It may seem hard to argue against making people with high superannuation balances pay more tax, but implementing it is a dog’s breakfast.
At face value, it may seem hard to argue against making people with superannuation balances above $3 million pay more tax.
After all, superannuation receives rather generous tax concessions on contributions and investment earnings.
But on a deeper inspection, the Albanese government’s attempt to double the tax on investment returns on superannuation balances over $3 million is a dog of a policy.
The problem goes back to Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones publicly floating the idea of the tax increase last year, before they or Treasury had any idea how to implement the policy made up on the run.
The accountants at Treasury have been scrambling ever since to try to land this policy.
Eighteen months later, the messy plan faces all sorts of implementation problems.
It is, frankly, bad and unprincipled tax policy, instead of the serious tax reform this country desperately needs.
Key crossbench senators whose vote will be required to pass the tax, such as David Pocock and Jacqui Lambie, have serious concerns about the new tax.
The new so-called division 296 tax of 15 per cent is on top of the existing tax of 15 per cent on super earnings.
People with superannuation balances above $3 million will face a headline rate of up to 30 per cent on their notional earnings each year.
Unrealised capital gains will be taxed, including on illiquid assets such as property and farms.
There is also the very real likelihood of double taxation on capital gains – on an unrealised basis and later when an asset is eventually sold.
Problematically, if the value of an asset falls – such as listed equities, there is no immediate refund for the tax previously paid on the paper gain.
Tax is paid immediately on valuation gains, but losses won’t be refundable and will be carried forward to offset against any future earnings.
Hence, there is an asymmetric tax treatment that favours the Treasury coffers, which could be particularly unfair if the stock market slumps.
Different rules for public servants
Judges and their surviving spouses, public servants and retired politicians on taxpayer-funded defined benefit pensions oppose the tax grab.
Nonetheless, these high-paid public servants during their working lives whose defined benefit entitlement valuation exceeds $3 million will have any additional tax liability deferred to retirement.
It is, in effect, an interest-free loan from the government for public servants, as economist Dimitri Burshtein points out.
This includes long-serving politicians such as Prime Minister Anthony Albanese and Opposition Leader Peter Dutton who are eligible for some of the $295 billion in unfunded superannuation benefits for past and present government employees.
There will be a complex and arbitrary calculation to estimate the value of their defined benefit pension.
Some judges and former high-paid public officials are planning court action to challenge the legality and constitutionality of the retrospective tax changes to their defined benefit pensions.
The real danger is that the only suckers who end up paying the additional 15 per cent tax rate are non-government workers with privately funded, self-managed superannuation funds.
There is a serious risk of tax inequity between private and public workers, particularly when it is politicians and public servants who are designing the tax.
Despite the serious design flaws, the problem for the Labor government is that they are relying on a considerable amount of projected revenue from the new 15 per cent tax rate.
Some $2.3 billion in 2027-28 is baked into Chalmers’ budget, a revenue figure that will rise considerably as more people are dragged into the new tax because the $3 million threshold is not indexed to inflation.
Labor has banked this revenue to pay for the exploding cost of the $44 billion National Disability Insurance Scheme, which the government actuary warns could hit $125 billion in a decade.
Creating a future tax ‘cliff’
The new tax will also create a policy problem for a future government.
Under the existing rules, people who retire with superannuation balances up to $1.9 million can roll that amount into a tax-free pension account.
They pay no tax on earnings for the rest of their lives, even if their balance continues to grow above $1.9 million.
It is an overly generous tax-free scheme. If the government is going to squeeze more tax revenue out of superannuation, there is a much stronger case to force this cohort to pay some tax on their investment earnings.
From the age of 60 in retirement, they currently pay zero tax on super earnings for the rest of their lives, potentially for more than 30 years, an inequity that former Treasury secretary Ken Henry and others have lamented.
In contrast, working people face penal rates on labour income of up to 47 per cent, plus the division 293 super tax of about $4250 for higher earners.
People who retire with super balances above $1.9 million, including those with more than $3 million, already face a tax rate of up to 15 per cent on their investment earnings.
Yet, the tax rate is being doubled on them, instead of extending the existing much simpler 15 per cent on actual earnings to retirees with up to $1.9 million.
Labor clearly feels politically safer imposing an envy tax on wealthier retirees, rather than a holistic and more principled reform that could raise revenue to fund income tax relief for working-age people.
Moreover, herein lies the future policy problem.
The $1.9 million threshold for tax-free super in retirement is indexed to inflation and has risen from $1.6 million since 2017.
With inflation on the rise, the tax-free threshold will hit $3 million by 2040 if annual inflation is 3 per cent a year, intersecting with the new division 296 tax.
This will create a distortionary tax cliff, which is only likely to encourage tax minimisation strategies via negative gearing, income splitting with family members and trusts.
Retirees with super balances up to $3 million will face a zero tax rate and people with super balances above this amount will face a rate of up to 30 per cent.
A uniform headline rate of 15 per cent on all super earnings would be far simpler and fairer.
But instead of doing the hard yards on tax reform, the government and Treasury have gone for a short-term revenue grab and bequeathed a problem to a future government.
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