Interview with Michael McLaren on 2GB Afternoons

‍Subjects: Labor's tax on unrealised capital gains

E&OE………
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Michael McLaren

Now, the question that keeps popping up is this: Are the politicians who are on defined benefit pensions exempt or will they be captured? In other words, are the ones that are going to bring this in for everybody else going to be protected because of the nature of their Super Fund? Indeed, this week, that question was put directly to the Treasurer Jim Chalmers, and he said that if the likes of the Prime Minister, for example, have substantial balances in their Super, yes, they would be impacted. But not everyone's convinced that's right. The Liberal party are now raising questions about the truth of that claim. Andrew Bragg, we spoke to Andrew throughout the campaign about this issue. He's a Liberal Senator for New South Wales. He's had plenty to say when it comes to this tax already, and he wants to keep the conversation going, and I think we should. He's with me on the line. Andrew, good afternoon.

Senator Bragg

Michael, how are you?

Michael McLaren

I'm okay. Now, look, not every politician, I think, is on a defined benefit pension. The pre-2004, post-2004 rules mean that some are and some aren't from memory. But for those that have been in there a long time, some of them are making this law. Are they or are they not going to be captured by the unrealised capital gains rule that the government want to bring in?

Senator Bragg

Well, Michael, the legislation does not include the Prime Minister and other ministers who would be subject to this tax. The legislation gives the government a regulation making power where they can subsequently apply this tax to the Prime Minister and other ministers, but the bill itself does not do that. And, the draft regulations, in fact, don't mention the scheme that the Prime Minister is actually a member of, the Parliamentary Contributory Superannuation Scheme.

Michael McLaren

So in other words, they won't be captured?

Senator Bragg

Well, I've got no confidence that where the legislation doesn't explicitly include the Prime Minister and members of his fund, that it will actually apply.

Michael McLaren

Okay. Even if they were to change that legislation and deliberately include them, that is the pre-2004 parliamentarians, how would it work? They're on a defined benefit. So how would the ATO be able to capture the unrealized capital gains out of a defined benefit fund?

Senator Bragg

Well, who knows? And the actuaries are very smart. They can do all sorts of computations and analysis about the future. But there's no way, no easy way to determine exactly how much tax should be paid, and so that's why I think it's very important as a fairness measure that the Treasurer say how much he thinks the Prime Minister should be paying if this is going to be applied. I mean, the whole idea of having a tax on unrealized gains is insane anyway, but, if the Labor Party thinks this is a good idea and they want to ram it through the Senate with the support of the Greens, they should say how much money would be paid by the Prime Minister.

Michael McLaren

Just to explain to people in layman's terms, a Defined Benefit Fund is different to your average Superfund that you or I might have, and we get a return every year or whatever we do when we move it into pension phase. The Defined Benefit Fund assumes that you will be getting, in fact it states, you will be getting X dollars per year, and it's not relying on the quality of the investments you've made behind the scenes as to whether that comes through or not. It is a guaranteed income stream, right?

Senator Bragg

That's right. It's a guaranteed income stream, and there is a value that could be applied to the fund for this purpose, but we don't know how, in fact, that would be working in relation to the parliamentary schemes. There are some draft regulations out there, but most of the pension experts can't make sense of those because, of course, at its heart the problem with this tax is it applies to unrealized gains, so it applies to money that doesn't actually exist. And there's never been a tax in Australian history where someone would be asked to pay tax on revenue or a value increase rather than on taxing profit.

Michael McLaren

So basically, Peter wants to rob Paul but won't be required to pay the same sort of tax as Paul, so there is a fairness question there. Beyond that, though, I mean, more and more people are coming out, people that understand money are coming out and saying look, this is a really bad policy. I just wish, and no doubt you just wish, that there were more of these people leading into the election rather than now. But we're seeing some of the big players in the venture capital industry, for example, come out and say that this will completely kill us.

Senator Bragg

Well, it's going to damage investment into disruptive industries because often these sectors rely on people putting money in. There might be a good year or a bad year, there may be a couple of bad years, and then a good year. And one of the other problems with this tax is that you pay tax on the upside if the investment increases in value. But of course, if the investment decreases the next year, you don't get a refund. So that's why in Australian tax history, you pay tax on profits once something is realised or sold or finalised, not based on a value at a point in time, because of course, the value of an investment can go up or down.

Michael McLaren

Often does both. The problem with the venture capitalist is, and I think Leigh Jasper, who's the chairman of LaunchVic, he made the point in the Fin Review today that the proposed tax, if it were to come in as we believe it will, would discourage people from investing their Super in startups. A lot of self-managed Superfunds put good money in startups, it's a way that they look at long term material gain, but long-term is the key. So they could be taxed on potential profits, which would actually take a long time to materialise. In the meantime, the whole thing could go belly up. So they've been taxed for money that they've not really seen or had in their hand. There's no commensurate negative gearing aspect for the losses that may come. And so they say, well, look, this is all too risky. I'll just put my money in real estate or something.

Senator Bragg

That's right. Because if you pay the tax in year three, let's say, of the investment because there's been an increase in value but the next year decreases in value, significantly perhaps, you get no refund. So I mean why would you invest your money in Superannuation through these vehicles? Frankly, I think it will cause a major loss of new ideas and development of new concepts in Australia because people won't put money at risk. The other point here, Michael, is that it could be expanded beyond Superannuation. The Greens would like to expand it beyond the current threshold, and I think once the principle is in Australian law, there's no reason to suggest that it won't apply more broadly. It's really dangerous.

Michael McLaren

Well, you want to have universal childcare, and everyone's got to go to the doctor for free, and all these things cost money, and all of a sudden, here's a way to raise some money. Now, Jim Chambers insists, this is the government's rebuttal, that it's only going to affect a tiny slice of the pie. 0. 5%, it's the top end of town, except the Prime Minister, of course, and others. And so nothing to worry about here. It's sort of just socialist rhetoric. But a number of people in the financial world have said, hang on, you aren't going to index this. So it is completely conceivable in the decades ahead that a very significant percentage of Australian Superannuants will have balances in excess of 3 million, or if the Greens get their way, 2 million, and they will be captured by this.

Senator Bragg

Well, that's right. So the main point is that Labor don't have the numbers in the Senate. I'm a member of that chamber, and I can tell you that the Greens will be required to support this measure if it becomes law. The government have already put it in their budget, so when you look at the government's budget papers, they've already taken the money, billions of dollars. So they have to put this legislation through, and the Greens are required. The Greens want to have it down to 2 million. And so unindexed plus a lower threshold means it will hit hundreds of thousands of Australians and it will particularly hurt millennials because the lack of indexation means that they will ultimately pay a bigger price than older people like the boomers.

Michael McLaren

Well, I guess now in opposition, you've got three years to prosecute that case before we get to the next election. The task will be, no doubt, educating those younger voters who think, oh, this is miles away I don't even own a home. But, in fact, this could be them in 40 years time.

Senator Bragg

Well, it could also apply to the family home in the future. I mean, once you've created a precedent like this and you’re going to tax things that aren't even real, money that isn't even in existence, then why wouldn't you be able to apply it to other things? So that's why it's a dangerous precedent. We will do everything we can to stop it in the Senate, but we're realistic about the Labor Greens alliance and their crazy Venezuelan style policies.

Michael McLaren

Yeah. Okay. Thank you for your time, Andrew. All the best.

Senator Bragg

Thanks, Michael. All the best.

[Ends]

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