FSC projects 500k Australians to be hit with super tax without indexation

New data from the Financial Services Council (FSC) has projected the impact of the proposed superannuation tax on different age cohorts of Australians under four different scenarios, including lowering the cap to $2 million and if both thresholds were subject to indexation.

The analysis is based on data from the ATO Taxation statistics 2019–20 of superannuation contributions by individuals, total superannuation member accounts balance range, taxable income range and age range.

It also makes a number of assumptions, such as inflation at 2.5 per cent per year, investment return on superannuation balance of 7.5 per cent per year, effective tax on earnings at 7 per cent per year, as well as fees and expenses related to administration and a retirement age of 65 years.

The four scenarios modelled by the FSC include:

• $3 million threshold without indexation, as previously released (Labor policy).
• $3 million threshold with indexation (potential negotiated outcome).
• $2 million threshold with indexation (Greens policy).
• $2 million threshold without indexation (potential negotiated outcome).

The FSC said the decision on whether to index the proposed tax will have a significant impact on younger Australians and is critical to the overall fairness of the measure.

It found that under the four scenarios modelled, with a $2 million threshold and no indexation, more than 1.8 million Australians currently in the workforce will be impacted by the legislations by the time they reach retirement.

Furthermore, under the Labor policy of a $3 million threshold and no indexation, more than 500,000 Australians currently in the workforce would be impacted by the time they reach retirement, while under the Greens policy of a $2 million threshold and indexation, more than 200,000 Australians currently in the workforce would be hit by the time they reach retirement.

Alternatively, with a negotiated outcome of a $3 million threshold with indexation, the number would be reduced to 64,000 Australians currently in the workforce being impacted by retirement.

Blake Briggs, CEO of the FSC, said the government will set the tone for how it intends to govern in its second term by deciding whether to listen to broad consumer, industry and economists’ feedback on how the current design of its superannuation tax is unfair to future generations of Australians.

“The superannuation industry recognises the government has the capacity to force the new tax through the Parliament with the support of the Greens but encourages the two parties to take a more constructive and consultative approach,” Briggs said.

“The Financial Services Council encourages the government to consult on options that would not unfairly target future generations of Australian superannuation consumers and undermine confidence in our retirement system by introducing a new, contentious tax on unrealised capital gains.”

He added that the superannuation industry recognises there is merit to ensuring the superannuation system remains fair and fiscally sustainable.

“However, the government’s current approach risks undermining consumer confidence in Australia’s retirement system by changing the goal posts on current and future retirees who, until now, have played by the rules,” he said.

“The FSC is concerned that the absence of indexation is a deliberate and cynical design feature of the new tax, that targets younger Australians, in full knowledge that Australia’s deteriorating financial position means future governments will be too cash-strapped to introduce indexation at a later stage.”

Sector hits back on Treasurer’s ‘farcical’ claims

The FSC’s latest modelling comes on the back of the SMSF Association labelling the Treasurer’s comments that no alternative to the $3 million super tax had been put forward as “farcical”.

Peter Burgess, SMSF Association CEO, said the industry has put forward “many alternatives” that would achieve the desired policy outcomes without all the complexity, cost, unintended consequences and disruption to the flow of investment funds so critical to many sections of the economy.

“At no time has Treasury shown any genuine desire to consult or consider alternatives,” he said.

Tony Greco, senior tax adviser with the Institute of Public Accountants, said the IPA learnt very early in the consultation process that the method proposed was supported by APRA funds as being the best option administratively to implement.

“I do not believe due consideration was given to alternative models as Treasury was fixated on pushing ahead with its proposed methodology,” he said.

“It’s ironic that the new tax will impact the SMSF sector more than the APRA funds. SMSFs can perform calculations on a member balance so alternative methodologies to reduce the concessionary benefits for members with high balances are viable.”

Greco continued that the proposed methodology does not accord with good principles of taxation.

“The Senate inquiry did not engage in alternatives and was comfortable with the methodology on the basis that it impacted only a small portion of the population (so why should we care) and less so on whether it adhered to good taxation principles,” he said.

Tony Negline, CA ANZ superannuation and financial services leader, said the organisation does not support the Better Targeted Superannuation Tax Concession policy and has been highlighting the bill’s design flaws since it was announced in 2023.

“We are particularly concerned about the taxing of unrealised capital gains and the precedent this would set. As a result, CA ANZ has participated in every consultation opportunity available, which includes making submissions to Treasury and the Senate economics committee,” Negline said.

“In those submissions, we explained the design flaws of the bill, the cash flow concerns the amendments would likely create and suggested alternative solutions. If the government is concerned that superannuation is no longer being used as intended, there are other options available, some of which we have suggested in our previous submissions.”

Natasha Panagis, head of technical for the Institute of Financial Professionals Australia, said the IFPA has been actively involved in the consultation process since the government’s proposal was first announced.

“We made multiple submissions, participated in Treasury roundtables, and appeared before the Senate economics legislation committee alongside other industry bodies to raise serious concerns about the Division 296 tax and to argue that the bill, in its current form, should not be passed without significant amendments to ensure fairness and equity for all Australians,” Panagis said.

“We put forward a number of alternative approaches for Treasury and the government to consider. Unfortunately, these have largely been ignored. From the outset, we have maintained that if changes to tax settings for larger superannuation balances are deemed necessary, there are simpler, fairer options – most notably, taxing actual earnings above $3 million rather than taxing unrealised gains. This approach aligns with existing tax principles and avoids punishing Australians for paper gains that may never materialise.”