cold.
I think every Australians should be unsettled by what the Labor Party's doing at the moment. They went to an election and the Prime Minister promised and looked the Australian public in the eye and said that it wouldn't change superinuation.
There was a month's long battle and the government was unable to get this change through the Senate. The expectation now is that with Labour's thumping victory and the Greens holding the balance of power in the Senate, that this will go through. The start date for this is July one, so there is some time to prepare for this for people who are affected, but it also gives us plenty of time to have a lot more debate and for detractors to stir discontent.
So, Michelle, you've been writing a lot about this, the ins and outs of the tax, how it's going to affect people. Can you explain exactly how the change will work and who it's going to affect.
Sure, Lisa, Well, it's effectively a plan to increase the tax on the earnings of superbalances above three million from fifteen percent to thirty percent. But for many people there's an actual misconception about how that will work because it's not a flat tax rate. So, for example, if your balance was three point two million, the amount above three million, is that two hundred thousand dollars and thirty percent of that would be sixty.
Thousand, sixty thousand dollars.
Yeah, correct, But that is not the tax that that person would pay. It's actually a proportional tax, and it only applies to the proportion of earnings above three million dollars, the proportion that that makes up of someone's total superballance. So, for example, imagine someone starts the year with a three million dollars superballance and ends it with our three point two million in super The change is that two hundred thousand dollars, But that only represents just over six percent
of their total superbalance of three point two million. So the tax levied on the t two hundred thousand dollars works out to one eight hundred and seventy five dollars.
So it's quite complicated, but the tax is a lot less than that thirty percent figure that we think about at the outset.
Yes, that's right.
And look, I think it's also worth saying here that when we've spoken to many many people about this tax that will be personally affected, it's not the idea of paying more tax on their super that they are against per se. It's the calculation of this tax, because it'll be calculated at the end of each financial year based on all those gains that they are considered to have made, whether or not they've sold assets and realized those gains. So it's effectively taxing paper profits.
And that's the major.
Complaint about this tax. And for example, there if one year you make a gain, you pay the tax, but then if the following year the value of your assets in super drops and you make an unrealized loss, there's no refund.
For you don't get that money back, that's right.
Instead, you get a credit that could potentially be used against a future game. But if you've passed away in that time or closed your superfund, the credit's lost. And in terms of who this effects, the people that seem to be most agitated about the change were farmers and small business owners because they often own their property, their farm or the business premises they operate out of. In a self managed superfund. So if a superfund owns listed shares, those are liquid assets.
They're easy to sell, that's right.
If they get that tax bill on the paper profits, they can sell some shares to pay the tax. But if you haven't a liquid asset, much harder to sell, like a farm or a commercial premises, and the value of that goes up and you need to pay.
Tax on it.
It's pretty difficult to sell a paddock of a farm
or a bathroom of a property to pay that. So the government is expecting to generate two point three billion in the first full year of collection, and of course we know charmers keep saying it's only to affect eighty thousand people or zero point five percent of taxpayers at first, But then we get to the other major criticism of this plan is that the three million dollar threshold isn't indexed, and due to bracket creep, which is essentially the tax
thresholds not rising with inflation and wage increases, Treasury projects that if that threshold doesn't change over thirty years, some one point two million people, or actually ten percent of taxpayers will eventually be hit, and young people particularly will be in the firing line. So AMP Deputy chief economist Diana Messina estimates that today's typical twenty two year old worker will definitely accumulate more than three million in SUPER by the time they hit sixty four. And that's only
if they ever earned the average wage. That's just due to wage inflation and the power of compound interest in super.
So Joe Michelle's picked up there on the two main contentious issues with this tax. One is that it's not indexed, which means the threshold for the tax that three million dollars doesn't rise in line with inflation, so it captures more and more people every year, and as Michelle said, it will eventually capture young people who've started paying souper today. And the other big criticism is that it includes unrealized gains. So where's most of the opposition coming from.
Yeah, so, as Michelle said, the farmers aren't happy. It's estimated that about three thousand and five hundred farms we affected. When the government announced this measure, it did give those sort of figures about who would be affected, but it's been silent since, so there's been sort of quite a bit of speculation or modeling that's filled the void. So there's also smsfs who are obviously vocal critics. Some of them own residential property that may have appreciated significantly. They
might own commercial property. They might also have invested in sort of private companies or startup businesses whereby the shares have grown significantly over time, sort of these lumpy, unlisted assets.
They're the people who will be affected. Of course, the newly elected Tim Wilson and funds manager Jeff Wilson, who runs money on all retirees, have leapt in and started a campaign to sort of get rid of this proposal, as they did for the franking credits in the twenty nineteen elections, So they're going to be pretty noisy going forward. There's opposition from tax purists who argue that it's bad policy. We don't tax unrealized gains anywhere else, why should we
do this here. Of course, there are others who point out that the income tax scales aren't indexed either. Paul Keating, the father of superannuation, is apparently a critic of the proposal. Or let's just say the unrealized gains and the indexation issues.
