Proposed superannuation tax changes not black and white, says RSM Australia

Acton, thank you for a thoughtful reply which addresses some of my comments. I will disagree with some of it at a later point, after chatting to some of the others.

@Acton
While I agree that an unindexed threshold, be it $3m or $2m, will ‘eventually catch more and more retirees’, it is still quite a substantial amount (actually, a sh*tload of money) to have in a current super account.

Nevertheless, in another article by Phillip Coorey, also from Wilson Asset Mgt:
https://wilsonassetmanagement.com.au/spender-pocock-join-forces-against-3m-super-tax-grab/
it’s reported that independent MPs, such as Kylie Tink and Allegra Spender, suggested amendments when the bill was in the lower house – including indexing the threshold, but such amendments were rejected. However, the article goes on to report that Ms Spender has already begun talking to Senator Pocock about possible changes to the legislation before the Senate.

So, while the government did not allow indexation of the threshold in the bill passed by Reps, it may well be included before it passes the Senate – assuming it will pass eventually.

Then perhaps the independents can work with the government to address another travesty – which is the current non-indexation of PAYG tax brackets.

In case anyone missed it, here is the bill showing the calculation method, with worked examples:
https://treasury.gov.au/sites/default/files/2023-09/c2023-443986-em.pdf
and here is a shorter discussion and example:
https://www.pkf.com.au/insights/common-misconceptions-about-the-proposed-division-296-tax-for-individuals-with-a-total-superannuation-balance-greater/
Note from the second article about misconceptions that it is only a proportion of the amount above $3M which is then taxed at 15%, not all of it.

@Acton, I discussed distinctions over “earned” and “realised” below as a voluntary decision. Put in reverse, unrealised does not equal unearned, as many examples make clear, apart from which, if you haven’t earned it how can you realise it anyway? You have an entitlement, a lien on new assets if you like. Geoff Wilson is wrong. If one of my stocks rises in value it is my choice whether to take the money to which I am entitled or leave it in the market in reasonable expectation of further long term increase. The fact there is risk in my decision is my affair, not something against which government must insure me. I earned it, I decide what to do with it in the regulatory environment.

The tax most certainly does not “undermine the whole concept and purpose of superannuation”. As I discussed in response to JustSaying below, it actually adheres directly to the purpose rather than providing a concessional vehicle for hoarding of wealth by the top 1%.

I agree about indexation. My suspicion has been that it is being held back for negotiation. At least, I hope that is the worst case. Tink is pushing for indexation, Spender wants more dramatic change, we will see where Pocock et al fall in the Senate.

If indexation were accepted then there is nothing to claim about “people working hard their whole life”, when 99% of such people will be wholly unaffected and the other 1% remain even wealthier than the rest.

@byline
It would appear that you and I have been arguing at cross-purposes.

The link to the second article, provides an example of the calculation of “Earnings” … the only use of the “value of the holding” is to compare the previous year to the current year to determine those earnings. There is no mention of ‘unrealised gains’, only actual gains = earnings, in the calculation of the tax to be paid.

I don’t have a problem with that – as it identifies the “income” earnt by the super account holder over the year.

As defined for Div 296, earnings is the change in your super balance, which includes unrealised gains exactly as it does for compulsory withdrawal amounts at your age-rate for the 99% not subject to Div 296. The difference now is that a 15% tax is proposed for that < 1%. As noted, indexation is needed to keep it at 1%.

@byline
Apologies for “reigniting the flame”, but having had a second look at that link you provided to the article with the proposed formula, I rescind my comment that we “have been arguing at cross-purposes.”

The proposed formula using total superannuation balance (TSB) for calculating earnings:
TSB Current Financial Year – TSB Previous Financial Year + Withdrawals – Net Contributions
is a crock of sh*t and I can see why, many commentators, including cross bench MPs are up in arms – and I hope they succeed in getting it changed.

The TSB at any given time is a virtual valuation only, and to compare these values, at different times is only an indication of ‘paper’ (i.e. unrealised) gains not realised gains.

Our whole income tax system is based on, if you will, ‘cash-in-hand’ earnings, not virtual earnings. Every super account I have ever held, clearly shows the income I have received – i.e. via dividends or interest. It is that income on which these rich b*st*rds should be taxed, not some arbitrary figure because there is a belief that they will be already comfortable enough in retirement.

Elsewhere, you mentioned, land rates and taxes, calculated on unimproved value, as a comparable example to what is proposed. You then stated “They are also applicable to all such property, not to less than 1% of the most expensive in Australia.” Exactly, it’s based on a consistent formula for all – not only the rich b*st*rds.

