So resounding was Labor’s election win that there can be no question over its mandate to legislate the policies it took to the polls, including the taxing of unrealised gains in superannuation.

However few Australians would have had that in mind when they voted, as it certainly wasn’t a headline issue during the campaign, and even for those who were aware of it, many were unclear on exactly what it meant.

Treasurer Jim Chalmers has been hosing down fears that his new tax is something most Australians need to worry about – after all, it only applies to those with super balances above $3million, which is only a lucky few.

But the truth about this policy is much more complicated than that.

Taxing unrealised super gains will not long remain a tax on the wealthy, because the way it is designed will, over time, capture millions of Australians in its net, and here’s why:

Unrealised gains are increases in the paper worth of assets you haven’t yet sold. So in this case, if your super savings go up on paper, that increased value is classified as an unrealised gain which will be taxed.

This means that for some Australians they won’t only have to pay tax on the earnings from their super that they use to live on in retirement, but they’ll also have to pay a tax on the superannuation investments themselves that deliver those earnings.

The result will be a reduction in balances, and lower returns going forward.

Labor claimed a mandate with its thumping election win, but how many Australians really know what they're in for with the new super tax?

Labor claimed a mandate with its thumping election win, but how many Australians really know what they’re in for with the new super tax?

Labor will put a 30 percent tax on unrealised gains from superannuation accounts of $3million or more. 

So, for example if someone’s super investment goes up by $100,000 in value, they would need to pay $30,000 in tax. If they don’t have the funds to do so when the tax bill arrives, they will need to sell some of their super savings to cover the bill.

A major problem with this is that super investments can also go down, just like we saw in the immediate aftermath of Donald Trump’s new tariffs when sharemarkets saw a sharp sell-off. If that happens again with this new tax in place, bad luck, you’ll still have had to pay the tax from when the investments previously went up.

This is something many tax experts have expressed concerns about.

In a joint submission to Treasury last year the superannuation lead at Chartered Accountants, Tony Negline, and the head of policy at Certified Practising Accountants, Ram Subramanian, described the proposed changes to superannuation as ‘poorly designed’.

That’s not surprising given that the former minister for super and assistant treasurer, Stephen Jones, wasn’t exactly a stellar performer in Labor’s first term. He’s now left the parliament, leaving his poorly designed new tax behind.  

Most Australians will think that this new tax won’t affect them, because they don’t have $3million in their super accounts and probably never will, but they should think again.

This incoming tax isn’t indexed, which means slowly but surely over time more and more Australians will reach that $3 million threshold. The same way that in decades gone by few would have thought they could ever afford (much less buy) a million dollar home. Now that’s closer to the median house price in capital cities.  

That’s because of inflation. Give it a few years and a $3million super balance will no longer be the reserve of the well-to-do.

The Prime Minister and Treasurer have constructed a policy that will see potentially millions of Australians in coming years forced to pay taxes on their super balances, not just the income.

The Prime Minister and Treasurer have constructed a policy that will see potentially millions of Australians in coming years forced to pay taxes on their super balances, not just the income.

Tax experts have called for the new tax to be indexed to inflation, which the government has refused to do, citing that income taxes aren’t currently indexed either.

Precisely. And that’s why more Australians keep having to pay more taxes, because inflation pushes them into higher and higher tax brackets. This bracket creep dynamic will soon afflict superannuation once this new tax comes into effect. Even if the government occasionally raises the balance at which it kicks in – something it currently has no plans to do – those increases will be highly unlikely to keep pace with inflation.

Forcing people to sell down their super holdings from accounts that are based mostly on stock investments is bad enough. But what about those with super portfolios that are much less liquid than shares? Such as property for example.

If you own property as part of your portfolio – as many people do – and it is assessed to have increased in value, how do you pay for that ‘unrealised gain’ the government is going to tax at 30 percent?

Unless you have other savings to cover it, your only option is to sell the property, which can result in all manner of further costs such as real estate agent fees.

It puts anyone with property investments as part of their super in a very difficult position. This is especially problematic for farming families that often have their land assets included in their super savings. Many will be forced to carve up their properties and sell them, potentially at heavily discounted prices, to cover the tax bill they will incur as a result of this new policy.

