The unintended consequences of the legislation to tax unrealised gains in superannuation, which has already passed the House of Representatives, will have a devastating impact on all Australians.
With superannuation assets now reaching $4.2 trillion, our system is the world’s fourth-largest and one of the fastest-growing retirement savings pools. However, I have concerns about the illogical and unfair taxing of unrealised gains proposed by the Labor government. This policy, to be reintroduced to the Senate if Labor wins the federal election on Saturday, is fundamentally flawed, economically unsound, and brings with it unintended consequences that threaten to undermine the foundation of our retirement savings framework.
Earlier this week, we published a discussion paper, Critiquing the Proposed Taxation on Unrealised Gains in Superannuation, after overwhelming concern about Labor’s proposed policy from our investor base. Our concern is not the increase in the tax rate to 30 per cent on balances above $3 million, it is the significant negative impact of this tax on the $4.2 trillion in superannuation assets in Australia.
At first glance, the allure of increased government revenue can be enticing. Yet, a closer examination reveals that this proposal disregards fundamental economic principles, overlooks potential pitfalls, and introduces complexities that could destabilise the economy and erode the retirement security of Australians. This new tax warrants rigorous scrutiny and a more comprehensive reassessment before it inflicts lasting damage on our nation’s financial well-being.
The concept of deadweight loss of taxation is crucial to understanding the damaging consequences of this proposed tax. Our detailed estimates contained in the paper, grounded in established economic theory, reveal a staggering $94.5 billion per annum deadweight loss could be imposed on the Australian economy if this tax is implemented. This represents a reduction in overall societal welfare.
Moreover, the Laffer curve, a cornerstone of supply-side economics, reminds us that higher tax rates do not automatically equate to higher government revenue. In fact, our calculations, specifically applied to the context of superannuation, indicate that any tax rate exceeding $1.00 per $100 invested would disincentivise investment and ultimately shrink the tax base, leading to diminished returns for the government. This highlights the counterproductive nature of the proposed tax.
“The $3 million cap on superannuation balances … lacks any form of indexation, creating a significant intergenerational inequity.”
Taxing unrealised gains could also have significant repercussions for the Australian housing market. The family home is exempt from age pension asset testing, and thus, this policy could incentivise retirees to shift assets into their primary residence or to make tax-free distributions to children and grandchildren to purchase a primary residence to minimise tax liabilities. In our paper, we estimate that $155 billion could shift out of superannuation into primary residences. This demand for higher-value properties and first homes will drive up prices, further exacerbating housing affordability challenges for younger generations.
Beyond these core economic principles, the proposed tax also fails to adequately consider the potent influence of wealth effects. Individuals and markets are not passive entities; they actively respond to changes in their perceived economic landscape. This tax, perceived as eroding accumulated wealth, could trigger a range of adverse behavioural responses, including reduced savings, increased consumption, and a significant shift towards less taxed investment options, further complicating the policy’s intended objectives and undermining its effectiveness.
“This tax poses a direct threat to the growth and innovation of Australian businesses such as Canva, which required multiple funding rounds to achieve their growth potential.”
To fully grasp the potential dangers of this policy, it is essential to examine global examples of analogous tax policies. These real-world experiences that we document in our discussion paper serve as cautionary tales, highlighting the potential for unforeseen and often detrimental secondary impacts. From wealth taxes implemented in countries like Spain and Sweden, to adjustments in capital gains tax rates in the UK and unrealised gains taxation in Norway, the lessons are clear: these policies can lead to liquidity crises, capital flight and economic stagnation.
In addition to these fundamental flaws, the proposed policy is poorly constructed and riddled with oversights. The $3 million cap on superannuation balances, for instance, lacks any form of indexation, creating a significant intergenerational inequity. Without indexation to account for inflation, a growing number of Australians, including many young people just starting their careers, will be unfairly caught in the tax net. This policy also demonstrates a lack of understanding of the practical complexities of calculating realised gains per member, particularly within large industry and union funds, which often lack the granular data necessary for such calculations.
Furthermore, this tax poses a direct threat to the growth and innovation of Australian businesses. Successful Australian start-ups, such as Canva, which required multiple funding rounds to achieve their growth potential, would be particularly vulnerable. The imposition of a tax on unrealised gains at each funding round, based on hypothetical valuations that they could not fund, could stifle innovation, force premature closure or even drive these promising businesses offshore.
Beyond the economic and policy shortcomings, the proposed tax also presents significant administrative and implementation problems. Accurately valuing unrealised gains annually across diverse asset classes, including shares, property, unlisted assets, and derivatives, is an incredibly complex and costly exercise. This complexity opens the door to disputes, increases administrative burdens, and adds to compliance costs for both superannuation funds and individual account holders.
There are viable and more sensible alternatives to this damaging tax. We must carefully consider the practical challenges, the lessons learned from global examples, and the fundamental economic principles at stake.
Therefore, I strongly urge policymakers to reconsider this ill-conceived tax on unrealised gains, given the magnitude of unintended consequences and engage in a more thoughtful and comprehensive dialogue about the future of Australia’s superannuation system.
