This change just highlights the logic problem with the original superannuation proposal. Neither the size of the low-income super offset nor the threshold at which it ends have been altered since it was introduced in 2017.
That has meant millions of people – all low-income earners, most of them women – have actually been left with smaller super accounts than they otherwise would have if the offset or thresholds had been indexed with inflation or wages growth.
Chalmers has done the right thing by lifting both. But by not indexing his initial super design tax, he would have foisted the same problem onto future treasurers and future taxpayers.
The retreat on taxing unrealised gains is a smack in the nose for Treasury, which knows that wealth – rather than income – will be ground zero in the fight over the state of the budget for the coming decade.
Super has been a bête noire for Treasury ever since Paul Keating forced the department into accepting it in the early 1990s.
Keating’s original plan, for super to ensure working-class people had a quality life in retirement, has been dramatically altered over the past 30 years. In too many ways, super has become a wealth management scheme (with a heavy dose of intergenerational wealth transference) rather than a source of retirement income.
Both Chalmers and Keating, who backed Monday’s revamp, went quickly to why the nature of super has changed – the 2007 decision of the Howard government to axe superannuation’s reasonable benefit limit.
Under the reasonable benefit limit, a person would get taxed at their marginal rate once they hit an amount deemed a “reasonable” amount for retirement. When the limit was axed, people could get huge tax incentives from super, no matter how much they pumped into their account.
Scott Morrison, as treasurer, started to tidy up the mess that was created by the 2007 changes. Now Chalmers has gone further.
The 40 per cent rate on earnings over the $10 million mark now makes it very unattractive, from a tax perspective, to keep pumping cash into super. The $10 million threshold is now effectively the pre-2007 reasonable benefit limit.
Within hours of Chalmers’ announcement, industry pundits were warning that investors and high-net-worth individuals would have to rethink “how their wealth is structured” given the $10 million change.
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Apart from the political embarrassment caused by such a large reverse ferret, Chalmers now has a budget issue.
He says the combination of his changes will mean that in 2028-29, instead of earning about $2.5 billion in extra revenue, the government will collect about $2 billion.
The real hit, however, will be due to indexing thresholds. While Chalmers maintains the reforms will still raise a “substantial” amount of cash, it will be well short of what had been factored into a measure pivotal to the long-term repair of the budget.
