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RUBY:

From Schwartz Media. I’m Ruby Jones, this is 7am.

Labor is poised to move forward with its plan to increase the tax on superannuation balances over $3 million.

Critics say it's unfair – and question why Labor’s super tax will apply to unrealised gains – rather than just money made.

But with Labor’s majority in parliament, and support from the Greens in the senate – their opponents can’t do much, but complain.

Today - national correspondent for The Saturday Paper, Mike Seccombe, on Labor’s superannuation plan, and what it tells us about the government’s economic priorities in its second term.

It’s Wednesday June 4.

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RUBY:

So, Mike, Labor wants to overhaul superannuation, but to begin with, can we talk about how what we have at the moment, the current super, how it was created in the first place, because this goes back to Keating, doesn't it, in the 90s? So what was the purpose of superannulation?

MIKE:

Yeah, you're right. Universal Super goes back to Keating. A fortunate minority of people had it before then, of course, but Keating's plan was that everyone should have it.

Audio excerpt – Speaker of the House:

“The Honourable Prime Minister.”

Audio excerpt – Paul Keating:

“Mr Speaker, this House last night passed the Superannuation Guarantee Levy and doing so it has entrenched in legislation a great reform which will be of great benefit to coming generations of Australians.”

Audio excerpt – Labor members:

“Hear hear!”

Audio excerpt – Paul Keating:

“Mr Speaker, for the first time in our history, well in advance of reform in other advanced industrial countries, ordinary Australians will be able to build a decent nest egg for their retirement.”

MIKE:

The idea was that it would provide people with a comfortable retirement. But along the way, it would also reduce pressure on the pension, which would be a good thing for future taxpayers. And of course it gave Australia this sort of huge fund of wealth sitting there earning income on behalf of its citizenry.

Audio excerpt – Paul Keating:

“This is a long term project because workers in their 50s and even in their 40s on modest salaries simply cannot set aside enough of current income to achieve financial independence in their old age. To achieve this, these workers would have to start contributing a substantial percentage of their income to super in their 20s. Is this likely without compulsion? The answer is no.”

MIKE:

To encourage people into this form of saving, which is what it is, the government not only required that a portion of your pay goes into super, so your employer puts it in, but you can top that up; and a concessional tax rate was applied, so 15 per cent was the tax on contributions and earnings. So that was well below the marginal rates of what most people would otherwise pay. So it was a very attractive place to park your money. And over the years, the super pool has grown enormously. It's now, I think, almost $4 trillion or something like that.

As of this moment, the Association of Superannuation Funds in Australia reckons that for a comfortable retirement you need $690,000 for couples, $595,000 for singles. But over time though, super has drifted well past that purpose. A growing number of people have way more than they need for a comfortable retirement. I mean there are people with tens of millions of dollars, even hundreds of millions of dollars stashed away in their super. And so there's been a lot of complaint about this. I spoke to Brendan Coates, who's the director of the housing and economic security programme at the Grattan Institute, and he told me the thing was turning into a, as he called it, “tax-subsidised inheritance scheme”. Those big balances, they often sit inside self-managed funds, they're stuffed with property or family businesses or real estate, investments or even artworks. Then they're never selling those assets. They're never paying tax on it. And then when they die, they pass it on to their children tax free. So it's a very good way of minimising tax in this life and maintaining family wealth, you know, in your afterlife as it were.

RUBY:

Right, okay, so this is what Labor has identified then as the problem that it wants to solve. So tell me what exactly it's proposing.

MIKE:

Well, it's pretty straightforward actually, you know, how I said there was a 15 per cent tax on superannuation. For people with more than $3 million in their accounts, that would effectively double, so it would become 30 per cent So you know if you've got more than 3 million dollars in your super, on the amount over the 3 million, so not all of it, only the extra, you pay a high rate of tax. And the estimate out of Treasury when they ran the numbers on this was that it would raise $2.3 billion for government revenue in the first year and that would grow to $40 billion over a decade. So it's not to be sneezed at. And actually not many people would be caught by this, roughly 80,000, which is about 0.5 per cent of people with superannuation funds. Almost all of them would have much more than $3 million on average on their funds. Like I said, some accounts have more than $100 million. Where Labor's proposal is novel, however, is that it would tax unrealized gains. So say you own a super account with $3 million in it at the start of the year, and at the end of the year that's on paper worth $4 million, well, you pay tax on that paper gain. Whether or not you've actually sold anything and put any money in your own pocket, you still pay on the notional gain. And this is something that is contentious.

