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Speaker 1: The Australian Financial Review.

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Speaker 2: The government's super tax change has been hugely divisive. Jim

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Speaker 2: Chalmers insists it's prudent policy that affects only the richest Australians.

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Speaker 3: This is a change which is modest and it makes

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Speaker 3: a meaningful difference to the budget.

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Speaker 2: Opponents say it's confusing, unfair and will eventually capture those

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Speaker 2: in their early twenties just starting out in the workforce. Today,

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Speaker 2: after a resounding election victory, Labor together with the Greens,

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Speaker 2: has the numbers to get the change through Parliament and

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Speaker 2: those Australians with large superbalances are already preparing. But ahead

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Speaker 2: of the vote, critics are becoming louder, warning there may

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Speaker 2: be more taxes on wealth to come.

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Speaker 4: The reality is that we do have a problem in

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Speaker 4: our tax system. There is an overreliance on income taxes

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Speaker 4: and young people pay very great proportion of the taxes

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Speaker 4: and that problem is going to get more acute.

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Speaker 2: Welcome to the Finn. I'm Lisa Murray. Today, Wealth editor

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Speaker 2: jo Animes and reporter Michelle bows on how the new

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Speaker 2: tax will work, why it's so controversial, and what people

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Speaker 2: are doing to get ready for it. It's Thursday, June five,

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Speaker 2: Hi Joe, Hi Michelle, thanks for coming on the podcast.

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Speaker 1: Hi there, thanks for having us Joe.

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Speaker 2: This super tax change was proposed just over two years ago,

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Speaker 2: back in early twenty twenty three. At the time, Jim

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Speaker 2: Chalmers and Anthony Albanizi said it would make the superannuation

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Speaker 2: system more equitable, and they made a point of noting

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Speaker 2: that seventeen people had superbalances worth more than one hundred

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Speaker 2: million dollars. How did they pitch land.

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Speaker 4: The language was really direct and incendjury. They challenged mister

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Speaker 4: Dutton to take to the next election opposition to this

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Speaker 4: policy and sort of in which case he would be

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Speaker 4: standing on the side of millionaires. So in late February

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Speaker 4: twenty twenty three, Gin Chalmers and Anthony Albanezi called a

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Speaker 4: press conference. They were there to commemorate a year since

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Speaker 4: the devastating floods in the Northern Rivers. But then came

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Speaker 4: this surprise announcement.

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Speaker 5: The Cabinet has met this morning and had a discussion

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Speaker 5: about superannuation.

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Speaker 4: They talked about the idea that this was really necessary

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Speaker 4: because the government had inherited a trillion dollars worth of

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Speaker 4: debt and you know, they had no choice but to

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Speaker 4: try and find money from somewhere.

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Speaker 5: And today I'm announcing the earnings on superbalances above three

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Speaker 5: million dollars will have a concessional rate of thirty percent

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Speaker 5: rather than fifteen percent.

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Speaker 4: And straight away they made the point that it wasn't

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Speaker 4: going to affect many people. They stressed that point a lot.

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Speaker 5: This proposal does not changed the fundamentals of our superannuation system.

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Speaker 5: Ninety nine point five percent of people with superannuation are

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Speaker 5: unaffected by this reform.

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Speaker 4: It was only going to be zero point five percent

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Speaker 4: of zuper account holders, the wealthiest Austraians. And they made

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Speaker 4: a real point of noting how some of the big

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Speaker 4: account balances in the system were worth many hundreds of

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Speaker 4: millions of dollars and that super had kind of gone

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Speaker 4: beyond the remit of retirement savings for a dignified retirement

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Speaker 4: and all this sort of language we use.

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Speaker 5: And with seventeen people having over one hundred million dollars

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Speaker 5: in their superannuation accounts, the individual who has over four

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Speaker 5: hundred million dollars in heesel or her account, most Australians

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Speaker 5: would agree that that's not what superannuation was for.

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Speaker 4: Straight Away, the proposed tax change became a political issue

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Speaker 4: and the Coalition said the government was leaving retirees in

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Speaker 4: the cold.

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Speaker 6: I think every Australians should be unsettled by what the

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Speaker 6: Labor Party's doing at the moment. They went to an

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Speaker 6: election and the Prime Minister promised and looked the Australian

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Speaker 6: public in the eye and said that it wouldn't change superinuation.

