Opinion Pieces

Super reform a breach of trust and design flaw in policy

It has been well established that the government promised not to touch super before the last election. It also promised to leave franking credits alone.

These are both breaches of trust, which the government will have to live with. 

The rest of the country will have to live with the consequences of the new policy. There are at least three major implications of the new super tax. 

First, it introduces the unworkable concept of unrealised gains. 

There is no other part of the tax system where people or entities are taxed without a profit to pay the tax bill. Companies pay tax on profit not on revenue or on assets. 

A company with a large asset base generating and strong revenue streams will pay tax only on the profit it earns. Revenue minus expenses equals profit. 

The same goes for super funds. 

The super funds pay tax on earnings regardless of the balance of the fund. For example, today a super fund with $1.8m in retirement phase that earned $100,000 would pay 15 per cent or $15,000. 

By introducing a tax on balances, the government will be asking super funds that contain lumpy and perhaps illiquid assets to pay a tax where no earnings have been generated. This wholly new concept will create an obligation, which has never existed in Australian tax law – a tax liability on assets. 

Presumably, the tax bill will have to be paid by selling down assets. This could lead to a fire sale of assets at the wrong time for the super fund and their members. It will be a wealth destroying tax. 

Second, the failure to index will kill super. 

At the moment, this mess applies to 80,000 Australians. However, this number will balloon in coming years. 

The government itself admitted in the Senate that it would apply to 10 per cent of Australians. That’s because it isn’t indexed. 

The value of the cap in real dollar terms is eroded in the years ahead to the point that the youngest Australians will no longer see super as the savings vehicle of choice. 

According to super industry modelling, the $3m cap unindexed today will mean a person who is now 40 and has another 25 years to retirement will have an effective cap in today’s dollars of $1,618,172. 

Treasurer Jim Chalmers has brushed these points off by suggesting it wasn’t his problem and that a future government could resolve it. The trouble with that response is by definition, super is a long-term, inter-generational policy. 

By leaving a massive design flaw in the policy, which the Treasurer knows must be fixed, he is undermining the long-term viability of the superannuation scheme. You have to wonder what his hero Paul Keating thinks about all this. 

Why would anyone want to put a dollar of extra money into super now? You’d have to be very brave. 

I am certain that younger Australians will now look for other ways to save. In some ways, the government’s new policy closes the monopoly on savings. 

Third, in tandem with Labor’s super “objective”, the system is far too inflexible. But that’s now a deliberate design feature. 

As I have previously stated, Labor’s inclination is always to put the interests of the super funds before Australians. In this term, they have stripped transparency from super fund disclosures and helped the funds buy more houses. 

But they won’t let you use your super to buy a house! 

The new announced super “objective” proposes to stop the use of people’s super during emergencies and for first home deposits. 

Accordingly, next time there’s a pandemic, super won’t be available to help and you can forget about that coveted first home. This of course is all part of the super industry’s wish list because they want to have your money locked up for as long as possible. 

The new wrinkle here is that the government also needs the super money to be locked up so it can collect its new tax. 

If the money leaves the scheme and is put into a house or used to pay down a debt, Canberra will collect less tax revenue. 

Labor wants to make super one of the world’s most heavily taxed pension schemes. It wants to tax contributions into the fund, earnings on accumulation, earnings in retirement and now balances in retirement, including unrealised gains. 

The Treasury has wanted to raise taxes for many years. 

This is just the first new tax that Labor is facilitating. I predict it won’t be the last. 

Andrew Bragg is a Liberal senator for NSW

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