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.
Jim Chalmers may be channelling his inner Tom Petty as he responds to the growing chorus of opposition to the Australian Government’s plans to increase taxes on high superannuation balances.
“I won’t back down” (as The Heartbreakers’ leader sang in 1989) seems to be the essence of the Treasurer’s response to calls for the tax to be indexed or scrapped in its current form.
Criticism continues even before a new bill has been introduced to the new Parliament where Labor commands a substantial majority following its comprehensive election victory on 3 May where the conservative party lost the support of the electorate.
Emboldened by this win, the ruling Labor Party has the numbers in both houses of parliament in Canberra to force through the proposed Bill.
Treasurer Jim Chalmers could not convince enough upper house members to support the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 before the last poll, which lapsed when Prime Minister Anthony Albanese sought another mandate from the people.
But for the changes to become law now Labor mainly needs only the support of the left-leaning Greens, who wanted the threshold lowered from $3 million (US$1.92 million) to $2 million despite their parliamentary numbers being decimated in the last election.
Labor and the Greens have 38 of the 76 seats in the Australian upper house, which means they need only one more vote to pass legislation, possibly from an independent.
The prospect that the tax proposal will become law has encouraged more voices to join the outcry against the Government’s major new second term revenue measure, which is forecast to raise $2.3 billion in 2027/28, the first full year of collection.
Critics join the queue
Even those who would ordinarily be considered reluctant to line up on the other side of the people who make the tax laws have expressed dissatisfaction with the fact that the $3 million threshold at which the higher rate applies will not be indexed to inflation.
Among them are the union-created industry super funds that usually align with Labor when it comes to Australia’s retirement savings system.
They include the three largest super (pension) funds in the nation: AustralianSuper, Australian Retirement Trust and Aware Super which between them manage more than $853 billion for 7.19 million members.
Add to that criticism from former Prime Minister Paul Keating, prominent former union leader Bill Kelty, former Reserve Bank of Australia Governor Philip Lowe, former Treasury Secretary Ken Henry, Wesfarmers CEO Rob Scott, self-managed super funds (SMSFs), financial advisers, tax experts, venture capitalists behind start-up companies, and some of the so-called Teal independents in the Federal Parliament.
Keating, one of the architects of the $4.1 trillion (US$2.6 trillion) system that requires employers to pay 11.5% of an employee’s wages and salary into super, has reportedly described the Government’s refusal to index the tax threshold to inflation as “unconscionable”.
Kelty is said to be strongly against the absence of indexation and taxation of unrealised capital gains.
“There are fundamental concerns with taxing unrealised gains, that does create a dangerous precedent,” Scott was reported as saying.
Almost to a person the critics agree people with $3 million in super should pay more tax, but they do not like the way the Government plans to achieve it, with some suggesting ending super pension tax exempt status by adding a 15% tax.
The harshest criticism has been for plans to tax unrealised profits as part of the calculation of how much fund tax that Australians, mostly those with SMSFs, will pay on the earnings on the balance of their accounts above $3 million.
The Government’s response is that only 80,000 people (0.5% of taxpayers) are affected and then only wealthy people who have been using the super system to minimise tax, which is not illegal.
The late media billionaire Kerry Packer famously told a 1991 parliamentary inquiry into tax avoidance: “.. if anybody in this country doesn't minimise 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."
But Treasury has 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.
It is important to understand how the tax liability will be calculated because the devil is in the detail of the proposed new Division 296 of the Australian Income Tax Assessment Act 1997.
How it will work
The bill proposes a 15% tax on super earnings corresponding to the percentage of a person’s total superannuation balance (TSB) that exceeds $3 million.
The earnings are calculated based on the difference between the TSB at the end of the income and at the start, with adjustments for withdrawals and contributions.
The Government provided number of worked examples in the Explanatory Memorandum for the lapsed bill, including one for the fictitious account holder ‘MG’.
MG’s has a TSB of $2.8 million on 30 June 2025 and $3.2 million on 30 June 2026 and made no contributions or withdrawals to his fund in 2025-26.
The calculation will be based on $3 million to ensure it captures only earnings over this balance.
MG’s super earnings are calculated on $200,000 ($3.2 million - $3.0 million).
The percentage used for the tax calculation is 6.25% ($200,000 as a percentage of $3.2 million).
MG’s taxable earnings are $12,500 (6.25% x $200,000).
His tax liability will be $1,875.00 ($12,500 x 15%).
Still generous
This was the point made to Azzet by industry super pioneer Garry Weaven, who considers criticism based on a misunderstanding of how the tax, which he admitted will apply to him, will work.
“The fundamental issue is just how minor relatively the actual effect is when you understand it's only applied to the proportion of the holding that is above $3 million,” he said.
“So the… average tax rate for (these people), it’s still going to be highly concessional.”
