The modest adjustment we announce today means 99.5% of Australians with superannuation accounts will continue to receive the same generous tax breaks, and the 0.5% of people with balances above $3 million will receive less generous tax breaks.

The Hon Dr Jim Chalmers MP

Tuesday, 28 February 2023

Treasurer Jim Chalmers on Tuesday announced changes to the super system.

It was announced that earnings would be taxed at 30% on member balances above $3 million. On the face of it, this appeared better than was envisaged – taxing those earnings at the top marginal tax rate of 45% (excluding the Medicare levy); or a hard cap, forcing members to withdraw their balances above a threshold. And, as it will only apparently affect 80,000 very wealth Australians, it was hard to argue against the change.

It is now apparent, however, that all is not as it appears. The tax does not apply to income and realised capital gains – it applies to growth, that is, unrealised capital gains as well as income. This is a radical new policy and is not in line with tax law. To my knowledge, there is no jurisdiction in the world that taxes unrealised capital gains.

Jim Chalmers, in a way, has by stealth achieved his goal of imposing a hard cap. Members with large balances will be assessing whether their money should remain in a regime that imposes a tax on unrealised capital gains. They may as well take the money out and invest it via a company structure, and pay 30% tax, or possibly 25%, depending on turnover and the source of the company’s income. The problem is, if a member has not satisfied a condition of release, the money is trapped.

Taxing unrealised gains is unprecedented and inequitable, regardless of the wealth of the tax payer – we are talking about tax principles here. An asset will inevitably rise in some years and fall in others. Under the proposed changes, tax is applied and payable when the asset rises but there is no tax refund when it falls. It’s also not clear if there will be further tax when the gains are realised.

It will also create an administrative nightmare. Another reason unrealised gains are not taxed is because of the difficulty and inefficiency of valuing assets every year – not all assets are traded on an exchange.

Jim Chalmer’s defence is that as the change affects so few people, it’s not material and he’s banking on the electorate seeing it that way. But this is not about the number of people impacted – it’s a step change in the principles of taxation. If he’s prepared to do this, what else is on his hit list?

A further sting in the tail is that Chalmers has stated that the cap will not be indexed, meaning that more and more savers will breach the cap in years to come. A $3 million cap today is worth $1.8 million in 25 years in real terms discounted at 2% per annum, and $1.35 million in 40 years, when 25-year-olds will be retiring. At a 3% discount rate the number falls to $919,670. Caps also have a history of being lowered – the concessional cap was $100,000 after 2007 – it’s now $27,500.

To say this is bad policy would be an understatement.

General disclaimer

This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is accurate and current but we do not warrant the content nor its currency. You should seek professional advice before acting or relying on any of the content.

Contact Us

Please complete the following form to contact McEwen Investment Services today

 

15 + 10 =

McEwen Investment Services

4/53 Grandview St
PYMBLE NSW 2073
 
McEwen Investment Services Sydney North Shore