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Speaker 4: There was a month's long battle and the government was

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Speaker 4: unable to get this change through the Senate. The expectation

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Speaker 4: now is that with Labour's thumping victory and the Greens

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Speaker 4: holding the balance of power in the Senate, that this

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Speaker 4: will go through. The start date for this is July one,

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Speaker 4: so there is some time to prepare for this for

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Speaker 4: people who are affected, but it also gives us plenty

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Speaker 4: of time to have a lot more debate and for

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Speaker 4: detractors to stir discontent.

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Speaker 2: So, Michelle, you've been writing a lot about this, the

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Speaker 2: ins and outs of the tax, how it's going to

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Speaker 2: affect people. Can you explain exactly how the change will

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Speaker 2: work and who it's going to affect.

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Speaker 7: Sure, Lisa, Well, it's effectively a plan to increase the

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Speaker 7: tax on the earnings of superbalances above three million from

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Speaker 7: fifteen percent to thirty percent. But for many people there's

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Speaker 7: an actual misconception about how that will work because it's

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Speaker 7: not a flat tax rate. So, for example, if your

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Speaker 7: balance was three point two million, the amount above three million,

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Speaker 7: is that two hundred thousand dollars and thirty percent of

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Speaker 7: that would be sixty.

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Speaker 1: Thousand, sixty thousand dollars.

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Speaker 7: Yeah, correct, But that is not the tax that that

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Speaker 7: person would pay. It's actually a proportional tax, and it

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Speaker 7: only applies to the proportion of earnings above three million dollars,

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Speaker 7: the proportion that that makes up of someone's total superballance. So,

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Speaker 7: for example, imagine someone starts the year with a three

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Speaker 7: million dollars superballance and ends it with our three point

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Speaker 7: two million in super The change is that two hundred

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Speaker 7: thousand dollars, But that only represents just over six percent

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Speaker 7: of their total superbalance of three point two million. So

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Speaker 7: the tax levied on the t two hundred thousand dollars

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Speaker 7: works out to one eight hundred and seventy five dollars.

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Speaker 2: So it's quite complicated, but the tax is a lot

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Speaker 2: less than that thirty percent figure that we think about

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Speaker 2: at the outset.

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Speaker 1: Yes, that's right.

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Speaker 7: And look, I think it's also worth saying here that

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Speaker 7: when we've spoken to many many people about this tax

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Speaker 7: that will be personally affected, it's not the idea of

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Speaker 7: paying more tax on their super that they are against

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Speaker 7: per se. It's the calculation of this tax, because it'll

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Speaker 7: be calculated at the end of each financial year based

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Speaker 7: on all those gains that they are considered to have made,

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Speaker 7: whether or not they've sold assets and realized those gains.

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Speaker 7: So it's effectively taxing paper profits.

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Speaker 1: And that's the major.

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Speaker 7: Complaint about this tax. And for example, there if one

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Speaker 7: year you make a gain, you pay the tax, but

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Speaker 7: then if the following year the value of your assets

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Speaker 7: in super drops and you make an unrealized loss, there's

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Speaker 7: no refund.

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Speaker 2: For you don't get that money back, that's right.

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Speaker 7: Instead, you get a credit that could potentially be used

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Speaker 7: against a future game. But if you've passed away in

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Speaker 7: that time or closed your superfund, the credit's lost. And

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Speaker 7: in terms of who this effects, the people that seem

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Speaker 7: to be most agitated about the change were farmers and

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Speaker 7: small business owners because they often own their property, their

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Speaker 7: farm or the business premises they operate out of. In

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Speaker 7: a self managed superfund. So if a superfund owns listed shares,

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Speaker 7: those are liquid assets.

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Speaker 1: They're easy to sell, that's right.

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Speaker 7: If they get that tax bill on the paper profits,

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Speaker 7: they can sell some shares to pay the tax. But

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Speaker 7: if you haven't a liquid asset, much harder to sell,

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Speaker 7: like a farm or a commercial premises, and the value

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Speaker 7: of that goes up and you need to pay.

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Speaker 1: Tax on it.

