Why the super tax got a rethink

Why the super tax got a rethink

Australia’s superannuation system is a bit unusual in the world as far as how we go about ensuring our population has a long-term savings plan for retirement. Changes to that system were proposed by the Albanese Government, but they were attracting a lot of negative attention, so on Monday, Treasurer Jim Chalmers announced a new approach. In this Squiz Shortcut, we’ll get you across:

• the latest revisions,

• and what it might mean for your retirement nest egg.

Prefer this in your ears?

Listen to our podcast 🎧

Listen time: 13 minutes

Squiz the Shortcut

What’s that beeping sound I can hear?
Oh that’s Treasurer Jim Chalmers backing up the truck when it comes to his proposed changes to superannuation tax…  Who knew when we first dived into the debate around this in June that it was going to be a 2-parter?

Not me…
And yet here we are with a sequel… Look, we know finance talk can be a bit dry, but we think this issue is worth unpacking because what’s happened here is a fairly major policy U-turn from the government. And it’s raised some questions, given the hype around the Economic Reform Roundtable in August, about how tax reform happens and the government’s appetite for fixing big picture economic issues…

That escalated fast…
Don’t get scared off… Before we get into those bigger questions, let’s look at what was announced this week. And we’re assuming you’re across the basics of our superannuation system for this one, so if you want to get a handle on those, maybe go back and have a read of our Shortcut to the Super Tax Debate from June.

Remind me of what the Treasurer originally had planned?
The key thing to know is that the tax on earnings for super balances over a $3 million threshold was going to be doubled - from the standard 15% to 30%. That’s unchanged. 

OK, so what are the new parts?
There are 2 major changes grabbing most of the headlines… The first one is that the $3 million cap will now be indexed to inflation. 

Can you explain that for me?
Sure… It means that the $3 million threshold will rise over time along with the Consumer Price Index (so, alongside salaries and the cost of things instead of staying frozen in place). Chalmers had resisted this move, but without the limit being pegged to inflation, more and more people would have been up for the higher tax rate as their balances grew.  

Who was calling for indexation?
Members of the Greens, the Coalition, some economists and experts were all calling for it. And some Labor heavyweights, like former Treasurer and PM Paul Keating, weighed in too. 

What did Keating say about it?
While he didn’t come out against it publicly, reports say he privately told people inside Labor’s ranks (including the PM Anthony Albanese) that it was a “bad policy”. His opinion is noteworthy because he’s known as the ‘father of superannuation’, given he was the one who designed Australia’s compulsory superannuation system and implemented it 33 years ago. 

How does he feel about the revisions?
He’s onboard… Chalmers says he’s spoken to Keating, and Keating has since said that the new version is a “huge policy achievement”.

What else has been tweaked?
There’s now a second, higher tax threshold of $10 million which will also be indexed. Accounts with balances over that amount (there’s about 8,000 of them) will be taxed at a rate of 40% on their earnings above that mark. It’s how the government will make back some of the lost revenue from these changes - we’ll get back to that. 

OK, and what’s the other big change?
Under the previous plan, unrealised gains or ‘paper gains’ on the value of properties or businesses included in superannuation funds would have been taxed - but not anymore… That’s a big deal because that idea - taxing unrealised gains - was one of the most controversial parts of the policy. 

Remind me what unrealised gains are again…
It’s a bit complicated, so stay with us. Basically, it means that if the value of assets included in your super went up - even if you hadn’t sold them - you could still be taxed based on the increase. It would’ve meant people potentially having to sell assets to pay tax on money they hadn’t actually received yet. 

How did that go down?
It sparked a fair bit of alarm and it was widely panned as unworkable - not only by people with self managed super funds (SMSF), but also by economists, experts and members of the Coalition. Chalmers has now dropped it from the legislation… And another change - there’s a boost coming for low income earners…

What’s that?
Around 1.3 million lower-income earners will receive a top-up payment. Currently, people who earn under $37,000 get $500 added to their super. That threshold’s going to increase to $45,000 and the payment’s going up to $810.

So, when does this all kick in?
That's one more change - the start date has been pushed back to July next year, while the low income payment increase will start from July 2027.

Got it… What was Chalmers trying to achieve with his super tax reforms?
Originally, he framed the policy as a fairness measure, saying the super system had drifted away from its original purpose of having people save money for retirement so they were less reliant on the age pension when they stopped working - which takes a heap of pressure off the budget. 

How had the system drifted away from that?
The government has generous tax incentives in place for super accounts, and people have been taking full advantage of them. Some SMSF hold hundreds of millions of dollars, far beyond what’s needed for retirement income, and they’re paying a lot less tax than they’d usually be up for. So Chalmers is trying to discourage use of the system as a high-end tax shelter and make it more sustainable for future generations. 

Why did the Treasurer go back to the drawing board on some parts of the policy?
The perception coming through strongly in media analysis about it - and there’s been a lot - is that the Treasurer has adjusted the policy because he’s been reined in by the PM, rather than in response to concerns raised by the Coalition and the Greens, or backlash from the public, economists and tax experts.

What’s that about?
Reports say Albanese’s office stepped in and asked Treasury to work on new modelling after weeks of internal debate. So the fallout this week has been a bit awkward for Chalmers, given he’s spent 2 years defending the original policy and insisting it wouldn’t change. Adding to that is the fact that this isn’t the first time the government has backtracked on major economic policy. 

So it’s got form?
Yep… It backed out of Stage 3 tax cuts promised last year. And it said those revisions were in response to feedback that time too. But Chalmers is insisting it’s just the way good policy is made: testing ideas, listening to feedback and refining them. It’s a different theme coming through in the analysis though…

What’s that?
That the government - and particularly the PM - is reluctant to take political risks. And that’s the broader issue here… The government won the last election in May convincingly, and when it comes to economic reform, people are beginning to question its appetite to forge ahead with politically risky but necessary changes.

What kinds of changes?
Things like broader tax reform - making the system simpler and more sustainable, finding ways to boost productivity and ensure the budget is resilient when it comes to surprises like a pandemic, tariffs, and world conflicts. 

Wait, wasn’t the Economic Reform Roundtable about generating ideas for all of that?
It sure was… but the perception of a backflip on the super tax policy feeds into a narrative coming through in some parts of the media that Chalmers has big reform ambitions but keeps getting overruled by a cautious PM. You might remember that Albanese was quick to talk down any changes to the tax system before the roundtable had even kicked off… And adding to the Treasurer’s current headache, the super tax revisions have created a large hole in the budget.

How big of a hole?
The revised super tax policy is projected to raise about $2 billion instead of $6.2 billion over the next 4 years… So that means there’s a $4.2 billion gap. And there’s a whole heap of questions now about how that’s going to be plugged.

Keeping little ones cool this summer

Those with little ones (or shopping for them) know the drill - summer heat plus kids equals constant outfit changes and cranky wake ups. Love to Dream's new bamboo range tackles both. The fabric is clever - it stretches with every move, making the what-time-is-it nappy changes less of a wrestling match, and the bamboo in it helps with sweaty backs for a better sleep all round. The range covers everything from bodysuits to PJs, and they've built them to survive your washing machine's heavy rotation. Worth bookmarking for baby shower gifts too... Check the collection out here.

Onto our Recommendations

Reading: This analysis piece in The Guardian sums up why this week’s rethink of the super tax policy has called into question the government’s appetite for economic reform that comes with political heat.

Recent Shortcuts