But that’s not the only way this new tax can hit Australians hard. If someonedies and their super investments are transferred to the surviving spouse, that widow or widower can be subject to the tax too. That makes it a form of inheritance tax by stealth. That’s not something most Australians would want to deal with while grieving the loss of a loved one.

While Labor has suggested that the new tax threshold could be increased above $3 million in the future to account for inflation, there are no guarantees that will happen. Indeed, it is just as likely that threshold could be lowered by a future government, to capture more people and therefore raise more tax revenue.

The Greens are already demanding that it be reduced to $2million, and they now hold the balance of power in the Senate.

Once the tax becomes law it will be just as easy to lower the point at which it starts to apply as it is to raise it, and lowering it gives the government more revenue out of your pocket not less.

The newly elected Liberal MP for Goldstein, Tim Wilson, is very concerned about how this tax might lead to further taxes on other asset classes.

Tim Wilson (right, with Peter Dutton on the campaign trail) has sounded the alarm about the super tax, saying it is a direct tax on family savings that many will not be able to afford.

Tim Wilson (right, with Peter Dutton on the campaign trail) has sounded the alarm about the super tax, saying it is a direct tax on family savings that many will not be able to afford.

He describes it as ‘a family saving tax’. Expect to hear that phrase time and time again in the coming three years as the Liberal Party tries to find a way to counter-attack against a dominant Labor government.

‘The sole purpose of unrealised capital gains tax is to hit family savings in superannuation,’ Wilson says. 

‘But once applied on super will be replicated on property, shares, businesses and trusts.’

If you trust governments to not put up taxes, then you have nothing to worry about. However, if you suspect governments are always looking at new ways to raise more revenue, especially when debt is as high as it currently is, then this new tax could just be the beginning.

‘By applying a family savings tax on unsold assets, it will create a massive problem for households who have an asset but can’t afford to pay the tax – particularly older Australians’, Wilson claims.

‘A family savings tax on unrealised capital gains violates basic tax principles: that a tax is applied at the value of a real economic activity. Earn an income you pay tax. Sell an asset you pay tax. It is a capital income tax but where there is no asset sold.’

Now back in parliament after defeating Teal MP Zoe Daniel, Wilson was the chair of the House of Representatives economics committee prior to losing his seat at the 2022 election. Ahead of the 2019 election he led the charge against Bill Shorten’s franking credits tax policy, and sees similarities in what Chalmers is trying to do now:

‘This family savings tax is about one thing: revenue. Once Chalmers figures out how to administratively apply an income tax on unsold assets expect it to be replicated beyond super’, Wilson argues.

Could Labor’s franking credits plans from six years ago also now resurface? Labor says no, but then again it also promised not to increase taxes on superannuation ahead of the 2022 election, yet here we are.

For most Australians the new legislation is likely to pass largely without much notice, for now at least. But the fact it isn’t indexed means they will certainly become front-of-mind pretty soon, with parliament to resume in late July. 

To put the signifcance of this new tax in context, including a hint as to how many Australians will be affected by it in the coming years, Treasury estimates that it will reap $40billion for government coffers over the next decade.  

‘The government currently projects less than 100,000 people will be captured by the family savings tax’, Wilson points out. 

‘But as the threshold is not indexed it will cover millions of Generation Y and Z Australians by the time they hit retirement and when $2million or $3million will not be worth anywhere near its value today.’

Is this the issue that Liberals might use to start appealing to younger Australians worried about their futures?

There is another unintended consequence of this new tax. It risks making investments in innovative startups less likely because small speculative investments that grow rapidly in value on paper but take years to return profits will suddenly become undesirable, because that on-paper value will be taxable up front.

Currently super funds heavily invest in such asset classes which often take years to deliver profits. Australia’s world leading super savings – courtesy of Paul Keating’s wise decision to introduce compulsory superannuation in the early 1990s – has been the bedrock of Australia’s capacity to invest in start ups. That won’t be possible under the looming tax change that’s been flagged.

Wilson claims this is why the new tax ‘will kill technology companies particularly and send ideas, jobs and talent offshore’.

That’s the last thing Australia needs right now in the increasingly uncertain global economic environment being created by Donald Trump’s presidency.

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