Using the ‘arbitrary’ value of the holdings, to assess whether to apply the progressive rate from 15% to 30%, is a necessity, but that’s where it should end.

“Does anyone whose house value has gone up by 20% or 100% think they are poorer as a direct result?”

*raises hand*

If a given house goes up in PRICE (not value, these words are not interchangeable) by 100%, that means that all else equal, you need to work twice as many hours to afford the same house.

Essentially your labour has now halved in value, congratulations.

Rampant increases in house prices makes everyone poorer.

Why would I think that “rampant increases in house prices” do other than make housing less available, *society* the poorer thereby? However, that is off the point that the individual has an increase in asset market value, regardless of how many hours someone else has to work to buy it. This is what has happened to houses over the last decades, especially since the late 1990s.

This is a distraction from the general points that unrealised gains are gains are made, which gains you may or may not choose to realise at the time.

@byline
I certainly have no issue with taxing the income, from super accumulation accounts of $3m or greater, at 30%. However, I don’t think it’s appropriate to tax a super account holder on unrealised gains.

“Paper gains” are not worth anything until you realise the gains on (i.e. sell) the asset and receive it’s actual value … it’s the reason Capital Gains Tax is only payable on sale of the investment asset.

As per my comment above, I believe, this aspect of the legislation is far from settled.

JustSaying, I headed the item on which you comment, “Some things to consider while discussing the principles”. This is not a position of advocacy, yet I think people need to consider each of my examples of effective taxation of unrealised gains before throwing their hands in the air and running about (the usual response to possible tax changes).

The purpose of superannuation is a comfortable retirement. Over $150k tax free annually is not uncomfortable, and might be considered a gross distortion. Just ask those on lower pre-tax incomes with a mortgage and child expenses. Thus, the proposal from the government is to discourage holding assets beyond need in a tax-advantaged vehicle.

In any event I will bet a fair $sum that of those holding in excess of $3M in super the vast majority have assets (perhaps themselves income-producing) outside super. Any retiree utterly disheartened by a tax rate of 30% on gains (realised or not) on assets in excess of $3M can avoid it easily by withdrawing sufficient money for direct investment, with advantages of a tax-free threshhold and probable franking credits to alleviate the pain of personal taxation. Maximising useful super while also investing outside is normal, where you are in a relevant wealth bracket.

“Local poors discuss scheme to get their grubby hands on more of other peoples money”. 🤣

@byline
Yes – I did consider the things you raised and have stated that I have an issue with the principle of taxing a super account that has a ‘deemed’ value, when that value is not yet realised. Don’t forget, the super account holder will still pay tax on the income generated by their account.

As I said, I don’t have an issue with raising that tax amount from 15% to 30% on income actually generated by the account, but even though we are dealing with gigantic super holdings, even for multi-millionaires the system should only tax them on what they earn – admittedly what they earn and what they eventually declare is an entirely different matter which also should be addressed.

Not often I agree with anything Capital Retro posts, but I agree on this occasion, that taxing “unrealised gains” is akin to a provisional tax – which is also a ‘guesstimate’ on what might happen to a tax payer’s income in the future; and often the reason for the ‘provisional tax’ is an easily once-off “windfall”, such as depositing the proceeds of a recent house sale and earning a lot of interest.

JustSaying, I accept that you are happy with land rents and with taxes and enforced withdrawal on deemed value of land gains and of ordinary superannuation gains but abjure related taxes on capital wealth beyond need or principles of superannuation.

OK.

It would probably have been clearer to put a hard cap on superannuation accumulation so the rest is outside that vehicle, taxed at personal marginal rates. This proposal is less onerous, its point being precisely to tax capital meaningfully, something not done today except in the case of common property landlords most of whom own far less.

I get the “unrecoverable provisional tax” problem, though are you quite sure it is a meaningful problem rather than a bleat?

JS, thanks for agreeing with me re provisional tax.
What is your take on people in the the defined benefit schemes like CSS and PSS?
They may not be “superannuation funds” but there is a “future benefit” to those in them and isn’t that future benefit and “unrealised gain”?
Do they get exempted because there a quite a few that would collect over $3 million if they live long enough. Sure, that its taxable but everyone else in superannuation funds pays accumulation and earnings tax before the fund goes into pension (retirement) mode.

@byline
I’m sorry but I honestly have no idea what you are talking about.

Can you tell me in what format, capital wealth is currently taxed in Australia? We have Capital Gains Tax, which is applied to the known return on the sale of an investment. Nobody pays tax on the presumed or deemed value of that investment – they only pay tax on the actual realised gain on that investment.

