The Australian Business Review
13 July 2023
James Kirby – Wealth Editor
The government’s plan to double taxes on high value superannuation accounts has been slammed as “flawed” in a scathing report from the Centre for Independent Studies, which suggests what is essentially a “wealth tax” should be shelved.
Under planned legislation, the government is to effectively raise taxes on super to 30 per cent for amounts over $3m. But the method by which the tax will be introduced – focusing on paper gains – is unprecedented and threatens to hit one in ten people over time.
The think tank has entered the super policy debate questioning the justification of the new tax, challenging the design of the tax and undermining much of the political logic for the change.
The think tank has entered the super policy debate questioning the justification of the new tax, challenging the design of the tax and undermining much of the political logic for the change.
As the report points out, even if the government were to lose power in the next election, the changes will be legislated in this term. As a result – similar to the Coalition’s legislated personal tax cuts – it will be very difficult to repeal the scheme in parliament.
At present there is no further tax paid on super earnings up to $1.9m after that tax is applied at 15 per cent. Under the new plan the major change is that an extra 15 per cent tax is applied on amounts over $3m and the new tax is applied on “unrealised” or paper gains.
How paper gains will actually be taxed is open to question since the CIS points out that the Australian Taxation Office does not collect such data.
Though the $3m cap super plan has been criticised widely inside the wealth management industry, this is the first time it has been analysed in the context of national affairs and the wider tax system.
Public surveys show the majority of Australians do not object to higher taxes for large amounts in super but as the report points out, in its current design the tax will eventually hit millions of taxpayers.
The problems of the new plan – variously described as “flawed”, “indefensible” and “illogical” by former Treasury economist Robert Carling – include that the change breaks with Australian tax tradition in being effectively retrospective in that it denies the validity of past contribution rules.
Mr Carling also said taxing unrealised gains was unprecedented in the tax system.
By refusing to index the $3m plan, he argues it undermines the current tax cap of 15 per cent for $1.9m as the ongoing indexation of the lower cap will ultimately reach and overtake the existing cap. The CIS calls this policy “indefensible”.
It also says the new changes worsen bracket creep across the tax system since they will not change regardless of inflation and says there is no plan to grandfather the new changes – saying they do not just apply to future investors but hit existing investors immediately.
The report undermines the argument that tax concessions “cost” $45bn a year and points out that higher income Australians’ share of super tax concessions is less than their share of tax paid.
If the government sticks with the plan, the report suggests a number of key changes that would make taxing high amounts in super more equitable and logical than the current scheme.
It says the new tax cap should be indexed and could be easily linked with the indexation of the current 15 per cent tax on $1.9m by putting in a multiple.
It also suggests the new tax be applied on conventional earnings as they are understood and established across the tax system – this could be done by applying a uniform rate on all earnings with no exemptions such as 15 per cent tax, which would raise more revenue than the current system, the report suggests.
The report also points to capital gains tax adjustments to be introduced into the system. Under present plans, the effective one third CGT discount from capital gains tax in super is ignored.
According to Mr Carling: “Politically, it is easy to take pot shots at people with more than $3m in superannuation, that does not relieve government of the responsibility to craft policies in the broad public interest – and the total balance threshold proposal does not pass that test.
“The new policy now effectively says (past) superannuation rules were wrong and the consequences must now be addressed through higher taxation. This flies in the face of grandfathering in similar situations in the past, and it undermines trust in the superannuation system and government more generally.”
Financial advisers suggest that investors – especially those with significant property assets in super – are already making plans to move money out of super into lower tax alternatives.
Mr Carling suggests: “There is likely to be a shift to trusts, negatively geared real estate and upmarket primary places of residence.”
