Despite an avalanche of objections to the Federal Government’s new super tax reform – dubbed Division 296 - Treasurer Jim Chalmers remains unwilling to budge on proposed tax changes that take effect 1 July.
Unless you’ve been living in a cave, you’ll know that Division 296 effectively doubles the tax on the earnings of superannuation balances over $3 million.
Initially shelved late in 2024, this new super tax is expected to help democratise the super tax playing-field, which currently favours those with higher balances over those at the other end of the scale.
While the super fund system was set up in the early 1990s as a tax-effective vehicle aimed at maximising retirement income, the Gratton Institute has repeatedly argued that tax concessions [still available through super] disproportionately favour the top 20% of income earners.
Fuelling Gratton’s grievances with the tax system on super are revelations that combined concessions on contributions and earnings – worth around $50 billion annually – cost more than the age pension itself.
Given that the typical fund member is a net saver in retirement – meaning their balances will continue to grow for decades after retirement – Gratton also argues that super is morphing from a retirement fund to a taxpayer subsidised inheritance scheme.
These revelations may explain why the Albanese government is going after what it may see as the super fund sector’s lowest tax fruits.
But there are growing concerns that there’s further tax pruning ahead, and well beyond the purview of super.
Meanwhile, given that Division 296 only affects super earnings above $3 million, it’s residential property held inside a self-managed super fund that appears to be subject to a not so ‘tender trap’.
Given that property held with an SMSF can’t be disposed of easily like shares, it appears to be in the eye of this new controversial tax.
Unsurprisingly, in light of Division 296, financial advisers have encouraged their well-heeled clients to exit their SMSFs and move into family trusts where tax treatment should theoretically be better.
Admittedly, property investors are no strangers to unrealised gains imposed via a state-based land tax.
However, there’s growing speculation that Division 296 is a precursor to more sinister tax reforms under review by the Albanese government.
While former Australian governments have from time to time toyed with reforms to tax concessions, the electorate has always been quick to remind them that this holy grail is not to be tampered with if they want to remain in office.
With that in mind, Jim Chalmers kicked off the latest discussion on tax reform by taking inheritance tax - and the biggest ‘persona non grata’ of them all - the family home, off the table.
However, with those two protected species off radar from a government tax review, there’s growing speculation that Chalmers and Co will turn their attention to the generous 50% capital gains tax (CGT) on assets held for more than one year.
Given that the government wouldn’t want to be seen favouring [or disadvantaging] one asset class over another, both property and shares are likely to be in the eye of any pending tax reform.
What exactly the government has in mind remains to be seen, and history suggests these reviews take so long - a government is invariably out of office before they’re acted upon.
Meantime, while Louis Christopher of research house SQM hasn’t ruled out the prospect of the government taking a scalpel to negative gearing, he agrees that CGT reform appears more likely.
The great unknown is what this would do to the investment market.
Should CGT cuts proceed, many investors may see investing back into super as the lesser of two [or more] evils from a tax perspective.
However, due to lack of proper indexation, there's growing concern that Labor’s new super tax will include a lot funds within its catchment than initially intended.
While it’s unclear how property investor markets would respond to reduced CGT, would-be investors only have to look to the state of Victoria for clues.
At face value, no fewer than 10 state-based taxes directly affecting property owners in Victoria have severely compromised what was an otherwise vibrant property market.
Clearly, Chalmers will not make any friends with the electorate by trying to sell a wind-back in the 50% discount on capital gains and by cutting corporate tax rates by trading off franking credits.
Like other tax reviews that have gone before it, notably the Ken Henry reform proposals, Chalmers' pending tax review may simply end up gathering dust in some Canberra lock-up.
