Revised super tax penalises ambition, not extreme wealth

The very rich will quickly move money out of super, but the mass affluent who aspire to grow their wealth in super will mostly stay where they are and that means many will face a doubling of previous tax rates.

Very wealthy super investors will switch funds out of super entirely and resort to using the family home, family trusts and anything else they can find that is more tax effective.

That means more demand at the top end of the luxury home market and a guaranteed crackdown on family trusts from Treasury, which has already been gearing up for potential new business as the richest prepare to drain their super stash.

This teeny cohort of 8000 investors with $10m plus in super will now lean on their private armies of financial consultants to ensure they have $9.99m in super and not a penny more.

That’s because holding any money in super above $10m at an effective tax rate of 40 per cent makes no sense. There are much better tax arrangements elsewhere.

But the key news from Treasurer Jim Chalmers’ super tax backflip is not that he’s finally seen reason and will no longer tax unrealised gains, or paper profits, or that the tax will be sensibly be indexed. Amid all the backdown talk remains the fact that at least 90,000 super investors – mostly those with self managed super funds – will find their earnings from super is hit with a 30 per cent tax rate when it used to be 15 per cent.

Chalmers is betting that this ever-widening group will come to the conclusion that keeping money inside super at a 30 per cent tax rate still makes sense – that is, it remains effective in comparison to other options.

ProSolution Private Clients director Stuart Wemyss tells The Australian’s The Money Puzzle podcast, in an episode that drops on Wednesday, that many investors will likely shoulder the extra tax burden.

“With this change, the tax benefits are not as great as they were in the past, but they are still in place relative to other tax structures,” Wemyss says.

Many of these investors, who have portfolios largely dependent on property, will not rearrange their affairs for the simple reason it will be too expensive to do so.

Moreover, unlike those with liquid assets such as shares, it is much more difficult to refine portfolios for tax when they comprise “lumpy” assets such as a rental property that can’t be sold off in segments.

All up, we get the impression there is a crackdown on the very wealthy, but the action will be extremely limited in terms of overall market activity.

Instead, the real action will be – as always – in the middle band of income earners.

To recap, hopefully for the last time, the new tax rates are based on actual earnings on super amounts per capita. There are no more plans for taxing unrealised gains. That daft and unworkable concept looks like it is dead and buried.

Instead, from July 1 next year, earnings on super in retirement will be tax-free up to $2m, at this point onward it will be taxed at 15 per cent, then from $3m upward it will be taxed at 30 per cent and at $10m upward it will be taxed at 40 per cent.

It’s an arduous, complex solution imposed on a system that’s already creaking from complexity. Most investors do not have the army of consultants employed by the very rich, but they will soon discover they need one.

This article first appeared in The Australian as Revised super tax penalises ambition, not extreme wealth