The newfound obsession with the government’s $3 million super tax within mainstream media post-election is a testament to just how unexpected the scale of victory was.
All of the arguments taking aim at the proposed change, which would see concessional treatment of large super fund balances wound back, could have been made during the election campaign.
For many, it must have seemed like a waste of time when the bill seemed unable to get through the Senate in the last term. With Labor so widely tipped to either lose the election or be forced into a minority government, there was just no way Division 296 could pass.
As Blake Briggs, chief executive of the FSC, said on a recent episode of The ifa Show, the industry had gotten “ahead of themselves in thinking there was going to be a change of government”.
“Even as the polls tightened, there were some who, I think, didn’t want to believe what they were seeing,” Briggs said.
Yet here we are, with Labor holding the most Lower House seats for a ruling party since John Howard’s first election in 1996.
Combined with the Greens holding the balance of power in the Senate, all of a sudden, taxing unrealised gains is back on the menu.
Why is Labor being so stubborn?
That’s the part of the measure that has been so confusing for many who have observed the Division 296 debate over the last two years: it would already be legislated if Labor were simply willing to remove the taxation of unrealised gains.
The Senate crossbench blocking it wasn’t enough to force a change of tactic, so it feels increasingly likely it will go ahead as is despite the increased public scrutiny.
If you listen to Treasurer Jim Chalmers, all there is to it is the budget bottom line. As he has trotted out consistently, the tax is necessary to fund important programs like strengthening Medicare and providing cost-of-living relief.
However, some of the arguments that critics of the bill have been making have shown an alternative explanation.
Geoff Wilson, chairman of Wilson Asset Management, has prosecuted the case that taxing unrealised capital gains would pull money out of the super system.
“Our own detailed study showed that $155 billion would come out of super and go into the housing market,” Wilson told SMSF Adviser.
“The only reason most people object to this legislation is because of the taxing of unrealised capital gains, not because of the rise from 15 per cent to 30 per cent tax over $3 million. It’s about the taxing of profit that you may never make.”
The panic selling is reportedly already under way, with Meg Heffron, managing director of Heffron, noting she is fielding “tons of questions” over the proposed legislation.
“Definitely the tone is ‘I’m going to take my money out’,” she said.
“While that won’t be the right choice for everyone, I think the idea of being taxed on gains that haven’t been realised and not getting a refund on losses is just making people say, ‘Well, at least if I take my money out I know I will only pay tax on money I actually have.’ In some cases they are ready to put up with a little more tax overall to achieve that.”
While the 30 per cent rate applied to earnings on the portion of a super balance that is above $3 million would still represent a lower rate than other investment structures, being slugged on gains before they are realised is the swing factor in moving money out.
And that’s the point.
Division 296 has been closely tied with the objective of super since they were both first announced, with the latter passing parliament in November.
The law now defines the objective of super as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
It’s clear that what the Treasurer actually wants is to disincentivise large super balances that are no longer used for this purpose.
His former boss Wayne Swan all but spelt this out.
Speaking on Nine’s Today Show last week, the former treasurer said the government “shouldn’t be giving concessions to people who have many millions of dollars squirrelled away well before retirement to engage in other investment activities”.
“They should be paying the appropriate tax on those funds that is normal for any business activity,” Swan said.
Creating a system in which balances above $3 million are taxed at 30 per cent simply wouldn’t be enough of a barrier to leaving the funds in super. Throw in an unprecedented tax on unrealised gains, however, and just the prospect of the legislation is moving money out of super.
Foundational tenets of the tax system be damned.
Muddying the waters
Earlier this month, Diana Mousina, deputy chief economist of AMP, modelled how an unchanged implementation of Division 296 would impact an average 22-year-old earning an average wage for the rest of their working life.
There are a range of assumptions within the modelling – 3 per cent wage growth, no change to the super guarantee rate, full-time earnings – but by the time that 22-year-old hits retirement, they would be above the $3 million mark and would be subject to the tax.
It’s an interesting demonstration of how a lack of indexation has the potential to expand the tax well beyond the 0.5 per cent of Australians that Chalmers rolls out at every opportunity. It’s also been highly effective, cited in more mainstream articles and think pieces than one can count.
The problem is that there’s essentially no chance this happens. The super guarantee was only introduced in 1992, and the number of changes over the three decades since would render any projections utterly useless. There’s simply no telling how different the system will look in 2070, but you can guarantee if Division 296 is still in place, the cap won’t be $3 million.
Indexation of some kind would invariably be a positive measure – it’s antithetical to the aims of the bill to reduce the concessions for the average Australian.
But the Treasurer also isn’t wrong that there is nothing stopping a future government from increasing the cap.
Maybe it would make more sense to include a provision for the level to be reviewed at set intervals – every five years, for example – but the idea that it will apply to the average super member in 40 years simply muddies the water and provides an easy target for the government to shoot down and direct attention away from unrealised gains.
This is the insidious part of the proposal that needs to be fought, not shadows on the wall like the prime minister being exempt.
