According to Robert Gottliebsen, the architect of Australia’s compulsory superannuation system, former prime minister and treasurer Paul Keating, is said to be furious about current Treasurer Jim Chalmers’ plans to tax unrealised gains within superannuation for balances above $3 million.
Back in the early 1990s, Keating and union leader Bill Kelty joined forces to implement Keating’s vision of a Medicare-style universal retirement savings plan, but Chalmers’ tax will lead to the destruction of that vision, according to Gottliebsen.
“Those industry funds who contacted Paul Keating after my weekend commentary explaining how the proposed tax of Jim Chalmers tax on unrealised gains would destroy the Keating 1992 vision of a massive universal savings pool, say he is white-hot with anger”, Gottliebsen writes.
“A number of those funds now believe, as a result of receiving an earful of that Keating anger, that in due course the former Prime Minister and treasurer will go public with a withering blast against Chalmers — more intense than any ever directed to a cabinet minister”.
If Chalmers does not back down on his plan to tax unrealised gains, Gottliebsen argues, there is likely to be the biggest internal battle within the federal Labor government since Prime Minister Anthony Albanese came to power in 2022.
The Australian’s Judith Sloan has also attacked the proposal to tax unrealised capital gains, pointing to several key policy flaws:
- “The failure to index will mean more and more superannuation members will be dragged into paying higher tax, with potentially 10% of all members affected into the future”.
- “Tax may be levied on an asset that is under water. This is because the starting point is July 1, 2025, and the new tax impost ignores the purchase price of the asset”.
- The unrealised tax is impractical for illiquid unlisted assets, such as farms, buildings, businesses. “At the very least, a shortage of registered valuers will make this approach unworkable”.
- “Very strong disincentives will also be created for any further investment in unlisted assets”.
- Those on defined benefit superannuation schemes, including politicians and public servants, will avoid the unrealised tax.
- Some constitutionally protected persons – judges, some state public servants and assorted others – will never have to pay the new tax.
Most can agree that superannuation concessions are inequitable and unsustainable.
Total superannuation tax expenditures were estimated by the Australian Treasury to be around $60 billion in 2024–25 and were forecast to grow strongly. Most of these expenditures flow to higher income earners.
Long-term projections from the Australian Treasury showed that superannuation concessions are projected to cost the federal budget more than the aged pension by 2050, with most concessions going to high income earners.
However, there are far simpler and better solutions to improve the sustainability and equity of the superannuation system than taxing unrealised gains.
Robert Gottliebsen argues that instead of taxing unrealised gains, Labor should go back to the original plan of Treasurer Chalmers and simply double the tax on income derived from superannuation balances above $3 million:
What the industry fund, treasury, unions and corporates want is for the 30% tax to be calculated uniformly.
And so the extra 15% tax should be calculated in the same way as the first 15% is currently calculated. Such a tax is simple, easy to understand and fair.
All Chalmers has to do is to stay with his base policy and say the idea of taxing the extra 15% in a way different to the first 15% was proving too complex and will be abandoned. And he adds indexation.
He will actually raise more money this way because if the Chalmers tax on unrealised gains is introduced we are going to see a mass exodus from self-funded superannuation funds to equity investment, and that money will be invested in all sorts of different ways to avoid the unrealised gains tax.
Alternatively, Labor could adopt the recommendation from the Henry Tax Review to replace the 15% flat tax on superannuation contributions and earnings with a flat 15% deduction from one’s marginal tax rate.
This approach would make superannuation concessions progressive in that tax rates would rise in line with marginal tax rates (less the 15% uniform discount).
Either policy would improve the equity and sustainability of the superannuation system and save the federal budget billions in foregone revenue.
Sadly, the justifiable backlash against Labor’s unrealised superannuation tax means that we may end up with no reform at all.
