Australia’s superannuation system may have breathed a sigh of relief after the Federal Government opted to walk back elements of its Division 296 superannuation policy, but the revised version remains deeply flawed and still risks undermining the retirement system.
While the super industry has largely welcomed the removal of plans to tax unrealised capital gains, the heart of the policy remains unchanged – the Government is effectively looking to implement Australia’s first wealth tax.
While the two-tiered model – increasing the tax on super earnings above $3million to 30% and above $10 million to 40% – appears to target the wealthy and ultra-wealthy, it’s actually targeting the assets Australians have built over time through hard work, careful planning and abiding by Government rules and regulations.
The fundamental structure of the policy is not only punitive, but it also acts as a disincentive to save and be self-sufficient in retirement.
While the thresholds will now be indexed, the value of property and assets like gold continue to rise quickly and significantly, and I would expect an increasing number of hard-working Australians will find themselves breaching the asset thresholds in future.
To use a schoolyard analogy – it feels as if we’re telling the younger generation not to aim for top exam marks or first place in the running race, because others around them might not do as well.
That’s not fairness, it’s mediocrity.
The policy is also flawed in its efforts to increase revenue for the Government.
Regardless of whether you agree with a 40% tax rate for balances over $10million, it essentially creates a ‘hard cap’. We will see changes in superannuant behaviour moving forward, including withdrawals from superannuation to other structures – such as companies and discretionary trusts which are not currently taxed based on asset thresholds.
Superannuants will also consider restructuring of portfolios, delaying realisations and an avoidance of high-growth strategies to avoid being penalised.
Industry has already seen this take place over the past two years ahead of the expected implementation of the original proposal.
Driving capital out of Australia’s superannuation system is not only bad for the industry, but it’s bad for the economy more broadly and has longer term impacts on investment, innovation and economic growth.
And, if superannuants actively change their behaviour to avoid the higher tax rates and withdraw funds from the superannuation environment, the Government will be unable to collect the forecast revenue. The concern then would be how the shortfall will be met, particularly if the precedent has already been set.
Will we see such asset thresholds being introduced to family trusts, companies, and other investment structures where the effective tax rate is currently 30% or less?
For those who believe such suggestions are unlikely, I remind you that it was only a few short years ago that the idea of making wholesale changes to our superannuation system were also considered unlikely.
Rather than continuing to tinker with flawed policy, the Government should draw on its greatest asset – the experienced and knowledgeable minds within the superannuation and professional-services associations.
These experts have guided millions of Australians through retirement planning over decades, and have an innate understanding of the system, its complexities, flaws, and genuine opportunities for improvement.
However, advisors have largely been left in the dark over the last two years, instead left to make long-term financial decisions based on unreleased Government modelling.
This has also raised questions; where is the modelling, and why has Treasury refused to release the assumptions and frameworks underpinning this revised tax? It appears that those designing both the original and revised policies don’t have a complete understanding of the complexity or long-term nature of superannuation planning.
The super industry has also taken note of suggestions that the Government’s original hardline rhetoric was strategic, and part of a broader political manoeuvre.
In a corporate setting, the use of ‘strategic redirection’ would generally invite closer scrutiny, to ensure transparency and accountability. Yet, in this case it is once again the super industry that is left to make sense of a policy that has real-world implications for those planning their retirement.
Our superannuation system is far too important for political theatre. If we want to continue to uphold a system that is genuinely fair, sustainable, and built to support generations in the future, then our policies must be transparent, consultative, and grounded in industry expertise.
Division 296 – even in its revised form – fails that test.