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Speaker 7: It's pretty difficult to sell a paddock of a farm

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Speaker 7: or a bathroom of a property to pay that. So

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Speaker 7: the government is expecting to generate two point three billion

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Speaker 7: in the first full year of collection, and of course

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Speaker 7: we know charmers keep saying it's only to affect eighty

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Speaker 7: thousand people or zero point five percent of taxpayers at first,

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Speaker 7: But then we get to the other major criticism of

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Speaker 7: this plan is that the three million dollar threshold isn't indexed,

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Speaker 7: and due to bracket creep, which is essentially the tax

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Speaker 7: thresholds not rising with inflation and wage increases, Treasury projects

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Speaker 7: that if that threshold doesn't change over thirty years, some

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Speaker 7: one point two million people, or actually ten percent of

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Speaker 7: taxpayers will eventually be hit, and young people particularly will

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Speaker 7: be in the firing line. So AMP Deputy chief economist

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Speaker 7: Diana Messina estimates that today's typical twenty two year old

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Speaker 7: worker will definitely accumulate more than three million in SUPER

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Speaker 7: by the time they hit sixty four. And that's only

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Speaker 7: if they ever earned the average wage. That's just due

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Speaker 7: to wage inflation and the power of compound interest in super.

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Speaker 2: So Joe Michelle's picked up there on the two main

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Speaker 2: contentious issues with this tax. One is that it's not indexed,

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Speaker 2: which means the threshold for the tax that three million

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Speaker 2: dollars doesn't rise in line with inflation, so it captures

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Speaker 2: more and more people every year, and as Michelle said,

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Speaker 2: it will eventually capture young people who've started paying souper today.

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Speaker 2: And the other big criticism is that it includes unrealized gains.

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Speaker 2: So where's most of the opposition coming from.

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Speaker 4: Yeah, so, as Michelle said, the farmers aren't happy. It's

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Speaker 4: estimated that about three thousand and five hundred farms we affected.

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Speaker 4: When the government announced this measure, it did give those

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Speaker 4: sort of figures about who would be affected, but it's

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Speaker 4: been silent since, so there's been sort of quite a

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Speaker 4: bit of speculation or modeling that's filled the void. So

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Speaker 4: there's also smsfs who are obviously vocal critics. Some of

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Speaker 4: them own residential property that may have appreciated significantly. They

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Speaker 4: might own commercial property. They might also have invested in

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Speaker 4: sort of private companies or startup businesses whereby the shares

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Speaker 4: have grown significantly over time, sort of these lumpy, unlisted assets.

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Speaker 4: They're the people who will be affected. Of course, the

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Speaker 4: newly elected Tim Wilson and funds manager Jeff Wilson, who

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Speaker 4: runs money on all retirees, have leapt in and started

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Speaker 4: a campaign to sort of get rid of this proposal,

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Speaker 4: as they did for the franking credits in the twenty

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Speaker 4: nineteen elections, So they're going to be pretty noisy going forward.

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Speaker 4: There's opposition from tax purists who argue that it's bad policy.

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Speaker 4: We don't tax unrealized gains anywhere else, why should we

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Speaker 4: do this here. Of course, there are others who point

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Speaker 4: out that the income tax scales aren't indexed either. Paul Keating,

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Speaker 4: the father of superannuation, is apparently a critic of the proposal.

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Speaker 4: Or let's just say the unrealized gains and the indexation issues.

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Speaker 2: And Keating is obviously a mentor to Jim Chalmers, So

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Speaker 2: it'll be interesting if his criticisms have any influence on

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Speaker 2: the treasurer.

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Speaker 4: Yeah, Jim Chalmers will definitely be sensitive to what Paul

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Speaker 4: Keating has to say.

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Speaker 2: Michelle, you've been talking to financial advisors and investors about

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Speaker 2: the change. How are people starting to prepare? Are they

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Speaker 2: trying to get around this change before it's even been introduced?

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Speaker 7: Well, as one financial adviser put it to me, he's

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Speaker 7: advising clients to be alert but not alarmed. So what

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Speaker 7: he was sort of alluding to there is they're definitely

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Speaker 7: modeling scenarios. They're definitely looking at their options and what

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Speaker 7: it might mean for their clients' tax bills. But until

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Speaker 7: this law actually passes, they're not taking action just yet.

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Speaker 7: If they do decide that they do need to take action,

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Speaker 7: there are several strategies that we hear that people are

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Speaker 7: looking at. So for some that might mean bringing forward

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Speaker 7: inheritances by gifting money to kids or even grandkids.

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Speaker 1: Which is a tax free that's right.