“The actuaries are very smart. They can do all sorts of computations and analysis about the future. But there’s no way, no easy way to determine exactly how much tax should be paid, and so that’s why I think it’s very important as a fairness measure that the Treasurer say how much he thinks the prime minister should be paying if this is going to be applied,” Liberal senator Andrew Bragg said last week.
While Bragg is correct that the exact calculation for the total super balance of a defined benefit pension is far from straightforward, peddling this line simply gave Chalmers an easy shot at rebuttal, saying this is “one of the reasons why nobody takes that guy seriously”.
“There is provision for defined benefit schemes, there are calculations, those calculations are very similar to the ones that the Liberals and Nationals put in when they changed superannuation in the last term of the government, and that will apply to the prime minister, it will apply to any politician who’s got the equivalent of more than $3 million in super,” he said.
Now the acting PM is taking aim, with Richard Marles labelling the pushback a “smear campaign”.
“We’ve seen a smear campaign in relation to the superannuation arrangements, arrangements which were announced two years ago,” Marles said.
“There’s nothing new in relation to this. And I would just further add that we’re talking about very modest changes, which apply to about 0.5 per cent of superannuation where they will still receive a tax break, they just won’t receive the extent of the tax break that they did before.”
The critics may think the broader arguments are highlighting how many issues will come from taxing unrealised gains, but all they are doing is providing the government with more chances to deflect from the core issue.
If the law passes in the current state – with greens blessings – three things will happen
1) Over 50,000 members will take money out
2) The remainder 30,000 will wait for a year and then half will take money out
3) Advisor will have strategies on managing regulation 5.03, so that $3M is never breached again
But not many will pay this tax. Because those who have the intelligence of collecting over $3M also have the intelligence to keep it.
But labor’s secret agenda was never to tax rich super members, it was to get money out of super so that income could be taxed outside.
A simpler super marginal rate system within super would have worked better, such as
0 – $2M Zero Tax for those in Pension
$2M to $3M 15% Tax on Income
$3M + 30% Tax on Income – this equates to about $200K income outside superannuation
Now treasury will get nothing in super and but will get 30% outside – till these smart super members decide to another spin or maybe even a dusra…… game is not over, not yet!
In 2006 Peter Costello, as Treasurer, announced a one-off additional non-concessional contribution allowance of $1 million during the 2007 tax year. This was actively encouraged by the Government from the sale of the family home or a business and would now result in a balance of $3.8m with average compound growth of 7% in Super fund returns over the past 20 years.
This allowance was in addition to the bring-forward arrangements for 3 years of non-concessional contributions of $150,000 in the 2008 financial year. So it was possible to contribute $1.45 million over the June/July 2007 period. This would now result in a balance of $5.3 million.
Those who sacrificed the family home in 2007 to do this in order to retire would now have $3 – $5 million in their account at the average rate of increase in funds over the period. This is not an excessive amount and those of us did this are now being penalised and labelled as “wealthy”. It is simply not true, and we deserve some compensation for having followed the Government incentive, and now being required to pay a penalty. I would love to still own my previous home, it would be worth far more than the super balance.
Wayne Swan claims they are targeting wealthy people with “tens of millions” in Super, so why set the limit at $3 million? If the limit was $5 million, indexed and only on actual income not unrealised gains, it might make some sense.
Assuming I am retired, I could transfer up to $3.5M super into my own name and invest in fully franked shares. Assuming a 4% average yield = $140,000 dividends and $60,000 imputation credit. Tax on $200,000 = $59,774 including 2% MC levy and I get a $226 tax refund! I only pay tax if I sell shares and realise a capital gain.
Can somebody please chew holes in this strategy!
TAXING UNREALIZED CAPITAL GAINS AS PER LABOR POLICY.
HO-HUM !
Peter Brugess, SMSFA, is an optimist, and good for him, as he should be in his comments concerning negotiations with the government and the Greens.
However, I doubt the government really does expect to raise anywhere near the estimated capital gains tax on super from unrealized capital gains !
Why, you ask ?
They know or should know, that people who followed the Law concerning super and contributed and have a balance exceeding $3m are not going to just lay down and get smashed with unrealized capital gains tax. They are just not that stupid.
The know that these people will say, enough is enough, let’s just remove it from the super fund after starting a pension thereby getting the money out tax free, where possibly of course.
However, I believe this is precisely what the Labor Governement wants. Each way they “gotcha”. So, it is back to the old days !!
Get it out of super and more than likely into a descretionary trust with corporate beneficiaries. Then it will be taxable anyway.
However, you will get the CGT 50% discount and negative gearing thereby making the difference in taxation negligible. At least in the accumulation stage. Smart minds will be all over this like a rash on a babies bottom !!
If you are a self funded retiree, you are totally screwed and you are back into the taxation system: returns, accountants, the full catastrophy.
There have been many senerios and modellings of which is better for wealth accumulation: inside super or outside super. These are usually done by “super” administrators or “pro-super” pundits, even actuaries and the conclusion is that super usually beats outside super in net investment return, but not by a massive amount.
