The Australian Business Review
Robert Gottliebsen – Business Columnist
1 May 2023
The best person to destroy a badly constructed Treasury case is a former senior Treasury officer. And that’s what has happened to the Treasury plan to double the tax on super balances over $3m.
Maybe it’s a coincidence but the tradition that in complex legislation informed submissions are posted on the Treasury website has been abandoned in the “$3m cap plan”, so the former Treasury official’s comments have not been revealed until now.
The former senior official is Terry O’Brien, who worked for some 40 years in the Commonwealth Treasury, Office of National Assessments, Productivity Commission and at the OECD and World Bank. O’Brien has not only torn the proposal to shreds but shown how the Treasury misquoted previous retirement reports to justify its case and did not take into account how government social services link to super.
But there could be a second reason why Treasury is so anxious to stifle debate on the proposal: too much publicity to the precedents created might threaten the very generous public service pension arrangements that were entered into many years ago and are no longer available to people now joining join the public service.
On February 28 the government announced that from July 1, 2025 there would be doubling of the nominal 30 per cent tax rate on super earnings over an unindexed $3m.
For the first time earnings are defined to include unrealised capital gains, taxed in full as income without the one-third discount usually applied to capital gains on assets held for a minimum qualifying period within a super fund.
O’Brien points out it is unlikely large amounts of revenue will be raised by the measures because those with $3m-plus super balances are already planning where to place their assets to reduce the taxation burden.
Many will increase their investment in the family home. In his Treasury decimation O’Brien says: “The measures are poorly justified by reference to a small number of large super balances, cited without information about how long ago those balances were initiated with large deposits, how much of those balances today are the returns to compound growth over decades, and whether any such large balances could be created today.”
At different times in the past the government of the day has enticed savers to invest large sums in super on the basis of the legislated rules at the time. Those who took up the government invitations probably represent the majority of those holding more than $3m in super. O’Brien points out that when they made the decision they had many other investment alternatives but they had faith in the government assurance, which has been dashed by a doubling of taxation.
Accordingly, he says: “The higher proposed tax is effectively retrospective, denying the targeted savers the legislated taxation treatment that drew their lawful savings into superannuation in the first place.
“Such policy reversals destroy confidence in superannuation saving, and should be avoided by grandfathering. Being unindexed, the $3m trigger damages confidence even among savers not presently near or over the trigger. If the measures proceed, the trigger should be indexed, at the least like the Transfer Balance Cap is indexed. There is now a shambles of different indexation rates for some key savings and retirement income parameters, coupled with failures to index others.
“It is misleading to claim that ‘By 2025-26, the changes are expected to apply to less than 80,000 people, meaning that more than 99.5 per cent of individuals with a superannuation account will be unaffected’.
“Ministers have already acknowledged that significantly higher percentages will be targeted over decades to come as a result of the compound growth of savings balances. It is laughable to claim that not indexing key parameters ‘provides certainty for people when arranging their tax and financial affairs’. “For those who have reached a condition for release of super funds, the measures as outlined in the consultation paper would likely trigger an exodus of savings near or over the $3m cap before 1 July 2025, and thus raise little revenue.”
“This is because accruals taxing of capital gains within super without discount yields effective tax rates above what many would face if capital gains were made outside of super and taxed with 50 per cent ‘discount’ only on realisation, under general tax principles.
“Savers also have the option of moving income caught under the proposed measures into their tax-free principal residence, which is unlikely to yield national economic benefit compared to allocation of super savings through competitive capital markets to finance productive investments.
“Imposing accruals taxation without discount for capital gains in superannuation – the longest-term, most patient saving in the Australian economy – seems driven wholly by the administrative convenience of superannuation funds rather than any consideration of sound tax principles.
“The measures introduce a distorting over-taxation of capital gains which creates an adverse precedent for the rest of the economy. They will embolden advocates of the reduction or elimination of the 50 per cent ‘discount’ in general CGT practice and the taxation of capital gains from the principal residence.
“Having proposed a retrospective, distorting tax policy on high superannuation balances in retail, industry and self-managed super funds, the Discussion Paper then seeks to project ‘commensurate unfairness’ on to defined benefit schemes that are in no way comparable. That idea should be dropped.
“The government’s objective (which we take to be raising more taxation revenue from savers with high superannuation balances) could be better met with less revenue evasion, less damage to tax policy principles and less damage to confidence in superannuation if the measures were withdrawn for extensive redesign. The measures apparently value the line of least resistance from retail and industry superannuation funds over alternative approaches that would preserve sound tax policy.
“The government should take its proposals back to the drawing board. With the measures yet to be put to parliament and not scheduled to take effect until July 1, 2025, there is plenty of time to achieve better outcomes.”
Robert Gottliebsen, Business Columnist