Resistance to ‘modest’ $3m super tax change a bad sign for broader reform: Chalmers

While professional bodies and think tanks have called on the government to commit to broad tax reform, the Treasurer has argued that the backlash against the Division 296 super tax amendments did not bode well for more substantive reforms.

“It doesn’t augur well for bigger, broader tax reform when such a modest and methodical change is being resisted,” Chalmers told a press conference in early June.

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“The [super tax] concessions here are still very generous. You know, we’re not eliminating tax concessions for people with big balances, we’re still providing very substantial tax breaks, just slightly less substantial.

“When it comes to tax reform, a lot of people say they’re in favour of tax reform in the abstract, but they very rarely, if ever, support it in the specific. And I think there’s an element of that playing out here as well.”

The Treasurer has argued that super tax concessions must be curbed to create a more equitable tax system. Tax professionals have warned that Australia’s system has become overly reliant on income taxes, placing a growing burden on workers amid structural budget deficits.

“The deficits over the coming years highlight the ever-increasing tax burden on Australia’s younger generations, which is unacceptable and can only be resolved by updating our outdated tax system,” Todd Want, head of tax services at William Buck said in March.

AMP chief economist Shane Oliver warned that, without budget repair, spending pressures could lead to higher inflation and interest rates, especially if commodity prices weakened.

“Structural spending pressures around the NDIS, health, aged care, defence and public debt interest are now taking the budget back into deficit when public debt is already high. They need to be checked and offset by savings,” he said.

Chalmers’ proposal to amend the superannuation taxes would see the earnings on amounts above the $3 million threshold taxed at an additional 15 per cent. It is expected to generate revenue of $2 billion in its first full year of operation and impact the wealthiest 0.5 per cent of Australians.

Super tax concessions are set to cost the budget more than the age pension by the 2040s in lost tax revenue, the federal government’s 2023 Intergenerational Report projected.

The tax bill, which had previously stalled in the Senate, is expected to be passed with support from the Greens. If passed, the new super tax rate would commence from 1 July 2025.

The plan to reduce super tax concessions has garnered sharp criticism, most pointedly due to its lack of indexation and the way it taxes unrealised gains.

Modelling by AMP deputy chief economist Diana Mousina found that, in the absence of indexation, today’s average 22-year-old worker could accumulate over $3 million in super by the time they hit 64 due to wage inflation and compound interest.

The Treasurer argued there would be nothing stopping a future government from increasing the cap, similarly to how income tax brackets are periodically reviewed to account for bracket creep.

Geoff Wilson, chairman of Wilson Asset Management, added 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 SMSF Adviser, ifa’s sister brand.

“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.”

In response to criticism, Chalmers doubled down on the Division 296 super changes, highlighting the Treasury’s competing budget priorities.

“A lot of the same people say we need to dramatically increase defence spending. We need to dramatically cut the company rate. We need to abandon the changes to make superannuation tax concessions fairer and we need to deliver bigger surpluses,” Chalmers said.

“Often it’s the same people saying that, if you can believe it. And so [Treasury’s] job is to make it all add up. Sometimes that involves decisions which not everybody likes. And obviously I understand that not everybody likes this change, but we have to do what’s right in response.”

The Treasurer said he would welcome discussions on tax reform and budget sustainability at the government’s productivity roundtable in August.

“No sensible progress can be made on productivity, resilience or budget sustainability without proper consideration of more tax reform,” Chalmers said in his National Press Club address on Wednesday.

“This evolution in our revenue base is one of the reasons tax reform is so crucial to budget sustainability – on top of restraining spending, finding savings and working on longer‑term spending pressures.”