Labor has dramatically overhauled its $3m super tax legislation, and the policy is weaker for it. It’s still pushing in the right direction, just not as hard.
None of this bodes well for Jim Chalmers’ lofty vision of a boldly reforming Labor party in those heady early days after May’s landslide election victory.
As Brendan Coates, the director of the Grattan Institute’s housing and economic security program, said: “I am less confident in broader super tax reform today than I was yesterday.”
There was good news for millions of Australians who will get an overdue boost to the low income super tax offset, starting from mid-2027.
Announcing the changes, the treasurer said “this is a fairer superannuation system from top to bottom”, adding that “14 times more people will benefit from the low income super changes than will be impacted by the better targeted tax concessions”.
It does result in a fairer system, but still far from as fair as it should be.
The better targeted superannuation concessions bill was introduced two years ago, but expired in July following the end of the last parliament.
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Its aim was to curb the worst excesses of a system where half of the tax breaks ended up in the hands of the 10% highest earning Australians.
It did that by doubling the tax on super earnings to 30% for balances above $3m – hardly a radical change, but, as mentioned, a step in the right direction.
After Monday’s shake-up, the policy will now also increase the earnings tax to 40% for balances above $10m.
Treasury reckons the same number of people will be affected – roughly 90,000 people when it’s introduced from mid-2026, one year later than planned to make time for another round of consultations.
Yet the revised super tax policy will only raise an estimated $2bn in 2028-29 (its first full year of operation), compared to $2.7bn in its original form.
The fact that the policy will immediately collect less revenue is the most obvious sign that Monday’s changes have resulted in a watered-down policy that will not go as far to fix the problem it was designed to address.
That problem is that overly generous tax concessions, particularly on earnings, have biased the super system from being a vehicle to save for a comfortable retirement, and towards a taxpayer-funded inheritance scheme for the very rich.
So why is the updated policy less effective than it was before?
There are two major changes which both respond to often hyperbolic, albeit not completely unfair, criticisms of the original bill.
The first and most potent criticism was that the extra earnings tax was levied on the notional – or “unrealised” – gains in the value of the super balances.
Normally, a cash tax is applied to cash, or “realised”, earnings (like rental income), so this was unorthodox territory.
Those lobbying against the proposals claimed, among other things, that cash-poor farmers would be forced to sell their farms to raise money to pay the extra annual tax.
It’s clear that taxing realised gains will collect less tax, as very wealthy people have a lot of money tied up in assets, such as investment properties, where the principal gains are in capital values.
The original bill would have taken a slice of that capital gain each year, but now it won’t.
Treasury had originally claimed it was too difficult and expensive for funds to calculate annual profits for each member with more than $3m in super, but is now more confident it can be done without too much extra cost for the funds.
What awaits is another year of consultation, with no guarantee the super industry will actually be able to get it done, although Chalmers said he has already been in contact with funds and doesn’t expect a fight.
The treasurer said that in the longer term, the bill would still raise a “substantial” amount of money, but it would be much less than before.
That’s also because of the other major change: lifting the thresholds in line with inflation every year.
The initial legislation would have captured progressively more people over time as their super balances grew above $3m. Again, the sometimes hysterical criticism was that average workers would breach this threshold some time in the 2060s.
Of course, future governments would have made changes to the threshold, as Chalmers pointed out.
But indexing thresholds is common practice, which means fewer people will be breaching the threshold over coming years.
What budget impact that will have remains to be seen, although it will be offset by the new extra tax on the higher threshold.
• Patrick Commins is Guardian Australia’s economics editor