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Speaker 7: And that would help them lower their superbalances below three

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Speaker 7: million dollars. Or another option would be taking some money

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Speaker 7: out of super and putting it into other structures they

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Speaker 7: may have, like a family trust or an investment company. However,

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Speaker 7: there would be a capital gains tax payable in the

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Speaker 7: moving of that money, so for some people, the modeling

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Speaker 7: might show that they're just better off leaving it in

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Speaker 7: SUPER and paying the tax. Of course, another way to

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Speaker 7: lower the balance could be to split SUPER with a spouse,

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Speaker 7: if your spouse has a much lower balance than three million,

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Speaker 7: so there's that option. I think the ones that are

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Speaker 7: really stuck, though, are the people that are younger than

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Speaker 7: sixty who haven't reached preservation age yet and they can't

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Speaker 7: withdraw any money from SUPER, so they're much more limited

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Speaker 7: in what they can do to adjust their balance, and

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Speaker 7: their best option is probably to change the asset mix

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Speaker 7: in SUPER, looking to hold more liquid, lower growth assets

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Speaker 7: inside SUPER, like bonds like larger amounts of cash or

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Speaker 7: even dividend paying blue chip shares that don't move too

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Speaker 7: much in value, and owning those higher growth assets outside

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Speaker 7: of SUPER. So that's things like property, cryptocurrency, or any

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Speaker 7: speculative shares because they obviously have a bit more price volatility.

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Speaker 7: Of course, there are some potentially what might be considered

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Speaker 7: anyway slightly dodgy strategies that might be a focus for

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Speaker 7: the ATO, such as people moving money offshore or seeking

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Speaker 7: more conservative valuations for unlisted assets such as property, and

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Speaker 7: the ATO is putting wealthy families on notice that it

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Speaker 7: will be watching what they're doing in preparation for this

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Speaker 7: tax going forward. But ultimately, Lisa, all of those scheming

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Speaker 7: about what they're going to do in response to this

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Speaker 7: tax might actually be missing the.

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Speaker 1: Bigger picture here.

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Speaker 7: Because government debt isn't getting any smaller, there's more and

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Speaker 7: more speculation building that there will be other taxes introduced

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Speaker 7: on wealth by this government. Historically, Australia's relied largely on

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Speaker 7: income tax revenue to fund the budget, but there's a

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Speaker 7: bit of a push away from that and it looks

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Speaker 7: like the wealthy could be in the crosshairs.

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Speaker 2: We're talking about the proposed super tax change, why there's

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Speaker 2: opposition to it, and how people are preparing for it. Joe,

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Speaker 2: there's speculation that this might just be the start. It

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Speaker 2: could lead to other wealth taxes. What do you think

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Speaker 2: the government might look at, Well.

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Speaker 4: We know that Treasury's hot trot on looking at trusts,

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Speaker 4: but I think you know, the problems are obvious to everybody,

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Speaker 4: including the people who oppose this tax, who say people

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Speaker 4: with high superannuation balances need to pay more tax. Superannuation

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Speaker 4: death benefits are projected to increase from about seventeen billion

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Speaker 4: in twenty nineteen to about one hundred and thirty billion

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Speaker 4: by twenty fifty nine, so obviously a lot of super

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Speaker 4: is being passed to the next generation rather than being

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Speaker 4: spent for a retirement income. The tax system undoubtedly favors wealthier,

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Speaker 4: older Australians. The system is increasingly generous to people aged

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Speaker 4: over sixty five, who have an average tax rate of

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Speaker 4: about seven point five percent, which is much lower than

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Speaker 4: the people who are building families, trying to buy homes,

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Speaker 4: building careers. So there's always speculation. You know, would the

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Speaker 4: government reintroduce an inheritance tax? Australia abolish those taxes in

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Speaker 4: the nineteen seventies, but we're an outlier, listen. I have

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Speaker 4: no idea, but it would be a pretty brave government

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Speaker 4: who introduced inheritance taxes. The thing about all this is,

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Speaker 4: of course, this measure, when taken alone, is easy to pose.

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Speaker 4: What a lot of the experts say is that a

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Speaker 4: government needs to come to the people with a tax

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Speaker 4: package that has trade offs it has winners, it has looters,

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Speaker 4: but it sort of rewrites the tax system in a

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Speaker 4: way that can be sold to the public other than

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Speaker 4: just doing one small tax change. At the time, of course,

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Speaker 4: Labor is a bit gun shy. It went to the

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Speaker 4: twenty nineteen election, the unlosable election, with some pretty bold

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Speaker 4: tax reform related to capital gains tax, negative gearing and

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Speaker 4: franking credits. They were met with a scare campaign from

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Speaker 4: the Liberals.

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Speaker 8: Vote Labor and a retiree taxes on the horizon Bill.

