Opinion
Plan to tax unrealised capital gains is inherently unfair
Noel Whittaker
Money columnistLast year, in response to claims that a few wealthy people had accumulated too much in superannuation, the Albanese government proposed far-reaching and controversial legislation. In simple terms, from July 1, 2025 the tax rate on superannuation earnings for balances over $3 million would be doubled to 30 per cent.
In one way it is not an unreasonable proposition because 30 per cent is the tax rate already being paid by many companies and insurance bonds. The controversy arises from the proposal to calculate the tax based on the member’s balances – including any unrealised capital gains.
Judges want their pensions to be exempt from new superannuation taxes.Credit: Jessica Shapiro
There are two major problems with taxing unrealised capital gains. The first is the difficulty of valuing assets such as farms, the value of which depends on a wide range of issues including weather conditions and markets. The second is that it fails to understand market volatility.
Let’s say a fund invested one million dollars in tech company Nvidia, whose share price was $US262 a year ago and is now $US867 ($1326). Suppose the portfolio value was $3 million as of June 30 (making up part of a member’s $7.5m super balance).
This is an unrealised capital gain of $2 million. Normally, no tax would be paid on this at all unless the investment was sold. But the proposed new tax would apply immediately to around 60 per cent of the $2 million gain ($1.2 million).
If this volatile stock dropped back by 50 per cent after June 30, there would be no refund available for the tax already paid. There would be a loss to carry forward against future amounts of this tax – but that’s not much use for members who sell up and take their money out of super at that point.
Taxing unrealised capital gains is an inherently unfair measure that should never be introduced.
And there is one group that was somehow initially forgotten: highly paid public servants with generous defined benefit superannuation funds. In the interest of fairness, the notional cash value of their super would need to be considered if the new laws were introduced.
A 2021 Commonwealth Superannuation Corporation analysis showed there were 41,000 retired public servants, including some judges, receiving pensions greater than $75,000 a year, with an average notional cash value of $3.4 million.
This doesn’t include the military, police, politicians, and retired governors-general. Under the proposed rules, it seems the annual pension paid to a federal judge will be added to the balance of their superannuation when determining the balance above $3 million.
Well, as the old saying goes, the horse that never stops trying is the one called self-interest. The Australian Council of Public Sector Retirees Organisations says its members should not come under the new tax, and the judges have joined them.
Appearing before a senate select committee, Michael Black, KC, said there was “no doubt” there would be a constitutional legal challenge to the tax change, creating a “frightening situation” where High Court judges may be asked to decide a case directly linked to their own finances.
Mallesons partner Michael Clough, a tax law specialist engaged by a group of judges to take up their case, claims: “to tax a notional movement on a notional amount that is somehow calculated actuarially from year to year is clearly a form of double taxation”.
Other federal judges have claimed they should be exempt from the changes as they would treat them more harshly than other retirees.
The government does not seem to understand this is a legacy issue; the big balances will all vanish as older members die. The laws have changed so much in the last few years that it is almost impossible to accrue a large balance.
There is now an entry tax of 30 per cent on tax-deductible contributions from high-income earners. If your balance exceeds $1.9 million you cannot make non-concessional contributions, which come from after-tax income anyway.
If the main “problem” was high superannuation balances, it could be solved simply by bringing back a modified form of compulsory cashing out. Perhaps everybody aged 70 or more could be compelled to draw down at 5 per cent, or the relevant pension rate on their entire superannuation balance.
For example, a person with $50 million in super might have to withdraw 9 per cent of the balance at age 85, increasing to 11 per cent at age 90.
The issue is still being debated, but industry figures tell me the government is not particularly interested in any more consultation. The industry has already pointed out a strange quirk in the legislation – a person who dies on 30 June is caught by this measure but a person who dies on any other day is exempt. The government is yet to respond.
Just remember, a balance of $3 million may seem a lot now, but more and more people will be caught by the measure as time passes and inflation takes its toll. Taxing unrealised capital gains is an inherently unfair measure that should never be introduced.
Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
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