There will no doubt be many more of these modellings by “promoters” of both persusasions. This wil be facinating to watch. and remember:
“I pay whatever tax I am required to pay under the law, not a penny more, not a penny less… if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
Kerry Packer
This will now change super to some degree. Governments change Rules,Taxation Laws, to move, incentivise, the public into the area they desire at a particular time. The public respond, but then they respond to well and the government of a different persusion or time reverses those incentives. Just like what is happening right NOW!
Bad luck for the older citizens who followed the Law. You are screwed when you are least able to respond: ” life’s a bitch and then you die”,as the saying goes.
This is a perfect example. However, taxing UNREALIZED capital gains is an entirely new ball game.
This biggest concern is whether taxing unrealized caiptals gains in super is a precuror to it being introduced elsewhere. Not a good omen !
When you have a big spending government, you will inevitably get a BIG taxing government to pay for all the “free” stuff. Obviously Labor does not believe it will dampen “aspirational” business entrepreneurship.
This is somewhat true. There are many 25 to 45 year olds who no longer see much benefit in “busting a gut” to get ahead when you can just get a government job at a very reasonable income( eg. $100,000 to $130,000 age 33 ) and just maximize the perks: WFH; Flex-Leave; OT; maturnity/paternity leave; free childcare etc,etc. I have many in this age bracket with this precise attitude.
Let the others “bust-a-gut” and pay the tax. Let’s just “USE” or “milk” the system tp maximize “my” benefit. Smart strategy !!
If this tax does become Law, the “targets” must conclude, “well it was good as long as it lasted and we accumulated much, now it is back to the old ways”; with a corporate tax rate for small business at 25% plus the 50% CGT exemption plus negative gearing plus the use of Trusts, there are plenty of tools for the switched on Tax Advisors and Accountants.
Deja vu all over again !! ???
Craig Offenhauser
My estimation is that the majority of retirees will pay lower tax by removing the excess over $3mill from their super. An individual does not exceed an average tax rate if 15% until taxable income is over $55,000 and does not exceed 30% average until taxable income is over $220,000. Indications are the the majority of the 0.5% have a balance no more than $5mill. If my estimate is correct most of them will pay lower tax with the investment not in super and will get a bigger capital gains tax discount.
Thank you for that David. I wil take Note.
Haha you journos are giving Chalmers and his cross-eyed union Labor mates way too much credit! The unrealised CGT aspect of this was an unintended by-product of the manner in which the tax was (lazily) designed! They had no idea what they were doing; it took (smarter) people from the financial services industry to work this out and feed it back.
Now they have been educated, the nuggets who have been re-elected via an anti-Dutton protest vote feel they have a “mandate” to get the “rich” to “pay their fair share”. Please. 40% of Australians pay no tax at all – the “rich” pay $millions. Who should be paying their fair share? I’d love to have a quick look through the tax returns of this 40% of people who bleat about “fair share” taxation – I’d bet most of them get a refund.
It’s alright – I’ll keep working to pay your way for you. At least I understand the difference between a tax return and a tax refund…
The tax is fair, the non indexation and un-realised liability is not.
Just the labor party looking after the union controlled funds.
Alignment of the regulator and the regulated, can’t see a conflict here….can you?
The flaw in the argument is not the use of superannuation funds over $3 million as a tax avoidance strategy, but the calculation of unrealised capital gains as the basis of the tax.
Very few people would have a problem with a higher marginal tax rate for superannuation funds over $3 million, but the concept of taxing unrealised gains is a bridge too far. Labor should understand this is a tremendous breach of principle which if invoked will be abused for money hungry politicians in the future.
yes, taxation of unrealised gains and the uncertainty it introduces is the core problem and will have the desired effect of reducing investment amounts in super. It will also haunt Labor.
I am willing to pay greater rates outside of super with cgt delayed until legally due, but the least tax-troubled area will be housing (e.g. Albo’s beachside purchase, so long as it is in a non-labor governed state of course) And owner occupied property remains cgt free. For now…
This looks like another fine mess you’re geting us into, Stanley.
Stubbornness (pig-headedness) does not make this OK.
Bottom line budget does not make this OK.
It is wrong on so many levels, which is why it seems akin to communism to many commentaries on this in the community.
They are changing the law to make it OK to steal people’s life savings. That is not OK.
They should come up with a better plan – pure and simple. They were advised to do that over 2 years ago and here we are, still where we started. It doesn’t matter how they paint this – it is still wrong on so many levels and it is still grossly unfair.
Calling it a “smear campaign” to deflect the public view is not OK – but typical. You refuse to listen and we refuse to be silenced. That is not a smear campaign, that is exercising our rights in a free country against an immoral concept.
Yes Marles, you are correct in this “there is nothing new in relation to this”. We are where we started with all the spins and lies only coming from your side.
How about listening and having a sensible debate about this, which is the only thing that we have been asking from the beginning?
There are better ways.