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Speaker 8: Shorten's new housing tax would take a wrecking ball to

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Speaker 8: the economy. Labor's billions of dollars in higher taxes will

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Speaker 8: put the squeeze on all Australians India.

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Speaker 4: And as we all know, that election defeat was very bruising.

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Speaker 1: They are inventing attacks.

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Speaker 5: They're inventing just completely fabricating attacks.

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Speaker 1: This does not exist and will not exist.

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Speaker 4: So within the party they're very keen not to repeat that.

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Speaker 2: And as you say, the tax treatment of superannuation is

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Speaker 2: very generous, isn't fair to say it's becoming a real problem.

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Speaker 2: Last week the Financial Review Rewindow column broke the news

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Speaker 2: that two Wise Tech directors have more than two billion

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Speaker 2: dollars combined sitting in their self managed super funds. That's

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Speaker 2: a bit more than you need for a dignified retirement.

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Speaker 4: Yeah, and the AFI has been putting in freedom of

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Speaker 4: information request to the tax Office for a number of

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Speaker 4: years now to find out what the biggest funds are worth.

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Speaker 4: We know that forty two smsfs have more than one

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Speaker 4: hundred million dollars in assets. And obviously this is actually

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Speaker 4: one of the first times that we've actually known who

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Speaker 4: these people are. These are the egregious examples that sort

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Speaker 4: of get people fired up. So the rear window column

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Speaker 4: revealed that Wise Tech director Charles Gibbon sold shares worth

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Speaker 4: two hundred million in December last year, saying at the

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Speaker 4: time that it was for personal estate planning purposes. They

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Speaker 4: were sold by the trustee for the Gibbons Ubranuation Fund,

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Speaker 4: trustees of which are mister Gibbon and his wife, which

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Speaker 4: meant they paid something like ten percent of in capital

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Speaker 4: gains tax, which is far lower than you would pay

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Speaker 4: outside of super in your own name, which in their

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Speaker 4: case would likely be forty five percent top marginal rate

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Speaker 4: plus the MIDI care levy. Even after the sale of

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Speaker 4: those shares. He still has wise Tech stock in his

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Speaker 4: SMSF and it would probably be worth we think about

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Speaker 4: one point seven billion dollars, and then another and then

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Speaker 4: to compound sort of the situation. Another Wise Tech director,

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Speaker 4: Michael greg we found had shares worth five hundred and

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Speaker 4: sixty eight million. So these were the kinds of examples

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Speaker 4: that really people get fired up about.

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Speaker 2: I guess both directors have been with wise Tech and

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Speaker 2: invested in wise Tech from early on, and that's.

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Speaker 1: What people do.

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Speaker 2: They have the shares in their fund before at IPOs

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Speaker 2: and then you get that huge escalation. But it still

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Speaker 2: is a pretty strong example of superfunds that have built

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Speaker 2: up too much in assets.

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Speaker 4: It is and opponents would say, well, this is a

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Speaker 4: tax on aspiration people who have ostensibly worked hard and

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Speaker 4: benefited from their ideas.

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Speaker 2: Michelle. Parliament sits again next month. The government, together with

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Speaker 2: the Greens, has the numbers to get this legislation through.

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Speaker 2: Do you think it'll be passed in its current form

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Speaker 2: or do you think the government might be forced to

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Speaker 2: make changes, either in response to the criticism or any

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Speaker 2: demands from the Greens.

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Speaker 7: Well, as you say, Lee, so the Greens do hold

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Speaker 7: the balance of power in the Senate, and they've argued

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Speaker 7: that they'd like the threshold lowered to two million dollars,

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Speaker 7: which would meet an extra sixteen thousand people would be

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Speaker 7: captured in the first year of this tax. But unlike labor,

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Speaker 7: the Greens are actually pushing for the threshold to be indexed,

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Speaker 7: meaning it would increase each year in line with inflation.

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Speaker 7: So if you were to assume an average inflation rate

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Speaker 7: of say two point five percent, the Greens proposed two

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Speaker 7: million dollar threshold would actually end up being less punitive

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Speaker 7: than the labor on in next three million dollar threshold

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Speaker 7: after around sixteen years. That means it would capture less

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Speaker 7: people than what the government is currently proposing now. Jim

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Speaker 7: Charmers has said recently in several interviews, there is no

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Speaker 7: other way to do this tax change.

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Speaker 3: These changes were announced almost two and a half years ago. Now,

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Speaker 3: we did multiple rounds of consultation and we said to people,

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Speaker 3: if there is a better fair way of making this calculation,

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Speaker 3: tell us about it.