And Keating is obviously a mentor to Jim Chalmers, So it'll be interesting if his criticisms have any influence on the treasurer.
Yeah, Jim Chalmers will definitely be sensitive to what Paul Keating has to say.
Michelle, you've been talking to financial advisors and investors about the change. How are people starting to prepare? Are they trying to get around this change before it's even been introduced?
Well, as one financial adviser put it to me, he's advising clients to be alert but not alarmed. So what he was sort of alluding to there is they're definitely modeling scenarios. They're definitely looking at their options and what it might mean for their clients' tax bills. But until this law actually passes, they're not taking action just yet. If they do decide that they do need to take action, there are several strategies that we hear that people are
looking at. So for some that might mean bringing forward inheritances by gifting money to kids or even grandkids.
Which is a tax free that's right.
And that would help them lower their superbalances below three million dollars. Or another option would be taking some money out of super and putting it into other structures they may have, like a family trust or an investment company. However, there would be a capital gains tax payable in the moving of that money, so for some people, the modeling might show that they're just better off leaving it in
SUPER and paying the tax. Of course, another way to lower the balance could be to split SUPER with a spouse, if your spouse has a much lower balance than three million,
so there's that option. I think the ones that are really stuck, though, are the people that are younger than sixty who haven't reached preservation age yet and they can't withdraw any money from SUPER, so they're much more limited in what they can do to adjust their balance, and their best option is probably to change the asset mix in SUPER, looking to hold more liquid, lower growth assets inside SUPER, like bonds like larger amounts of cash or
even dividend paying blue chip shares that don't move too much in value, and owning those higher growth assets outside of SUPER. So that's things like property, cryptocurrency, or any speculative shares because they obviously have a bit more price volatility.
Of course, there are some potentially what might be considered anyway slightly dodgy strategies that might be a focus for the ATO, such as people moving money offshore or seeking more conservative valuations for unlisted assets such as property, and the ATO is putting wealthy families on notice that it will be watching what they're doing in preparation for this
tax going forward. But ultimately, Lisa, all of those scheming about what they're going to do in response to this tax might actually be missing the.
Bigger picture here.
Because government debt isn't getting any smaller, there's more and more speculation building that there will be other taxes introduced on wealth by this government. Historically, Australia's relied largely on income tax revenue to fund the budget, but there's a bit of a push away from that and it looks like the wealthy could be in the crosshairs.
We're talking about the proposed super tax change, why there's opposition to it, and how people are preparing for it. Joe, there's speculation that this might just be the start. It could lead to other wealth taxes. What do you think the government might look at, Well.
We know that Treasury's hot trot on looking at trusts, but I think you know, the problems are obvious to everybody, including the people who oppose this tax, who say people with high superannuation balances need to pay more tax. Superannuation death benefits are projected to increase from about seventeen billion in twenty nineteen to about one hundred and thirty billion by twenty fifty nine, so obviously a lot of super is being passed to the next generation rather than being
spent for a retirement income. The tax system undoubtedly favors wealthier, older Australians. The system is increasingly generous to people aged over sixty five, who have an average tax rate of about seven point five percent, which is much lower than the people who are building families, trying to buy homes, building careers. So there's always speculation. You know, would the government reintroduce an inheritance tax? Australia abolish those taxes in
the nineteen seventies, but we're an outlier, listen. I have no idea, but it would be a pretty brave government who introduced inheritance taxes. The thing about all this is, of course, this measure, when taken alone, is easy to pose. What a lot of the experts say is that a government needs to come to the people with a tax package that has trade offs it has winners, it has looters, but it sort of rewrites the tax system in a way that can be sold to the public other than
just doing one small tax change. At the time, of course, Labor is a bit gun shy. It went to the twenty nineteen election, the unlosable election, with some pretty bold tax reform related to capital gains tax, negative gearing and franking credits. They were met with a scare campaign from the Liberals.
Vote Labor and a retiree taxes on the horizon Bill. Shorten's new housing tax would take a wrecking ball to the economy. Labor's billions of dollars in higher taxes will put the squeeze on all Australians India.
And as we all know, that election defeat was very bruising.
They are inventing attacks.
They're inventing just completely fabricating attacks.
This does not exist and will not exist.
So within the party they're very keen not to repeat that.
And as you say, the tax treatment of superannuation is very generous, isn't fair to say it's becoming a real problem. Last week the Financial Review Rewindow column broke the news that two Wise Tech directors have more than two billion dollars combined sitting in their self managed super funds. That's a bit more than you need for a dignified retirement.