RUBY:

Okay, so it's this idea of taxing unrealised gains that opponents are particularly against. So tell me more about their argument as to why that is unfair.

MIKE:

On principle, really. They say that this is not done very often in the tax sphere. In fact, some complain about the very idea of the wealthy paying more tax. I mean, there are some practical issues that have been raised. Some critics say, well, some people might not actually have the readies to pay the tax when it comes due. They've got all these assets sitting there in their account, but they might not have the money to pay their tax on the notional gain, and so they might be forced to sell up. You know, we've had the spectre raised of farmers having to sell their farms, small business people having to sell their business and so on. They complain that for volatile investments, like for example, start-ups, that it will discourage investment in those.

Audio excerpt – Allegra Spender:

“Why did the government choose not to allow people who can calculate their actual earnings and their realised versus unrealised gains? Why did you choose to tax everybody on unrealised gains.”

MIKE:

People like Allegra Spender, the Teal Independent MP for Wentworth, who opposes this measure - she argues that it will capture gains essentially that may never be realised; others would say that's in fact the entire point of the exercise.

Audio excerpt – Allegra Spender:

“This legislation is suggesting it's going to tax unrealised gains in super, which I think is bad policy, both of bad tax policy, but particularly bad for, and particularly damaging, I am concerned to see, potentially for the venture and the startup and scale up sector.”

MIKE:

A second concern for Allegra spender, and also I might say the Greens, is that the $3 million figure will not be indexed. So as inflation rises... At this stage, there's no prospect that the threshold for paying the extra tax will rise, which means that over time, more and more people will wind up paying it.

RUBY:

So, basically, Mike, critics say that this breaks with established principles and unfairly penalises a small group of people who, at least in their view, have, I guess, played by the existing rules of superannuation. What do you make of those arguments?

MIKE:

The point I would make is that a lot of people came out in opposition to this. More recently quite a number of experts have come out and said, hang on, these are kind of weak arguments. So one of the experts I spoke to, for example, was Professor Miranda Stewart, who is a tax specialist at the University of Melbourne Law School. And she says this idea that it's a really novel idea to tax unrealised gains is not really true. We tax unrealised gains in land tax, we tax unrealised gains in council rates. So, you know, even if it's a bit novel in the context of superannuation earnings, that doesn't necessarily make it a bad way to go about reining in what have become pretty gross inequalities in the current system.

As for the so-called hit to innovation, Brendan Coates from the Grattan Institute, you know he says when it comes to providing venture capital for startup companies, only 5 per cent roughly of that venture capital money comes from self-managed super funds. In fact, as all the tax experts that I spoke to say, really, you shouldn't be running businesses or property portfolios inside your super. That's not what it's there for. They say it's purely and simply a tax dodge and that this new tax goes quite some way to fixing that problem.

RUBY:

Coming up after the break – what does Labor’s move on super tell us about their bigger economic plans?

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RUBY:

Mike these changes to superannuation, they were actually introduced in the last parliament but the bill didn't pass. It was killed off and you mentioned Allegra Spender earlier she was opposed to these reforms who else voted against it?

MIKE:

Well, this is kind of interesting because in the House of Representatives, every Teal member voted against the government and with the Dutton opposition. So that's Allegra Spender, Kate Chaney, Zoe Daniel, Monique Ryan, Sophie Scamps, Kylea Tink, Zali Steggall.

But in the end it was blocked in the Senate, where David Pocock, who's sort of a Teal, and Jacqui Lambie, who is definitely not a Teal but is another Independent, they opposed it and Allegra Spender claims credit for persuading them to vote against it.