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Speaker 7: He has noted that the government did do three rounds

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Speaker 7: of consultation, although if you speak to those in the industry,

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Speaker 7: they say that they were pretty short rounds of consultation.

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Speaker 1: And his mind was already made up.

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Speaker 7: Chalmers has said that taxing unrealized gains is just the

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Speaker 7: simplest and best way to go about this.

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Speaker 3: The unrealized gains calculation was recommended to us by Treasury.

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Speaker 3: We provided years of opportunities for people to suggest different

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Speaker 3: ways to calculate that liability, and nobody has been able

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Speaker 3: to come up with one.

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Speaker 7: He's also defended his decision not to index that three

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Speaker 7: million dollar threshold. He says there's many instances in the

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Speaker 7: tax system, and one is income tax rates where thresholders

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Speaker 7: are not and from time to time the government can

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Speaker 7: then take a decision to raise those thresholds. There are

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Speaker 7: still a few weeks until Parliament comes back after the

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Speaker 7: election and the new parliament begins, So whether Amas holds

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Speaker 7: firm is probably going to depend to some extent on

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Speaker 7: how much pressure he comes under and whether the Greens

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Speaker 7: are willing to trade away any demands on this tax

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Speaker 7: concession that they might have for sweetness when it comes

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Speaker 7: to other policies.

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Speaker 2: Finally, a question for both of you, tax concessions on

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Speaker 2: super are generous, are they too generous? And what's the

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Speaker 2: best way to improve the system.

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Speaker 7: So, for my part Lisa, Yeah, I think the tax

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Speaker 7: concessions on super are probably too generous, and some thirty

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Speaker 7: years after compulsory super began, tax reform probably is necessary because,

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Speaker 7: as we've said several times here, people hoarding hundreds of

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Speaker 7: millions of dollars in their super is not what the

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Speaker 7: system was intended for. But that taxing of unrealized gains

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Speaker 7: really does still stick with me as somehow inherently unfair.

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Speaker 7: And the bigger concern is will it set a precedent

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Speaker 7: that will leak into other parts of the tax system.

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Speaker 7: But for me, any starting point on the bigger debate

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Speaker 7: about tax changes, we really need to think about the

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Speaker 7: sort of society we want to live in, because there's

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Speaker 7: no doubt that inequality, both between the generations and even

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Speaker 7: within the haves and have nots in each generation has

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Speaker 7: grown considerably in recent years, and unless that's addressed somehow,

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Speaker 7: it does threaten to tear apart the very nature of

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Speaker 7: what we consider Australian values. I think in our Australian society.

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Speaker 4: We've talked about the generosity of our retirement system for

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Speaker 4: a long time, and back in the tax white paper

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Speaker 4: process there are a lot of submissions from a lot

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Speaker 4: of people, very smart people talking about how to make

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Speaker 4: things more equitable. One of them was around making our

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Speaker 4: subranuation tax concessions progressive, just like the income tax scale.

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Speaker 4: Back then, Chris Richardson was with economics and he talked

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Speaker 4: about sort of making the scales more progressive, or making

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Speaker 4: superannuation taxes more progressive by taking one's marginal rate and

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Speaker 4: taking fifteen percent off that. So there were all these

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Speaker 4: kind of options that were put forward that are probably

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Speaker 4: worth recanvassing. The reality is that we do have a

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Speaker 4: problem in our tax system. There is an over reliance

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Speaker 4: on income taxes, and young people pay a very great

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Speaker 4: proportion of those of the taxes, while retirees can live ten, twenty,

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Speaker 4: maybe thirty years in retirement virtually tax free. And that

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Speaker 4: problem is going to get more acute now. Twenty nineteen

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Speaker 4: was a very nasty experience for labor and I am

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Speaker 4: hopeful that they will or somebody will bring another package

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Speaker 4: to the Australian people, one that will make our tax

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Speaker 4: base more sustainable, it will make things fairer, but that

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Speaker 4: it will be a very very brave party that does that.

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Speaker 2: Thanks Joe, Thanks Michelle, thank you, Thanks Lisa, thank you

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Speaker 2: for listening to The Finn. I'm Lisa Murray, with Joanna

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Speaker 2: Maser and Michelle Bows reporting today. The Finn is produced

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Speaker 2: by Alex Gau with assistance from Mandy Coolan. Fiona Buffini

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Speaker 2: is head of Premium Content. Alex Gau composed the theme.

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Speaker 1: The Australian Financial Review