A discussion paper from Wilson Asset Management on the proposal by the current Labor government to tax unrealised gains within the superannuation system said this deadweight loss will impact all Australians, including those not currently in the proposed $3 million tax threshold.
“At first glance, such a measure may appear to offer a straightforward path to increased government revenue. However, beneath the surface lies a broken social contract, profound economic complexities, unintended consequences, and multiple potential pitfalls that demand rigorous scrutiny,” the paper said about the controversial super tax.
“The relationship between tax rates and revenue is not linear, and that excessive taxation can be self-defeating, shrinking the base it seeks to tap.”
The discussion paper, Critiquing the proposed taxation on unrealised gains in superannuation, said there were potentially 16.3 million Australians who would be affected by the proposed tax, and although industry super fund balances were generally lower than those held in SMSFs, they would still be captured by the proposed Division 296 tax.
“Whilst superannuation is critical to the Australian government, contributing nearly $50 billion in taxation revenue per annum, the challenge today is a policy vacuum of uncertainty. The current superannuation system, with the myriad of caps, thresholds, and transition-to-retirement strategies, can be overwhelming for any Australian,” it read.
“Although this paper focused on taxation of unrealised gains in superannuation, simplifying the broader rules around superannuation would not only reduce the administrative burden, it would also improve transparency and accessibility. A more streamlined system would empower individuals to make informed decisions about their retirement savings.”
In relation to SMSFs in particular, the paper said the proposed tax would likely see SMSFs abandon the structure or significantly reduce assets to below $3 million by June 2026.
“There is a risk that more people will be pushed onto a government-reliant pension,” it said.
“Treasury modelling already predicts the $59 billion spent on the aged pension today declines as a percentage of GDP in the future due in most part to the expansion of the SMSF sector. The proposed tax on unrealised gains in superannuation will reverse the benefits embedded in Treasury forecasts as reliance on the government pension increases.”
The analysis calculated that the deadweight loss from taxing unrealised gains in super is $94.5 billion in lost economic efficiency from imposing a higher tax on superannuation.
It continued that a tax perceived as eroding accumulated wealth, such as the proposed taxing of unrealised gains in super balances over $3 million, may lead to reduced savings, increased consumption, or a shift towards less taxed investment options.
“Conversely, tax policies seen as promoting wealth accumulation can encourage savings and investment. The proposed policy is the former having a direct impact on reducing savings and encouraging people to alternative tax structures.”
“However, policy objectives are now shifting towards revenue generation. This reduces government credibility and alerted behaviours. This lack of trust leads savers to save less, undermining the system’s goals.”
The paper said taxing unrealised gains disrupts this incentive structure, potentially leading to reduced savings in the overall pool of retirement savings, distorted investment decisions and higher portfolio turnover, increased transaction costs, and potentially lower overall returns for superannuation account holders.
It could also lead to a shift to assets that are less likely to generate substantial unrealised gains, which could subsequently reduce the overall productivity of capital allocation within the Australian economy.
“If the tax significantly discourages investment and economic activity, it could lead to slower economic growth and lower overall capital gains across the economy, including within superannuation,” the paper said.
“This would further diminish the revenue potential from taxing unrealised gains. There are also intergenerational impacts and taxing unrealised gains may force premature liquidation of assets intended for inheritance. This could shift the timing and amount of wealth transferred between generations, reducing inheritances and then increasing dependence on the state for future generations.”
The paper concluded that instead of pursuing “this economically unsound and practically challenging tax”, policymakers should reconsider their approach and explore alternative strategies for revenue generation.
“A comprehensive review of the potential negative consequences, careful consideration of global lessons learned, and meaningful consultation is essential before proceeding with any policy that could undermine the retirement security of Australians and damage the nation’s economic future.”
Speculative at best. The loss to all Super is due to the prevailing headwinds. You cannot categorically attribute this to an unenacted policy.
I definitely don’t believe unrealised gains should be taxed. That is Rubbish Policy.
And the treasury staff that modelled this were obviously in la-la-land when they dreamed up such a fiction.
The long-held suspicion is policy is being determined by people with very little life or practical experience. They graduate, go into government, progress to senior levels and that is that.
Frequently the policies smack of this. Payday super is another classic. All the experience at the forum and all ignored by the ATO, because “they know best”.
The country is paying the price for this ignorance and lack of real consultation with industry professionals.
If only Dutton had not wandered off the reservation into matching or exceeding Labor’s handouts he might have had a chance this election by focussing on the devastating consequences of taxing fictitious (unrealised) capital gains via Div 296. But the Libs ran dead on Div 296 during the election campaign, convincing me they are on unity ticket with the Left and don’t care about the inevitable major damage to the economy and individuals.
Does the proposal provide refunds for unrealised capital losses!!
No, that is another problem with this poorly designed draft legislation
Hear hear!
This government of economic illiterates will ruin Australia.
They know what they are doing but think (probably correctly) that naive younger people swamped in the politics of envy think it only effects other ‘rich people’…but they will end up paying, just like they will for all the ‘handouts’ being given!
Shutting down SMSFs is the main purpose of this legislation, followed by extension to all tax entities & the family home. Almost a fait accompli for this dreadful government.
Fingers crossed common sense will prevail.