So why should the holders of super accounts pay tax on unrealised gains?

With respect byline, you are exposing your Marxist education plus a dash of class warfare because you have no idea what happens in the real world of a retiree with an SMSF.
For a start, “tax free” is what happens after accumulation which is gouged by contributions and earning tax.
And are you ignorant of the fact that a retired couple with a SMSF pension saves the taxpayer at least $50K a year by not accessing the age pension?
And you totally wrong about the perception that self-funded retirees have a “lower cost of living” because health insurance and the gap fees from even minor surgery is about $20K a year. Health insurance does not cover basic fitness classes ($2K a year). Re no children to support, have you heard about the “mom and dad bank”? And while I have no mortgage when I did I was paying up to 22.5%pa interest – the current battler generation whine about paying 6%pa! And who paid the childrens’ education fees?
Sure, no work related costs but we still have to run motor vehicles and pay tradesmen to do what we used to be able to do ourselves.
I hope you remember this post when you are retired and living in your “have nothing but happy” world.

@Capital Retro
To be honest, I don’t have a take on CSS and PSS schemes as I don’t know a lot about them.

I do know, they don’t have an account with a finitite figure, such as you and I have in our respective super accounts, but they provide indexed pensions for life, and that those receiving a pension each fortnight pay tax on the (already) untaxed portion. So in that regard, I guess they are paying tax once it goes into retirement mode.

As for how to deal with it under the $3m super cap on taxable earnings perhaps you have some thoughts?

JS, whenever I have delved into the “ins and outs” of the CSS and PSS I usually hit a brick wall. Those still on it in retirement don’t what to talk about it obviously because it is so beneficial to them (and their survivors) it is in the “rort” category.
With indexation it will probably send the ACT government broke.
In respect of whether it is superannuation as distinct from pension I am advised that it is, so beneficiaries should be included in the proposed changes.
I doubt if the Federal government has got the details worked out yet.

@Capital Retro
While I would describe CSS & PSS as very, very (add as many iterations as you like) generous schemes, it’s obviously why the government was so keen to shut them down, I think it’s harsh to put them in the ‘”rort” category’.

Like many legacy systems, they were the APS’s ‘super fund’ at the time – and as you are probably aware, it was compulsory for permanent public servants to join. Also, they were contributory funds with employees having to pay a percentage each payday. Notwithstanding that the government also kicked in a (generous) contribution in the days before SGC was a thing.

Nevertheless, I take your point that there will be retired public servants and pollies whose ‘vitrual’ holdings in these defined benefit schemes will exceed $3m and as such, whatever tax provisions are introduced for other pension accounts, they should equally apply to applicable CSS and PSS accounts.

“And are you ignorant of the fact that a retired couple with a SMSF pension saves the taxpayer at least $50K a year by not accessing the age pension?”

You don’t save the taxpayer anything by not accessing a welfare payment you don’t qualify for.

Your statement is equivalent to claiming having a job is saving the government money through not having to pay you Centrelink benefits.

As for lower living costs in retirement, it isn’t a perception, it’s a fact born out by pretty much all accumulated data about the issue. Sure health care costs may increase but your claims around gap fees for minor surgery of $20k per year are just ridiculous and would only apply to an extreme minority of retired people.

The rest of your complaints are irrelevant to the discussion.

“With respect byline, you are exposing your Marxist education plus a dash of class warfare because you have no idea what happens in the real world of a retiree with an SMSF.”

ROFL&L&L
Despite risk of split sides I have recovered enough self-composure to respond to this farrago, Capital Retro. Isn’t it blissful, that conviction you derive from the purest ignorance?

I neglected nothing in my considerations about cost of living, although it is interesting to hear that you consider 15% as “gouging”. Only Costello’s hugely inefficient superannuation surcharge was what I would consider gouging on any tax, that owing principally to its EMTR of ~100%.

By the way, did you fund your mortgage by Bankcard? Credit cards were 22.5% and beyond in the early 90s but mortgages peaked briefly only at 17% in those times, when necessary loans were far smaller than they are today, houses a far smaller multiple of median earnings. I am sorry to hear you were so careless as to be paying such a high rate.

“I’m sorry but I honestly have no idea what you are talking about.”

So it appears.

At no point did I claim there is a current tax on capital wealth in Australia. Whether there should be would be a separate discussion and rather further up the wealth scale.

At no point have you addressed my different partial analogies, so it is well understandable that you have found no answer to your “why should the holders of super accounts pay tax on unrealised gains?”
I ask in reply, why should earnings on capital over $3M be tax-advantaged beyond the purpose of the scheme?

