Super Nation is a fortnightly column that examines, explains and analyses key issues in one of Australia's largest, fastest-growing and most important industries: superannuation.
Aspiration, according to one definition, is "a hope, desire, or ambition to achieve a specified goal".
One of Treasurer Jim Chalmer’s goals is to increase tax revenue.
No doubt he is hopeful, desirous and ambitious in this regard.
One of Prime Minister Anthony Albanese’s goals is ensuring his Labor Government is returned at the next election, notwithstanding its landslide victory in May.
Pulling on the reins
Sensing an apparent lack of alignment between these goals, the Prime Minister has reportedly intervened to press pause on a planned increase in the tax rate on the earnings of superannuation accounts of more than A$3 million (US$2 million).
The Treasurer’s office had no comment on the reports when approached by Azzet.
According to media reports that so far have not been confirmed, the decision to rein in the Treasurer goes back to aspiration.
Citing unnamed sources, the Australian Financial Review (AFR) newspaper wrote that discussions about the additional 15% impost had been held in recent weeks as Albanese’s office showed increased interest in the policy, which has been widely criticised because it is not indexed and based on taxing unrealised capital gains.
During the last election campaign, aspiration was cited as important by Albanese, who has been lobbied by former Prime Minister Paul Keating, a strong critic of the tax, which in turn is being championed by the Treasurer, according to the AFR.
The plans emanate from the last term of Government, but Labor lacked the support in the Senate to push through the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 before the original starting date of 1 July 2025.
The bill proposed a 15% tax on super earnings corresponding to the percentage of a person’s total superannuation balance (TSB) that exceeded $3 million.
A worked example included in the explanatory memorandum for the proposed law showed someone whose total superannuation balance increased from $2.8 million on 30 June 2025 to $3.2 million on 30 June 2026 would be liable for $1,875.00 in tax.
“Although the government intends to proceed with the measure in some form, one source said the motivation to consider changes was based on sensitivities about the message that the bill, in its original shape, would send in terms of voter aspiration,” the AFR wrote in this article.
The newspaper subsequently reported that Treasury has confirmed aspects of the controversial proposed tax are under active review because it was concerned the proposed new tax could be hit by a legal challenge.
Good news for some
If true, this news has been welcomed by those speaking on behalf of those most affected by the planned tax, the $1.05 trillion self-managed super fund (SMSF) sector and funds in the $849 billion retail sector.
The balance of the $4.3 trillion super sector, including large industry funds and their peak bodies, declined to comment when approached by Azzet.
Retail funds typically have older members with higher balances than industry funds, which have other policy priorities because few members would be affected.
A major profit-to-member fund, for instance, indicated it had just over 100 members with more than $3 million in their accounts.
A retail fund prepared to speak about it was AMP, which managed $57.8 billion of retirement savings for the holders of 579,500 accounts at 30 June.
AMP Chief Economist and Head of Investment Strategy Shane Oliver said although the Government had the numbers to get the legislation through both houses of parliament, a pause was good news.
“The problem with the tax was not so much about whether those with high balances should get somewhat less tax concessions, it's more about the way the tax was being levied,” he told Azzet.
“It had two basic problems. One is that it was a tax on unrealised earnings and therefore some superannuation members may have had to sell assets to pay the tax. That could hit particular types of investors, farmers, small businesses, and investors in start-ups.
“But it's also a broader issue for the super members on which the tax would be levied (and that was ) because of the fact that it wasn’t indexed.”
Notwithstanding Government forecasts, the new tax would affect only 80,000 people (0.5% of taxpayers), AMP modelling suggested people starting their careers today and working full-time would probably end up paying the tax in their 50s.
In fact, the Treasury calculated the number caught up in the tax net would rise to 1.2 million (10%) over 30 years as salaries and super balances increased.
“So it's that that has a negative impact on aspiration,” said Oliver, adding the Government could introduce indexation after five years, leaving revenue forecasts from the four-year forward estimates period unaffected.
“I think it’s good news that the Government has listened and realised there could be an issue with this and there’s probably a better way to do it.”
Back to drawing board
SMSF Association Chief Executive Officer Peter Burgess said reports of the tax being paused were consistent with information he had received that concern among Labor backbenchers was rising.
“The Government is trying to position the party is as pro-aspirational and pro-innovation which is very difficult when they’ve got a tax like this on the table which is taxing unrealised capital gains,” he said.
Burgess expected the legislation to be amended if reintroduced by indexing the tax after the first four years.
“The Treasurer would be hoping that that will please the backbench and they can do it in a way which doesn't impact their four year forward estimates,” he said.
“We would certainly be disappointed if that's the only change they make because it doesn't address the main problem with this tax and that's the taxation of unrealised capital gains.
“How do you strip out the unrealised capital gain component now? Arguably the SMSF sector could do it but for the large industry funds it's like unscrambling an egg. It's just not possible to do.
“If the issue is that the Government is concerned about taxing unrealised capital gains, and we're hearing they are, the only solution is to return this legislation to the drafters for a major overhaul.
“In other words scrap the design of this tax and start again.”
Time will tell where this tax ends up.
