Labor’s tax reforms set to target wealthy older Australians

If we safely ignore the mountain of platitudes about cutting red tape, what actually matters is which suggestions the government will act upon following the Canberra talkfest.

If you are looking for signals, then it must be the Treasurer’s stated concerns with “intergenerational fairness”. This is the principle he will now use to justify a second wave of tax changes beginning with the new super tax.

And it only takes a quick look over the super and pension system to identify low-hanging fruit that would help achieve what the Treasurer wants.

The current system is clearly biased against young salary earners and tilted in favour of wealthier, and often retired, Australians.

Importantly, most of the talk at the summit was around business and productivity but most of the concrete measures already taking place centre on a wealth clampdown.

Two key developments taking place at the same time as the summit are crucial.

First, Chalmers is adamant the new super tax is going ahead as planned with all its highly controversial elements in place. It will be based on unrealised gains and it will not be indexed. This is the start of a clampdown on super.

The tax is never going to raise the level of revenue estimated. But it is going ahead. Even the last-minute attempt to suggest an alternative solution by the Treasurer’s associate, former Queensland treasurer Andrew Fraser, has been cast aside.

The new 15 per cent tax on earnings on amounts over $3m in super is going to be a nightmare for all concerned, but politically it is viable. Moreover, it is perfectly in tune with moves towards wealth taxes overseas, specifically in the UK and Scandinavia. This will embolden the Labor government to increase their efforts in this area.

What else might now happen in super? The number of people affected by higher super taxes will rise each year because the new tax is not indexed. What’s more, the headline figure of $3m is yet to be legislated, one risk is that the dollar cap could still come down. The Greens want it to be $2m and it is still not passed in parliament.

Second, the wider public will accept targeted wealth taxes, especially if they are subtle and difficult to grasp for those not affected.

“I think they are going to make decisions on items where there is less noise,” adviser Will Hamilton of Hamilton Wealth Partners tells The Australian’s The Money Puzzle podcast.

The deft “noiseless” cutback is typified by the surprise move this week on the deeming rate. This is the start of a clampdown on pension access.

Deeming rates, the rate at which the government “deems” investment returns to determine access to the pension, had not changed for four years before Social Services Minister Tanya Plibersek caught investors by surprise announcing the rates would rise on September 20 by 0.5 per cent.

Plibersek also made the point that this is the first move in what will be a planned escalation of the deeming rate to bring it back to “normal levels”.

With every uptick in the rate, thousands of older Australians will be culled from the aged pension lists.

Plibersek’s own department warned this year that generous levels of pension access had allowed some retirees to accumulate wealth through the social welfare system.

What else might the Treasurer do in terms of limiting pension access? Submissions to the summit have suggested the government includes the value of the family home in the assessment of assets used in paying out the pension. You can have a harbourside mansion and get an aged pension because family homes are excluded. There is clearly a risk there could be changes in this area.

Most likely is a continued tightening of the thresholds to get access to the pension. Around 65 per cent of older Australians have full or part pension access. This is a sitting duck for a Treasurer aiming for intergenerational fairness.

There were some more dramatic ideas put before the summit ranging from flat wealth taxes, death taxes and the reintroduction of inheritance tax.

Certainly, nothing can be ruled out until the Treasurer publicly does so. That also means changes to the capital gains tax discount or cutbacks in negative gearing taxes remain on the table.

But in the immediate future, advisers and industry experts suggest the target area will be the connected areas of super and pensions – that does not mean new wealth taxes, it means a crimping of the current benefits embedded across the system.

It goes without saying that the government will chase big money from one tax bolthole to another other – money move moved from super into family trusts will be watched carefully.

If the amounts shifted are dramatic, expect a clampdown on family trusts too.

In such an atmosphere, wealth taxes may also end up chasing people out of the country. This happened in Norway, where a flat wealth tax of one per cent on all fortunes higher than $260,000, prompted hundreds of the country’s best known rich-listers to move elsewhere.

“It’s a joke, this constantly playing around with super,” says Hugh Robertson of Centaur Financial Services.

“People lose all confidence in the system. Tax them too much, attack them for being wealthy and they just may not show up anymore. They might move overseas to a more friendly atmosphere.”

This article first appeared in The Australian as Labor’s tax reforms set to target wealthy older Australians