In a way that makes sense, you know, as the political scientists will point out to you, Allegra Spender's electorate, Wentworth, is the richest in the nation. You know, Point Piper, Vaucluse, those kinds of suburbs, you can bet there will be a lot of people with $3 million plus balances in their superannuation. So you might argue that the Teals, all of whom hold quite affluent seats, so when Labor targets a concession, even though it's enjoyed by only 0.5 per cent of all Australians, it affects many more people in the Teal seats and we see kind of a clash, I guess, between. The Teals' progressive branding and the financial interests of their constituents. I think that it might come as a bit of a surprise to progressive voters who have tactically switched their votes from Labor to the Greens and voted for a Teal candidate with the intention of keeping out a Liberal, because when it comes to this, effectively, the Teals are Liberals. And yet, you know, during this election campaign, even during the previous one. We had conservatives, we had Peter Dutton, we had Advance, we had other members of the coalition out there saying, well, the Teals are just Greens in disguise. But when you look at how they vote on economic issues, they're not. They align very frequently with the conservative side of parliament. They're small L liberals.

RUBY:

So that was the last parliament, Mike. But this time around, the Teals and the Coalition are essentially powerless. Labor can just rely on the Greens in the Senate. So given that, this legislation, it's likely to pass, isn't it?

MIKE:

Well, yes. So, you know, the coalition is up in arms, you know, saying that they will fight these reforms. Tim Wilson, the newly elected Liberal member for Goldstein, said it would be his first priority in parliament was to actually do something about this.

RUBY:

But Mike, what can he actually do?

MIKE:

He can complain in the hope of stirring enough popular opposition to convince the government to back off. Really, that's all that's happening. And I think the chances of that happening are just about zero, frankly. But you know, that has not deterred these wealthy superannuants and their supporters in politics and in the conservative and financial media.

Audio excerpt – Sky News Host:

“Now we've been speaking a lot about how farmers and other Australians may have to sell property or assets to pay their tax bill as a result of Labor's new super tax.”

MIKE:

I mean, The Australian and The Fin Review have just been full of stories about what a terrible thing this is.

Audio excerpt – Sky News Host:

“As if life wasn't hard enough already for our farmers. With this cost of living crisis, with weather fluctuations, and now they're worried about having to sell up to meet a tax liability on increased land valuations. I mean, it's insane and, quite frankly, unethical.”

MIKE:

So there's been an almighty campaign run against the reforms, but you know Labor went to an election on it, so it can claim a mandate. The Greens certainly support raising the tax on high-balance super accounts. In fact, they would say that the threshold should be two million, not three million. So a lot of complaining from the sidelines, but there's really nothing that the coalition and the Teals can do about it.

RUBY:

And are we likely to see this play out for the next three years, Mike, you know, given the Labor government's mandate, is this what opposition to any policy will look like in the future?

MIKE:

Well, not always. I mean, there are many issues where Labor is closer to the Libs and the Nats than it is to the Greens. You know, if development of fossil fuel projects, for example, you know, the Greens say there should be no more. Labor is every bit as keen on opening up new gas developments and coal mines as the coalition ever was. But when it comes to tax and to economic policy, the government can probably do most of what it wants and the Greens will back it.

The question here is how much does the government actually want to change, you know? Two elections ago they went with the plan of winding back capital gains and negative gearing and they lost the election and since then that's been put in a too hard basket. Well a lot of people would say, now that you've got all this political capital, why not pull those things back out and propose them again, even if you propose them as something to be done past the next election so that you can claim a mandate, you can claim to have gone to an election with it, like John Howard did with the GST. So, you know, it depends really, I think, ultimately on how brave Labor is when it comes to reform. And, you, know, I would just make the observation here that political capital is not like the capital in your super account, you know. It doesn't earn interest if you don't do something with it. You know, if you've got political capital, spend it.

RUBY:

Thank you so much for your time.

MIKE:

No worries, thanks Ruby.

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RUBY:

Also in the news today…

The national minimum wage will be raised to $24.95 an hour, or $948 per week, based on a full time 38-hour work week.
The decision by the Fair Work Commission will translate to a 3.5 per cent pay increase from July 1 for millions of Australian workers.

The raise is above the rate of inflation, which is currently at 2.4 per cent.

And,

The last seat in doubt after the May 3 federal election is likely to be called today.

The Australian Electoral Commission says it expects to finalise the count in the seat of Bradfield by this afternoon, after a tight contest.

Independent candidate Nicolette Boele was leading Liberal candidate Gisele Kapterian by just 30 votes yesterday afternoon.

I’m Ruby Jones, this is 7am. See you tomorrow.

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