Think tank slams government’s $3m super tax proposal

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.

If legislated, the report said, even if there is a change of government, the changes would stay in force for at least one term of a new government and would be hard to repeal.

The CIS report argues that the taxing of unrealised gains is not only inequitable, but that the ATO does not collect this kind of data, so it is open to interpretation and misuse.

The report is the first major opposition to the proposal from an organisation outside of the finance sector, and its author, Robert Carling, a former economist for Treasury, said it is flawed, indefensible and illogical.

“The most recent evidence cited in support of a reduction and restructuring of concessions is the Treasury’s Tax Expenditures and Insights Statement (TES) of February 2023,” Mr Carling stated.

“This is a longstanding annual publication but the most recent version has changed the title (from ‘Tax Benchmarks and Variations’).

“This seemingly innocuous change reflects an intention to convey the idea that revenue foregone by not taxing everything at full and regular marginal rates is as much an ‘expenditure’ as actual government expenditure.

“The ‘insights’ part of the title reflects an intention to make the document more analytical and more focused on distributional issues – who benefits from tax ‘expenditures’?

“It is no coincidence that the government’s announcement of the new TBT measure came the day after the release of TES.”

Mr Carling said the proposed tax will become even more detrimental the longer the TBT remains unindexed and suggests the government may well devise other measures to curb super tax concessions after the next election.

“The equity of superannuation taxation can only be properly assessed taking a broad view of taxes and transfers that includes the share of taxation actually paid by the top 10 per cent or 20 per cent of the income distribution, the distribution of the means-tested age pension and related benefits, and the distribution of taxes and benefits over lifetimes,” he said.

He said superannuation is only one part of the nation’s tax/transfer system, and “equity and progressivity should only be judged on the results of that system in its totality”.

“For all these reasons, the new tax should be shelved,” he stated.

“It is piecemeal policy change with no connection to broader tax reform. Superannuation tax should not be left out of tax reform; but the time to reconsider it is in the context of broader tax reform, if and when that occurs.”

If the proposal is to go ahead, Mr Carling said it needs a major redesign to remove some of its more “draconian” features and said the proposed calculation of earnings makes this fundamentally a wealth tax.

“There are no other comparable taxes in Australia apart from the states’ land taxes,” he said.

There are more sensible ways to raise revenue from superannuation, he said including taking up the 2010 Henry Tax Review’s recommendation.

This recommended to apply the tax on super fund earnings at a uniform rate on all earnings, with no exemption for earnings on balances supporting pensions.

“This could be done at 15 per cent or a lower rate such as 10 per cent that may still raise more revenue than the current system,” he said.

“Most importantly, it would be a major simplification, sweeping away all the complexity associated with the transfer balance cap, not to mention avoiding the additional complexity that the TBT will introduce.

Another option would be to align the threshold (currently $250,000) for the Division 293 additional tax on contributions with the threshold for the top marginal rate of personal income tax, which will be $200,000 from 1 July 2024 under the Stage 3 income tax cuts.

This means that the tax concession on contributions would be a flat 17 per cent (including Medicare levy) at all taxable income levels above $45,000.

The proposal would subsequently also worsen bracket creep across the tax system, Mr Carling notes, as they will not change regardless of inflation.

As well, there is no plan to grandfather the new changes so they will also apply to future investors but hit existing investors immediately.

“Politically, it is easy to take pot shots at people with more than $3 million 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,” he said.

“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.”