by Phillip Coorey
Government plans to raise the tax rate on superannuation accounts valued at more than $3 million have suffered a blow, with key Senate crossbenchers opposed to the taxation of unrealised gains.
The government will use its numbers to push the legislation through the House of Representatives this sitting fortnight, and then wants it through the Senate after parliament resumes in August.
But the bill, which breached a pre-election promise by Anthony Albanese to not make any changes to superannuation taxes, faces fresh hurdles with Senate independents David Pocock and Jacqui Lambie opposed to the taxation of unrealised gains.
Neither was prepared to comment on Monday, but spokeswomen for both said their concerns related especially, but not exclusively, to farmers. Fellow independent Tammy Tyrrell was still considering her position.
The legislation would establish a new tax known as a division 296 tax liability. It would double from 15 per cent to 30 per cent the tax rate on the earnings of the portion of super accumulation accounts over $3 million.
Earnings relating to assets below the $3 million threshold will continue to be taxed at 15 per cent, or zero if held in a retirement pension account.
Due to come into force on July 1, 2025, the change is budgeted to raise $2.3 billion in 2027-28, its first full year of receipts collection. Because the $3 million is not indexed, receipts will rise steadily beyond that as the number of affected people increases.
Forced asset sales
But the proposal has been plagued with challenges and unintended consequences. These include how to apply the tax rise to the generous defined benefit pensions paid to retired politicians and public servants who were employed before 2004, including the prime minister.
Retired judges, whose pensions are already taxed, say they will be double taxed in retirement due to a proposal to add their annual pension to the balance of their super when determining the balance above $3 million.
A group of retired judges have already threatened a High Court challenge, which could coincide with the next election campaign.
The application of the tax increase to unrealised gains is the most contentious aspect and experts and independents warn it will force the sale of illiquid assets such as investment properties and family farms held in self-managed super funds, as people will be forced to find large amounts of cash to pay a tax bill just because the value of their asset has increased.
There have also been concerns expressed that it will discourage angel investments in start-ups.
To pass the legislation through the Senate, the government needs the Greens plus at least two crossbenchers. Pauline Hanson’s One Nation is opposed, as is the United Australia Party’s Ralph Babet, meaning the government will need two of senators Pocock, Lambie and Tyrrell.
The Greens are going the other way, insisting the bill is not strong enough. They want the $3 million threshold lowered to $2 million.
Possible compromises being mooted include the use of a deeming rate or a liability account. Under a deemed earnings rate, the proportion of assets above $3 million would be taxed at a rate reflecting on average the income derived, such as 6 per cent for example.
This could mean that in some years people are taxed more on income actually earned and in other years taxed less, but would avoid taxing unrealised gains.
Another approach being flagged would be to create an account that alters each year with fluctuations in the asset prices. Tax is only paid when the assets are sold so an unrealised gain that turns into a loss is not taxed.
A spokeswoman for Assistant Treasurer Stephen Jones said indicated the government was in no mood for compromise, saying the legislation would make the system fairer and more sustainable.
“Our proposed adjustment will apply after the next election and will affect only a handful of people – the 0.5 per cent of people with superannuation balances above $3 million will still receive tax breaks, just slightly less generous. The remaining 99.5 per cent of Australians with superannuation accounts are not affected at all,” she said.
“The Coalition should either support this modest and sensible change or nominate where else they will find billions of dollars in budget improvements.”
But resistance is across the board. The lower house teal independents, whose votes do not count because of the government’s numerical majority, have also opposed the taxation of unrealised gains.
In comments echoed by other teals, North Sydney independent Kylea Tink said the bill introduces an unprecedented treatment of assets in Australia. She said it was reasonable to expect asset classes held by super funds, such as property, to fluctuate over time.
The federal opposition said it would amount to double taxation because capital gains tax would also have to be paid upon the sale of the asset.
“Double taxation is the natural consequence of this dishonest policy. Labor is taxing Australians before they’ve even realised their earnings,” shadow treasurer Angus Taylor has said previously.
Opposition Leader Peter Dutton said if the law was passed he would repeal it if elected. The next election is due by May 2025 at the latest, before the tax increase is due to begin.
Before the last election, Mr Albanese said, “we have no intention of making any super changes”.
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