The federal government’s proposed superannuation tax on profits you haven’t earned or may never earn is not only grossly unfair, but it will also have significant consequences for the Australian economy.
Under the proposed changes, the government is looking to tax unrealised gains on super balances over $3 million. This means if the value of your assets significantly rises in one year, tipping you over the $3 million cap, and then disappears the following year, you must still pay tax on gains from the first year, even though those gains may never be realised.
Why would you take the risk of having to pay tax on a paper gain that may disappear as quickly as it appeared? SMSFs would be better off moving down the risk curve by putting money in the bank, creating uncertainty for the trillion-dollar self-managed super industry.
The global financial crisis (GFC) demonstrates the unfairness of the proposal. In the 2007 financial year, the ASX All Ordinaries Accumulation Index increased 30.3 per cent, then fell over 50 per cent during the GFC. Under the proposed legislation, the increase in 2007 would have resulted in a significant unrealised tax liability even though the gain was wiped out two years later. While a loss can offset future gains under this legislation, there is no provision to claim back tax that has been charged on a gain that disappears due to a subsequent fall in value. This is contrary to our broader tax system.
The policy could also force superannuation members to liquidate investments and assets prematurely to satisfy tax liabilities that should not exist. Many individuals, such as Australia’s farmers, who have property in their SMSF, will find themselves with significant cash-flow issues because it is not possible to simply sell their farm to pay the tax liability, especially when it is tied to their livelihood.
The proposed tax, which is set to come into effect in July 2025, moved a step closer to reality on 9 October when it passed the House of Representatives without amendment, despite calls to index increases to the cap and remove tax on unrealised gains. It will now be debated in the Senate, where the government needs the backing of crossbenchers for it to be passed into law.
The government’s proposal is predicted to affect around 80,000 superannuation balances. However, this number will significantly rise as more people run into the unindexed trigger point due to inflation. The Financial Services Council is estimating about 500,000 super balances would eventually breach the $3 million cap, including 204,000 Australians under the age of 30.
Our government submission back in October 2023 recommended indexing the $3 million threshold to keep pace with inflation. Our proposal also pointed out taxing earnings over $3 million could be easily calculated for individuals with one superannuation fund, removing any need to tax unrealised gains. Given the vast majority of individuals with a $3 million balance currently have one fund, or could organise their affairs so that they have one fund, we believe this approach is sensible, practical and in line with current tax law.
Australia’s world-leading superannuation system, introduced by former prime minister Paul Keating in 1992, has benefited many Australians, the corporate sector and the nation by encouraging savings and providing access to large pools of domestic capital. We understand a decades-old system requires change to remain relevant and maintain its universal appeal, and that is why we support a tax increase from 15 per cent to 30 per cent on realised earnings for large super balances over $3 million.
We strongly urge the government to re-evaluate its proposal and for senators to be aware the proposed legislation will not only harm superannuants, but also jeopardise the access of Australian companies to a trillion dollars in risk capital.
Geoff Wilson is chair of Wilson Asset Management.
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