My own father has never trusted politicians with his super. He has long held the belief that the tax benefits will only be temporary. Owing to the fact that it is by law locked away until retirement some 30-40 years from when his first contributions were made, he held firm in prophesying that by the time he would actually need to access his super, the government will have moved the goalposts (which they have already done once and will likely do so again) and changed the rules, destroying all its tax benefits (which they are just getting started on now) so he would be better served keeping his investments outside super where he can access them when he wants, free to move his money where it is treated best, not trapped inside a structure (superannuation) and forced to watch as governments raid and pillage it without any way for him to stop it.
Years ago when he told me this i thought he was just being hyperbolic and overly pessimistic but it turns out he knew something i didn't, and was right all along.
What is the new Div 296 Tax?
Jim Chalmers is trying to spin it as just a 15% increase in the tax rate on super. That is an outright lie. This new tax does not change any of the tax rates on earnings of superannuation funds
Others are saying it’s a tax on unrealised capital gains. While this is partially correct, it is not the full story. Because you don’t get any tax credit for amounts you pay under this tax when you do eventually sell your assets, you are effectively paying capital gains tax on the same gain, Twice. And on top to this whilst you have to pay tax in the years you make unrealised gains, they ATO will not give you a refund in the years you make an unrealised loss.
Others still are describing this new tax as a wealth tax, and whilst Div 296 has elements of both a wealth tax and unrealised capital gains tax it does not neatly fit into either box.
What the government has done, is on purpose, come up with a new tax on superannuation so convoluted, contrived and confusing that no one is able to describe or discuss it effectively. If it were just an unrealised capital gains tax we could discuss the pros and cons of this and decide if we should implement it or not. Likewise if it were a pure wealth tax we could do the same.
Instead we have a situation where the Government can get away with just saying Tax The Rich, and when asked how, they don’t even need to explain it in a way that anyone can understand, they can launch into a spiel of technical tax policy babble and blame anyone that doesn’t understand as wanting the rich to pay less tax.
It is precisely this confusion that the government is banking on so that they can slide this new tax into the system and get it across the line without anybody realising how insidious it really is.
Superannuation industry asleep at the wheel
The superannuation industry is about to commit suicide and it is a difficult thing to watch, like a slow motion car crash.
I’m not surprised the government is wanting to get its sticky fingers on people’s superannuation, that much is easy to understand. They need a semi invisible new tax to plug their impending budget holes with and an easy scapegoat to go after politically (rich people)
But you would think an industry that exists solely on their assets under management, which they are mandated by law to have given to them, would support laws that increase this requirement and be against those that seek to take these assets away from them. But that is not what we are currently witnessing from the Superannuation sector, with many, including the large retail superfunds appearing to be in support of Div296. This has been the most staggering thing to watch. The entire superannuation industry seems to be in support of digging their own grave.
Incentives Drive Behaviour
When it comes to my fathers super he’s lucky that he’s already reached preservation age and is over 60 years old (remember those goal posts that got moved) so even in a worst case scenario if this tax does get passed in its current form, and he was staring down the barrel of this impacting him, he could just rip every cent out of his superfund and move it into a structure where he wouldn’t have to pay this egregious tax, and not need to think about it ever again.
Knowing this will be the immediate response by all those initially impacted should send shivers down the spines of all the retail superfunds, but so far they’re not coming out in opposition to this new tax.
The hidden dangers of not indexing the cap
I’ve also heard a lot of dismissive comments from people my fathers age that this only applies to the super rich and they’re happy for rich people to pay, because it won’t apply to them. But what they don’t understand is that taxes are always levied on the rich first, but when all is said and done the middle class always bear the brunt of their effects.
Not indexing the cap for inflation will mean that if we continue with our current 5% rate of inflation it will capture people with an equivalent balance of a $2M in today’s money in 9 years, a $1.5M a balance in 14 years, a $1M balance in 22 years, and a $500K balance (the average balance for a man of retirement age) will be paying this tax in 37 years.
- If you earn $220,000 per year and are younger than 55 you will pay this tax
- If you earn $150,000 per year and are younger than 45 you will pay this tax
- If you earn $100,000 per year and are younger than 25 you will pay this tax
And we also need to keep in mind, this is only taking into account consistent average growth rates, so if we go through another period of unexpectedly high inflation where asset prices do what they did in the last 3 years and have >20% annual growth rates you will be accelerated along this path much faster than you might expect.
The lock in effects of super
One final hidden element unique to superannuation is that you are locked in unless you are over preservation age. So if you do well with your super and exceed the cap you are stuck paying this tax until you are old enough to access all your money and start pulling it out.
Not so bad for all the boomers out there that can just pull all their money out now and avoid paying it, but devastating for those millennials and Gen Z who will just have to sit and watch it happen, unable to do a thing to stop it.
What would be ideal
Is if the government started being open and honest about what it was up to. Stop lying and obfuscating the truth. Just come out and say what you're doing and let the people decide for themselves:
"We want to increase the tax on super"
There I did it for you, that wasn't so hard was it?
To increase the tax rate on super intelligently all you need to do is:
- Increase the tax rate from 15% to 30% for super for funds with a Total Super Balance over $3M
- Repeal div 293 as the above would make it redundant
- Only tax realised gains
Done, simple, straight forward, problem solved.
If you still want to push through this egregious tax then at the bare minimum:
- Provide a tax credit for tax paid up front when the asset is eventually sold and CGT is payable to avoid double taxation
- Provide cash refunds in years there is an unrealised capital losses
- Index the $3M cap for inflation