Is there just the smallest glimmer of hope that the Federal Government may reconsider the (frankly silly) way they plan to tax large Super balances?
There is, if a story in today's Financial Review can be believed.
As a reminder, the government has previously announced a plan to increase the tax burden on particularly large Super accounts, which I think is a worthy aim. (I'll go into why, in a minute.)
(I did a YouTube video on it, here, if that's more your style.)
The problem is that their announced plan had three components which individually are bad policy and together are atrocious.
They intended to:
1. Tax unrealised gains. That is even if you hadn't sold an asset, an increase in its market value would have incurred a tax obligation.
2. Not index the level at which it was to apply. Some calculations from AMP Ltd (ASX: AMP)'s Diana Mousina suggested that not indexing it would mean even the average worker in their early 20s today would pay the new tax when they retired.
3. It was retrospective. When legislated, it would apply to the current tax year, which is already 3 months old, hitting investment decisions already made.
As I said, each is bad. Together… frankly indefensible.
Now, before you decide I'm just here to look after the fat cats, let me return to the 'worthy aim' I mentioned, above.
See, here's my take on tax policy:
The first step should be to work out how much tax to collect, based on a chosen level of spending (we can argue about how much we should spend, but that's a whole other article).
The next step is to work out how the burden is most reasonably shared, based, in part, on the taxpayer's capacity to pay.
Third, formulate the application based on two broad implementation issues: the efficiency of the tax, and the impact of the tax on behaviour (good and bad).
That's exactly how we'd design a tax system, if starting from first principles, I reckon.
We don't have that luxury of starting from scratch, of course, but it should still be the framework for all tax changes.
And Super?
Well, even before those proposed changes, a Superannuant can have $2m in 'pension phase', the income from which is entirely untaxed.
Now, the stock market tends to rise about 9% per annum, on average. If a hypothetical Superannuant had their $2m in an ASX ETF that delivered that result, they could essentially draw a $180,000 income, entirely tax free.
Now let's say their account balance was $4m, instead. The first $2m is tax-free, as I said, above.
Earnings from the next $2m are taxed at 15%. Again assuming the same return, they'd earn another $180,000 and pay only $27,000 in tax.
Which would work out to an average tax rate of 7.5% on a $360,000 income.
By contrast, according to the ATO's simple tax calculator, a nurse or copper earning $100,000 would pay $20,788; an average tax rate of almost 21%.
Is there anyone, other than the ideologues or the aforementioned Superannuant, who reckon that's a reasonable sharing of the tax burden?
(And to their credit, almost every Superannuant I've spoken to in that sort of situation agrees that they're getting it too good, and don't mind a change to the system.)
Now, before some people tell me that Super should be incentivised, I agree.
And before you tell me that it saves money for the Federal Budget, I agree with that, too.
But we're talking about amounts and degrees, here.
I am a huge proponent of Superannuation. I just reckon we've made it too generous.
There is more incentive than required. And the savings to the Budget are less than the value of the tax concessions. In short, we've got the idea right, but the settings wrong.
Is it fair and reasonable that someone with more than $3m in Super pays more tax? You bet it is.
If you think 'they don't spend it well' or 'it's yet another tax', I hear you. Government should absolutely be more efficient.
But this, for me at least, is a question of how the tax burden is shared, not one of how much should be raised.
Right now, we have a big and growing Federal Government debt. So I'd be happy to see any additional funds raised go toward paying that off.
After that? I'd love to see taxes reduced for the nurse on $100,000 if we've got excess tax revenue.
Both are more justifiable than a sub-10% average tax rate for someone drawing an average income of more than $350,000 annually.
Okay…so that's a lot.
Unfortunately, because of ideology and self-interest, much of the above has to be communicated each time we talk tax, and I think it's worth doing so.
Back to Super, then.
If we are to ask wealthy Superannuants to pay more tax, it should be applied reasonably.
That means the threshold should be indexed, to avoid more and more people being caught by it.
It means not sending someone a tax bill just because the price of their (unsold) house, shares or other assets go up.
And it means starting the new regime in a new tax year, so that people don't get caught out having made decisions about their current arrangements before the law changes.
I don't think that's an unreasonable ask. And makes the implementation better, and more reasonable.
(As to why they structured it that way, I don't want to get too deep into the electoral and political machinations, but I suspect they tried to be tricky and tripped on their own cleverness. I suspect the unindexed threshold was designed to catch more people over time, while starting from a level – $3m – that seemed 'very high', trying to make it politically palatable. And I suspect that the unrealised gains thing was intended as a de facto cap on Super, designed to incentivise people to cash out some of their Super, rather than have a tax bill to pay without the associated cashflow. Pure speculation, of course, but if so, they should have just made the appropriate changes, rather than getting too clever by half. They've kinda brought this on themselves, I reckon.)
Bottom line? I didn't expect the government to listen – they'd repeatedly said they'd push ahead – but if the report in the Fin is correct, then good on them for actually considering the feedback.
But so far it's just that – a report. So I'm adding my voice, once again, to the argument.
It's not unreasonable to consider asking wealthy Superannuants to shoulder a little more of the tax burden. But Treasurer, please do it in the right way.
Fool on!
