As Labor is negotiating the final details of the new “super tax” with the Greens to ensure it passes the Senate, the shrill calls about the unfairness of it continue. Michael Pascoe sets the record straight.
Funny how a committed values-free media campaign can warp perspective. For example, there are simple souls, or useful idiots, who’ve been led to believe the Federal Government wants to double the tax on superannuation earnings for 80,000 Australians, thereby ending capitalism as we know it and enslaving our grandchildren.
Never let facts get in the way of a good beat up.
A more accurate assessment is that the government wants to halve an excessively generous and quite unnecessary tax break enjoyed by a relatively few people, and even then, in nearly all cases, only on their somewhat marginal income.
Most of the people affected probably wouldn’t notice the difference if it wasn’t for the very rich and their political, media and accounting functionaries screaming about it.
Yes, there are a few handfuls of individuals whose well-paid financial advisers have successfully exploited bad policy to produce superannuation funds measured in the scores of millions. Such funds do not fit the legislated reason for subsidising superannuation, but they exist, and the government intends to keep subsidising them.
That’s a key bit that’s missed with the Tim Wilson-style hysteria over the changes: the main impact of the proposed reforms will effectively be to reduce the superannuation tax break enjoyed by the rich, currently 30%, to the same level as ordinary punters, 15%.
Overlooked in the whole process are the low-paid workers who actually get no tax break at all for money going into their super.
The LISTO (low-income super tax offset payment) cuts out at $37,000 a year. Thus, in round numbers, a worker with a taxable income of between $37K and $45,000 this year will have their super taxed at 15%, just 1% less than their 16% marginal tax rate.
That is crook, obviously crook, unlike the main super tweak the government is pursuing.
The rich get richer anyway
Contrary to the tenor of our national newspapers, a few paid-piper “think tanks” and sympathetic politicians, rich people as a class do not need government-provided incentives to become richer. It’s what they do, happily paying professionals to assist them.
Also, contrary to what the above-mentioned group claims, trickle-down economics demonstrably does not work. It’s been tried. It’s failed.
But it’s been a successful story to spin in the wealthy’s pursuit of becoming wealthier.
To recap, in the unlikely event that you’ve missed it, under Labor’s proposal, if your super fund holds less than $3m while it’s accumulating, you would theoretically pay 15% tax on its earnings, as you do now. If you have more than $3m in the fund, you would theoretically pay 30% on earnings of the proportion above $3 million.
(I write “theoretically” because as one of the godfathers of industry super, Garry Weaven, has explained ($), the effective tax rate is “typically much lower at, say, 5 to 7.5% due to factors such as the capital gains tax discount and dividend imputation credits”. The proposed 30% rate could be similarly reduced.)
The average growth fund has averaged 7.2% after tax over the past decade, but let’s be very generous and ignore the tax paid in this example. So a $3m super fund at present would be expected to be netting $216,000 a year.
In the real world, outside the massive super tax haven, an income of $216,000 would be copping a 45% marginal tax rate.
Thus, introducing a 30% rate on the proportionate earnings above $3m merely means super for the rich receive the same 15% tax break most of us get, and double what many low-paid folk receive.
Sounds very generous to me.
And it is more generous than it looks. Once a super fund is in pension phase, $2m of it is outrageously tax-free anyway. And a couple, of course, effectively have $6m working for them before being affected.
Indexation and CGT
There are two other aspects of the reform that attract attention: that the $3m threshold is not indexed, and that unrealised capital gains are taxed.
I think the latter is wrong in principle. The ends are desirable, as Greg Jericho has skilfully and persuasively argued in The Guardian, but I still think it is wrong.
The desired ends should be reached by more principled means. The APRA-regulated multi-member super funds that already pay such tax are different creatures from the SMSFs that these reforms are about, and, no, your council rates and land tax are not the same animals either.
If the Greens want to play the wise adult in the room, they could oppose that aspect of the legislation while approving the rest.
As for indexing, it has been well answered as something that is up for adjustment when it is required. This is a gentle introduction of minor improvement at the $3m level. Like other taxes, it can sit there until it is no longer comfortable.
And as for those handfuls who do have a farm or large commercial building making up the bulk of their super fund, it is likely they are actually in breach of their requirements. To quote Weaven again:
“So-called self-managed super funds are also, in theory, required to hold suitably diversified portfolios and include sufficient liquidity to meet their requirements, and there are specific prohibitions against investments in related-party assets. In practice, however, the absence of a high level of surveillance exercised by APRA over regulated super funds means it is quite likely that some of the complaints about the prospective earnings tax are being generated by SMSFs that, for one reason or another, do not meet required standards.”
I have an SMSF. I wouldn’t pass the required tests if it mainly consisted of a family farm.
But, if they were honest for a moment, the people screaming about the reforms are not concerned with superannuation. They are interested in intergenerational wealth preservation. There are many ways to do that. They don’t need a 30% tax subsidy to do it; 15% is just fine. In reality, no tax subsidy at all is required. We’re the country that chooses not to have a wealth or inheritance tax anyway.
Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.