As a a counterpoint from the other end of the scale, we provide unemployment and family tax benefits to help people transition through unusually difficult circumstances, to be able to reach a point when they can live normally. When the purpose of the scheme is served, they are in ordinary employment, would you argue that they should continue to receive government benefits because they had them during the transition stage? The purpose of the scheme is served, the benefit stopped.

Correspondingly, why continue any tax advantages at all when the purpose of the superannuation scheme, funding for a normal comfortable retirement, is more than served?

Here is an example of how it can play out.

Assume I have $2M in super and an investable $2M outside. From the first I withdraw $100,000 entirely free of tax, and in the ordinary course my base capital will grow faster than inflation or wages, so I will get richer already. The second $2M I invest in the market with a 9% long term (one can do better) from which I retain 5% and reinvest the rest, so again I will maintain earnings or get richer.

That second $100k after tax, with no consideration for franking credits, will leave me a mere ~$80,000 to add to the $100,000. At that point $180,000 clear of tax will allow anyone other than Capital Retro to invest further. You are in the top percent or two of income earners and do not even have to pay the top rate of income tax.

Note I did that on a $2M/$2M split, not $3M/$1M. Your position appears to be that if the whole $4M were in super then how could one dare touch that? Ever heard of progressive taxes? Means testing? Social equity? Efficiency of taxation and expenditure?

Please think about the principle some more, then we can discuss the means again. A 30% tax on marginal income does not cut it.

@byline
Firstly, “the purpose of the scheme”.
The purpose of the superannuation is to fund people’s retirement. While I agree, and as I’ve said elsewhere, $3m in a super account is a sh*tload of money, but who are you to decide what constitutes ‘ a normal comfortable retirement’?

I haven’t addressed your analogies because they are fairy tales. In all of the above analogies, you will pay tax on the income earnt not the capital.

I’ll give you a real life example.

A person owns an investment property. They purchased it for $2m and it is currently valued at $3m. The property is rented out and let’s assume that the property is positively geared. So our investor is only required to pay tax on the rent they receive. Until they sell the house and realise a capital gain, the value of the house is irrelevant for taxation purposes.

As for the 30% marginal tax … well that’s a lot better than the current 15% for income earnt in superannuation accounts of the magnitude we are discussing.

Can I ask … if you agree with taxing ‘unrealised gains’, would you then suggest that super account holders should be compensated, when their capital holdings go backwards – as happened to many (most?) super accounts during the GFC and COVID?

“Having made the money” – Money is only real once you can do something with it. You have not ‘made the money’ – some third party has arbitrarily taken a best guess stab at what the asset value is – only for the purpose of taxation. You can revalue my vehicle as often as you like, or my home – but it is theoretical and meaningless without the ability to cash it in. I can’t spend it to pay even $1 on my real current bills. You sell your house at an appreciated value, pay capital gains pre and post, and then buy another house that has equally gone up in value – net zero benefit, other than tax loss. How many people in reality consider they have a ‘choice’ to just go and sell their biggest retirement critical assets.
“Without question…” Just check the market price for shares – yeah, check it today, then check it’s changed value tomorrow, next month and realise just how little share prices have to do with the inherent value and operations of the company they are fixed in? They fluctuate on the whims of the market. So do I pay a random capital gains tax on unrealised value of a share today, to discover the next day it goes from $50 to 5c on a temporary market whim or international scare? Would I be refunded for the change in value?
It is not income until it is realised. THAT is when it should be taxed.

Many people arrange their finances to qualify for the pension, chewy.

A close colleague recently had a cancerous prostate removed under the private health system with the highest class of cover. It cost over $20,000 for the surgery and anesthetist and he only got back $5,000 from the fund.
It’s time you caught up with the real world.

Capital Retro,
I’m well aware people structure their finances to rort the pension.

It’s why it’s the most expensive program in the budget and is completely unsustainable in its current form and needs serious reform around eligibility so it meets its actual policy goals.

And as for your close colleague, did you really just use an anecdotal example to attempt to disprove my point that the overall data disagrees with you, despite their obviously being a small minority of cases with higher costs?

Particularly when our public system will also treat those types of patients for free when their conditions are serious.

The one place you don’t live is the “real world”.

ROFL&L&L, farrago? Are you trying to baffle me with big words, byline?
The superannuation contributions tax was 15% but the earnings were taxed at 30%. Also, people who ran their businesses as a family partnership and didn’t incorporate were denied uncapped concessional limits and other concessions. They were also taxed higher.
My mortgage was raised to 17.5% like all others but because I couldn’t sell my house in another town when I moved to Canberra for work I had to rent it out so the bank charged me a 5% surcharge. Not careless but luckless but you really couldn’t give a rats, could you.

