Div 296 critics are making the Treasurer’s case for him

The newfound obsession with the government’s $3 million super tax within mainstream media post-election is a testament to just how unexpected the scale of victory was.

All of the arguments taking aim at the proposed change, which would see concessional treatment of large super fund balances wound back, could have been made during the election campaign.

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For many, it must have seemed like a waste of time when the bill seemed unable to get through the Senate in the last term. With Labor so widely tipped to either lose the election or be forced into a minority government, there was just no way Division 296 could pass.

As FSC chief executive Blake Briggs noted on a recent episode of The ifa Show, industry had gotten “ahead of themselves in thinking there was going to be a change of government”.

“Even as the polls tightened, there were some who, I think, didn’t want to believe what they were seeing,” Briggs said.

Yet here we are, with Labor holding the most Lower House seats for a ruling party since John Howard’s first election in 1996.

Combined with the Greens holding the balance of power in the Senate, all of a sudden, taxing unrealised gains is back on the menu.

Why is Labor being so stubborn?

That’s the part of the measure that has been so confusing for many that have observed the Division 296 debate over the last two years: it would already be legislated if Labor was simply willing to remove the taxation of unrealised gains.

The Senate crossbench blocking it wasn’t enough to force a change of tactic, so it feels increasingly likely it goes ahead as is despite the increased public scrutiny.

If you listen to Treasurer Jim Chalmers, all there is to it is the budget bottom line. As he has trotted out consistently, the tax is necessary to fund important programs like strengthening Medicare and providing cost-of-living relief.

However, some of the arguments that critics of the bill have been making have shown an alternative explanation.

Wilson Asset Management chairman Geoff Wilson has prosecuted the case that taxing unrealised capital gains would pull money out of the super system

“Our own detailed study showed that $155 billion would come out of super and go into the housing market,” Wilson told ifa sister brand SMSF Adviser.

“The only reason most people object to this legislation is because of the taxing of unrealised capital gains, not because of the rise from 15 per cent to 30 per cent tax over $3 million. It’s about the taxing of profit that you may never make.”

The panic selling is reportedly already under way, with Heffron managing director Meg Heffron noting she is fielding “tons of questions” over the proposed legislation.

“Definitely the tone is ‘I’m going to take my money out’,’ she said.

“While that won’t be the right choice for everyone, I think the idea of being taxed on gains that haven’t been realised and not getting a refund on losses is just making people say, ‘Well, at least if I take my money out I know I will only pay tax on money I actually have.’ In some cases they are ready to put up with a little more tax overall to achieve that.”

While the 30 per cent rate applied to earnings on the portion of a super balance that is above $3 million would still represent a lower rate than other investment structures, being slugged on gains before they are realised is the swing factor in moving money out.

And that’s the point.

Division 296 has been closely tied with the objective of super since they were both first announced, with the latter passing Parliament in November.

The law now defines the objective of super as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

It’s clear that what the Treasurer actually wants is to disincentivise large super balances that are no longer used for this purpose.

His former boss Wayne Swan all but spelt this out.

Speaking on Nine’s Today Show last week, the former treasurer said the government “shouldn’t be giving concessions to people who have many millions of dollars squirrelled away well before retirement to engage in other investment activities”.

“They should be paying the appropriate tax on those funds that is normal for any business activity,” Swan said.

Creating a system in which balances above $3 million are taxed at 30 per cent simply wouldn’t be enough of a barrier to leaving the funds in super. Throw in an unprecedented tax on unrealised gains, however, and just the prospect of the legislation is moving money out of super.

Foundational tenets of the tax system be damned.

Muddying the waters

Earlier this month, AMP deputy chief economist Diana Mousina modelled how an unchanged implementation of Division 296 would impact an average 22-year-old earning an average wage for the rest of their working life.

There are a range of assumptions within the modelling – 3 per cent wage growth, no change to the super guarantee rate, full-time earnings – but by the time that 22-year-old hits retirement, they would be above the $3 million mark and would be subject to the tax.

It’s an interesting demonstration of how a lack of indexation has the potential to expand the tax well beyond the 0.5 per cent of Australians that Chalmers rolls out at every opportunity. It’s also been highly effective, cited in more mainstream articles and think pieces than one can count.

The problem is that there’s essentially no chance this happens. The super guarantee was only introduced in 1992, and the number of changes over the three decades since would render any projections utterly useless. There’s simply no telling how different the system will look in 2070, but you can guarantee if Division 296 is still in place, the cap won’t be $3 million.

Indexation of some kind would invariably be a positive measure – it’s antithetical to the aims of the bill to reduce the concessions for the average Australian.

But the Treasurer also isn’t wrong that there is nothing stopping a future government increasing the cap.

Maybe it would make more sense to include a provision for the level to be reviewed at set intervals – every five years, for example – but the idea that it will apply to the average super member in 40 years simply muddies the water and provides an easy target for the government to shoot down and direct attention away from unrealised gains.

This is the insidious part of the proposal that needs to be fought, not shadows on the wall like the PM being exempt.

“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,” Liberal senator Andrew Bragg said last week.

While Bragg is correct that the exact calculation for the total super balance of a defined benefit pension is far from straightforward, peddling this line simply gave Chalmers an easy shot at rebuttal, saying this is “one of the reasons why nobody takes that guy seriously”.

“There is provision for defined benefit schemes, there are calculations, those calculations are very similar to the ones that the Liberals and Nationals put in when they changed superannuation in the last term of the government, and that will apply to the prime minister, it will apply to any politician who’s got the equivalent of more than $3 million in super,” he said.

Now the acting PM is taking aim, with Richard Marles labelling the pushback a “smear campaign”.

“We’ve seen a smear campaign in relation to the superannuation arrangements, arrangements which were announced two years ago,” Marles said.

“There’s nothing new in relation to this. And I would just further add that we’re talking about very modest changes, which apply to about 0.5 per cent of superannuation where they will still receive a tax break, they just won’t receive the extent of the tax break that they did before.”

The critics may think the broader arguments are highlighting how many issues will come from taxing unrealised gains, but all they are doing is providing the government with more chances to deflect from the core issue.