The head of a wealth management organisation has highlighted some negative flow-on effects of the proposed Division 296 tax the government may not have considered when formulating the superannuation measure.
In a discussion paper titled “Critiquing the Proposed Taxation of Unrealised Capital Gains in Superannuation”, Wilson Asset Management (WAM) chair and chief investment officer Geoff Wilson said the tax will lead to “deadweight loss” as it will ultimately change the behaviour of Australian investors.
“Deadweight loss arises because taxes alter relative prices, causing individuals and firms to make decisions that deviate from what they would have chosen in a free market,” Wilson explained.
“Taxes on investment returns can discourage savings and investment, reducing capital accumulation and long-term economic growth.”
WAM has calculated the deadweight loss that will result from the taxing of unrealised capital gains of some superannuation funds to be $94.5 billion in lost economic efficiency.
Wilson pointed out the new tax will also affect people’s perception of their expected future wealth and exacerbate the impact of the measure on the wider economy.
“A tax perceived as eroding accumulated wealth, such as the proposed taxing of unrealised capital gains on super balances of over $3 million, may lead to reduced savings, increased consumption or a shift towards less taxed investment options,” he said.
“Conversely, tax policies seen as promoting wealth accumulation can encourage savings and investment.
“The proposed policy is the former having a direct impact on reducing savings and encouraging people to alternative tax structures.”
According to Wilson, the proposed taxing of unrealised capital gains under the Division 296 tax policy is unnecessary given the low number of individuals with more than $3 million of retirement savings and the fact most of them are likely to be single-fund members.
“If an individual only has one fund, the taxation of realised earnings could be easily calculated on balances over $3 million, therefore removing the requirement to tax unrealised gains. We propose that taxpayers who only have one superannuation interest should be able to elect to have this additional tax applied to that one fund and, as a result, only pay tax on actual realised taxable earnings,” he said.
In addition, he illustrated how damaging having no indexation applied to the $3 million threshold could be.
“Take, for example, Prime Minister Anthony Albanese, if inflation was adjusted for the $3 million cap from when he was 18 years old, he would be paying tax on unrealised capital gains equivalent to $550,000. Without indexation, many young Australians will be unfairly lumbered with this new tax,” he noted.