Yeah, and the AFI has been putting in freedom of information request to the tax Office for a number of years now to find out what the biggest funds are worth. We know that forty two smsfs have more than one hundred million dollars in assets. And obviously this is actually one of the first times that we've actually known who these people are. These are the egregious examples that sort
of get people fired up. So the rear window column revealed that Wise Tech director Charles Gibbon sold shares worth two hundred million in December last year, saying at the
time that it was for personal estate planning purposes. They were sold by the trustee for the Gibbons Ubranuation Fund, trustees of which are mister Gibbon and his wife, which meant they paid something like ten percent of in capital gains tax, which is far lower than you would pay outside of super in your own name, which in their case would likely be forty five percent top marginal rate plus the MIDI care levy. Even after the sale of
those shares. He still has wise Tech stock in his SMSF and it would probably be worth we think about one point seven billion dollars, and then another and then to compound sort of the situation. Another Wise Tech director, Michael greg we found had shares worth five hundred and sixty eight million. So these were the kinds of examples that really people get fired up about.
I guess both directors have been with wise Tech and invested in wise Tech from early on, and that's.
What people do.
They have the shares in their fund before at IPOs and then you get that huge escalation. But it still is a pretty strong example of superfunds that have built up too much in assets.
It is and opponents would say, well, this is a tax on aspiration people who have ostensibly worked hard and benefited from their ideas.
Michelle. Parliament sits again next month. The government, together with the Greens, has the numbers to get this legislation through. Do you think it'll be passed in its current form or do you think the government might be forced to make changes, either in response to the criticism or any demands from the Greens.
Well, as you say, Lee, so the Greens do hold the balance of power in the Senate, and they've argued that they'd like the threshold lowered to two million dollars, which would meet an extra sixteen thousand people would be captured in the first year of this tax. But unlike labor, the Greens are actually pushing for the threshold to be indexed, meaning it would increase each year in line with inflation.
So if you were to assume an average inflation rate of say two point five percent, the Greens proposed two million dollar threshold would actually end up being less punitive than the labor on in next three million dollar threshold after around sixteen years. That means it would capture less people than what the government is currently proposing now. Jim Charmers has said recently in several interviews, there is no other way to do this tax change.
These changes were announced almost two and a half years ago. Now, we did multiple rounds of consultation and we said to people, if there is a better fair way of making this calculation, tell us about it.
He has noted that the government did do three rounds of consultation, although if you speak to those in the industry, they say that they were pretty short rounds of consultation.
And his mind was already made up.
Chalmers has said that taxing unrealized gains is just the simplest and best way to go about this.
The unrealized gains calculation was recommended to us by Treasury. We provided years of opportunities for people to suggest different ways to calculate that liability, and nobody has been able to come up with one.
He's also defended his decision not to index that three million dollar threshold. He says there's many instances in the tax system, and one is income tax rates where thresholders are not and from time to time the government can
then take a decision to raise those thresholds. There are still a few weeks until Parliament comes back after the election and the new parliament begins, So whether Amas holds firm is probably going to depend to some extent on how much pressure he comes under and whether the Greens are willing to trade away any demands on this tax concession that they might have for sweetness when it comes to other policies.
Finally, a question for both of you, tax concessions on super are generous, are they too generous? And what's the best way to improve the system.
So, for my part Lisa, Yeah, I think the tax concessions on super are probably too generous, and some thirty years after compulsory super began, tax reform probably is necessary because, as we've said several times here, people hoarding hundreds of millions of dollars in their super is not what the system was intended for. But that taxing of unrealized gains really does still stick with me as somehow inherently unfair.
And the bigger concern is will it set a precedent that will leak into other parts of the tax system. But for me, any starting point on the bigger debate about tax changes, we really need to think about the sort of society we want to live in, because there's no doubt that inequality, both between the generations and even within the haves and have nots in each generation has grown considerably in recent years, and unless that's addressed somehow, it does threaten to tear apart the very nature of
what we consider Australian values. I think in our Australian society.
We've talked about the generosity of our retirement system for a long time, and back in the tax white paper process there are a lot of submissions from a lot of people, very smart people talking about how to make things more equitable. One of them was around making our subranuation tax concessions progressive, just like the income tax scale.
Back then, Chris Richardson was with economics and he talked about sort of making the scales more progressive, or making superannuation taxes more progressive by taking one's marginal rate and taking fifteen percent off that. So there were all these kind of options that were put forward that are probably worth recanvassing. The reality is that we do have a
problem in our tax system. There is an over reliance on income taxes, and young people pay a very great proportion of those of the taxes, while retirees can live ten, twenty, maybe thirty years in retirement virtually tax free. And that
problem is going to get more acute now. Twenty nineteen was a very nasty experience for labor and I am hopeful that they will or somebody will bring another package to the Australian people, one that will make our tax base more sustainable, it will make things fairer, but that it will be a very very brave party that does that.
Thanks Joe, Thanks Michelle, thank you, Thanks Lisa, thank you for listening to The Finn. I'm Lisa Murray, with Joanna Maser and Michelle Bows reporting today. The Finn is produced by Alex Gau with assistance from Mandy Coolan. Fiona Buffini is head of Premium Content. Alex Gau composed the theme. If you like the show and want to hear more, follow us wherever you get your podcasts, and consider rating
and reviewing us as it helps others find us. For more stories about markets, business and power, subscribe to The Financial Review at AFI dot com slash subscribe, See you next week.
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