New data from the Financial Services Council (FSC) has projected the impact of the proposed superannuation tax on different age cohorts of Australians under four different scenarios, including lowering the cap to $2 million and if both thresholds were subject to indexation.
The analysis is based on data from the ATO Taxation statistics 2019–20 of superannuation contributions by individuals, total superannuation member accounts balance range, taxable income range and age range.
It also makes a number of assumptions, such as inflation at 2.5 per cent per year, investment return on superannuation balance of 7.5 per cent per year, effective tax on earnings at 7 per cent per year, as well as fees and expenses related to administration and a retirement age of 65 years.
The four scenarios modelled by the FSC include:
- $3 million threshold without indexation, as previously released (Labor policy).
- $3 million threshold with indexation (potential negotiated outcome).
- $2 million threshold with indexation (Greens policy).
- $2 million threshold without indexation (potential negotiated outcome).
The FSC said the decision on whether to index the proposed tax will have a significant impact on younger Australians and is critical to the overall fairness of the measure.
It found that under the four scenarios modelled, with a $2 million threshold and no indexation, more than 1.8 million Australians currently in the workforce will be impacted by the legislations by the time they reach retirement.
Furthermore, under the Labor policy of a $3 million threshold and no indexation, more than 500,000 Australians currently in the workforce would be impacted by the time they reach retirement, while under the Greens policy of a $2 million threshold and indexation, more than 200,000 Australians currently in the workforce would be hit by the time they reach retirement.
Alternatively, with a negotiated outcome of a $3 million threshold with indexation, the number would be reduced to 64,000 Australians currently in the workforce being impacted by retirement.
Blake Briggs, CEO of the FSC, said the government will set the tone for how it intends to govern in its second term by deciding whether to listen to broad consumer, industry and economists’ feedback on how the current design of its superannuation tax is unfair to future generations of Australians.
“The superannuation industry recognises the government has the capacity to force the new tax through the Parliament with the support of the Greens but encourages the two parties to take a more constructive and consultative approach,” Briggs said.
“The Financial Services Council encourages the government to consult on options that would not unfairly target future generations of Australian superannuation consumers and undermine confidence in our retirement system by introducing a new, contentious tax on unrealised capital gains.”
He added that the superannuation industry recognises there is merit to ensuring the superannuation system remains fair and fiscally sustainable.
“However, the government’s current approach risks undermining consumer confidence in Australia’s retirement system by changing the goal posts on current and future retirees who, until now, have played by the rules,” he said.
“The FSC is concerned that the absence of indexation is a deliberate and cynical design feature of the new tax that targets younger Australians, in full knowledge that Australia’s deteriorating financial position means future governments will be too cash strapped to introduce indexation at a later stage.”
While the proposed taxation of unrealised gains has somewhat overshadowed the lack of indexation, even supporters of Division 296 more broadly have pointed to the flaw of not indexing the threshold.
HESTA and Australian Retirement Trust (ART), two of the country’s biggest profit-to-member funds, had described the $3 million super tax as a move towards a fairer and more equitable retirement system. However, they argue the proposed threshold must be indexed to avoid unintended bracket creep.
“Australia’s tax system favours high-income earners with high super balances,” a HESTA spokesperson told InvestorDaily.
“We support the proposed 30 per cent tax on investment earnings on super balances over $3 million to help make our super system fairer and more equitable. Indexing the threshold will help preserve the policy intent over time.”
ART echoed this view, stating the tax should be subject to “some form of regular review mechanism or indexation … to ensure the policy remains aligned into the future”.
Treasurer Jim Chalmers recently confirmed on ABC’s The Conversation podcast that while he understands the argument for indexation, there are “many instances in the tax system where thresholds aren’t indexed” and future governments have the opportunity to adjust the threshold.
“I’m anticipating that that’s what would happen here. Some of these calculations about what people’s liability would be in 40 years assume that the $3 million threshold never changes,” he said.
“I think we’re making it consistent with other areas of the tax system where the threshold is not indexed. I fully anticipate that governments of either, if not both political persuasions at some point in the future will change the threshold.”