JustSaying, we already decide progressive tax scales. On what basis is that? We decide levels of benefit and withdrawal of social security. On what basis is that? Entire budget allocations are decided, on what basis? The answer is (supposed to be) our best estimate of social good. Your query about who may decide what constitutes a “comfortable retirement” is something to which you might have given more thought before writing.

It seems you did not respond to my analogies because you did not follow them. In the case of an investment house, did you not notice increases in land tax, or rates on that and on a domicile? They increase with estimates of unimproved value; unrealised gain. They are also applicable to all such property, not to less than 1% of the most expensive in Australia.

There are provisions in the Div 296 tax for carry-forward of losses where you fall below $3M. Read the papers I referenced above to see how the tax works in various scenarios.

Regarding GFC and Covid, do you mean all of the other years do not count? You would like a guarantee in the market? I will make no presumptions, just ask, do you personally invest in risk assets?

@ross dennis
If a share loses 99.9% of value overnight then more than a whim will have been involved. Why would anyone invest in it if there were not reasonable expectation of long term gain?

The market always stands ready to buy your shares in listed companies. You can sell your house, you just may not like the price. If you have over $3M in superannuation assets then in the retirement phase you can withdraw some to invest in your own name, if you really think that makes sense (it most probably does not). If you are in accumulation phase, your flexibility is less, but you can ask your fund (including yourself in an SMSF) to put the money in government bonds and hold them to maturity. Notice that you have all of that money to do so. You earned it.

I understand the view that unrealised gains should not be taxed. Can’t say I like it myself. Treasury appears to believe it is efficient and achieves the aims with equity. My thrust here is to observe that the case may not be as black and white as some seem to believe.

Capital Retro, people who have reorganised their affairs to claim a part or whole pension do not also have $150,000 tax free income from a super fund, by definition. Your point is hopeless.

OK, so your mortgage was 17.5% and you make no comment on relative housing affordability, ratio of price to income. You could afford it to the extent that the financially sound decision from your point of view was to rent out your previous property despite an increase in the interest rate on that house, rather than sell in the market at the time. Good on you for making a decision that was sensible for you in the circumstances. Based on this and historical posts by you, I do not believe you are impecunious so any sympathy would appear not to have an object. I am sorry if I am incorrect about that inference.

@byline
“… do you personally invest in risk assets?” No

The 2020-21 ACT audited financial statements estimate the ACT superannuation liability as of June 30, 2021 as $13.2 billion. This applies to public servants on the old CSS and PSS defined benefits who were transferred to the ACT government books when self-government happened. According to the projections included in the budget papers, the liability is forecast to peak in the early 2030s, reducing progressively over the following 50 years, based on the current mortality rates and other relevant assumptions.
This means if there are only 4,000 left on that scheme the unearned money due to each of them is over $3 million each.
And that is the ACT only.

@Capital Retro
Thank you for that information, CR, As I understand it, the ‘future fund’, which as you will be aware was set up to address the issue of future unfunded super liability, is nowhere near covering the costs of CSS & PSS superannuants, so those figures you quote ally nationally (on a greater scale) as well.

Big debt there for any government.

Capital Retro,
why would you believe there was 4000 left on the CSS and PSS schemes who were ACT public servants?

When the scheme closed, the size of the ACT Public Service was about 17-18 thousand employees. Pretty much all of them would have been on those schemes.

Now, that number would have dropped somewhat but people who were already on those schemes had some level of transportability across government’s, so may not be as much as you think.

I divided $13 billion by $3million and speculated that is was possible that about 4,000 people could have the virtual $3 million. The youngest ACT public servants would have been about 18yo then and today they would be 54 now, on the cusp of retirement. They would be the ones that were “loaded” and the indexation will guarantee them dues of around $3 million.
If you stopped bagging me all the time and instead introduced some meaningful data it could be helpful to other readers on this blog.

“I … speculated”

“meaningful data”

see: oxymoron

Capital Retro,
I gave you the numbers of the public service at the time the scheme was closed to new entrants.
That number alone tells you that the average defined benefits pension value for ACT public servants would be far less than the $3million cap.

I read that only 2% of superannuation balances are currently valued at over $3 million dollars.

No, but if you lose enough to have less than $3M on hand, you’ll be fine.

Portfolio.

There are plenty of Labor supporting retirees out there too, Roy.
You do not have to have a SMSF for these new rules to apply. It is about the balance, not the type of fund.