Last year, the Albanese Government put forward a proposal to introduce a cap on tax concessions on high balance superannuation accounts.
It is proposed that from 1 July 2025, earnings on superannuation balances over $3 million will be subject to an additional rate of 15 per cent on top of the existing rate of 15 per cent, bringing the total tax payable to 30 per cent.
The Government anticipates that this measure will deliver an additional $2 billion per annum in tax revenues in its first year.
Should this new Super Tax see the actual light of day, it will clearly cast a shadow on the tax efficacy of superannuation as a vehicle for retirement savings for wealthier retirees. The Government is sticking to its guns on the social ‘fairness’ of this policy in that only 0.5% of account holders, or 80,000 people, will be affected.
However, a study by the Grattan Institute, an Australian think-tank, shows that in thirty years’ time, about 10% of the population will be retiring with nominal superannuation balances of around $3 million.
The Australian Bureau of Statistics anticipates that by 2053, the Australian population will reach 38 million people at a median range, and 42 million people at a high range.
https://www.abs.gov.au/statistics/people/population/population-projections-australia/latest-release
Considering these statistics, just 80,000 people could quickly evolve to almost 4 million people (if not more) across the span of just one generation.
It’s not clear how much foresight the Government has applied to this perceived conundrum. At this point in time, there doesn’t appear to be any plans to index the $3 million threshold.
The jury is out.
In saying that, this is certainly not the first time that the government of the day has chased the wealthy to bolster tax revenues.
With depleted coffers after the Nine Years’ War (1688 – 1697) it was King William III – also known as William of Orange – who originally introduced the Window Tax in 1696 as an innovative way to tax the wealthy at a time that income tax was completely unacceptable. Believe it or not, there was once a point in time that the disclosure of personal income to the government represented an egregious intrusion into the personal lives of the populace!!
The rationale behind the Window Tax was quite simple; wealthier people had larger homes. The larger the home, the more windows they had, and the more tax that they had to pay.
The Window Tax was applied in various forms across England, Ireland, Scotland and Wales between 1696 and 1851. The idea also exported itself to France, where it remained until 1926.
As it eventuated, the Window Tax didn’t actually generate the revenues that it was anticipated to generate. Why?
Behavioural finance, with its bedrock in human psychology, shows that the application of taxes ultimately changes human behaviour.
Rather than pay the Window Tax those few hundred years ago, property owners took matters into their own hands.
They started to brick up their windows.
The rationale (the human psychology) behind their behaviour was quite simple. The fewer windows they had, the less tax they paid.
A visible example of this in the current day is the Bank of Ireland building on College Green in Dublin, Ireland (refer picture shown, taken July 2023). Originally built to house the Irish Parliament (the 1801 ‘Act of the Union’ put paid to that), it was subsequently sold to the Bank of Ireland, who duly responded by bricking up the windows to avoid the tax.
In a similar vein, this is exactly what will happen in Australia should the ‘Super Tax’ be legislated to commence in 2025 as proposed.
Human nature will take over, and people will follow paths that will dextrously circumnavigate this extra tax impost on their personal wealth.
History doesn’t repeat itself, but it absolutely rhymes. Remember, taxes change human behaviour.
As experienced Certified Financial Planners at Bastion Financial Group, we know that vehicles like Discretionary Trusts, Bucket Companies and Investment Bonds and other structures will provide solutions for those who are impacted by the proposed Super Tax, to the point that the Government will likely not realise its anticipated revenues with this policy change.
One last sentiment from this author; the national conversation has recently turned towards the structural imbalance of assets versus liabilities across the generational divide, whereby younger Australians are concerned about the fact that they will be bearing the brunt of future tax revenue requirements as we face into a rapidly aging population. An ‘inherited’ future liability so to speak.
To solve and rectify this structural imbalance, significant tax reform is required, but that is the Rubicon that most politicians and policy-makers appear to be unwilling to cross. Most will agree that tax reform – however it may look – needs to happen, however most will not agree on how it should happen.
For just a $2 billion delivery to the Australian bottom-line, and where it absolutely won’t be a game-changer, it remains to be seen if the proposed ‘Super Tax’ will ever see the light of day.
As experienced Certified Financial Planners at Bastion Financial Group, we also know that the one constant of the financial services landscape in Australia is change, and we will continue to provide our clients with valuable wealth management advice across their structures.
Naomi Mee-Martino CFP® is Director and Senior Financial Planner with Bastion Financial Group.
Bastion Financial Group specialises in holistic financial planning advice and investment management to high net worth families, professional executives and business owners. We utilise our proven strategic expertise, asset allocation, research based methods, and a focus on education and decades of professional experience to help clients minimise the risk and stress of creating, optimising and managing wealth. We are Certified Financial Planners and active members of the Financial Advice Association of Australia (FAAA). Our Advisory team can be contacted on (08) 6225 5150.
Important information
This article has been prepared by Bastion Financial Group Pty Ltd., Authorised Representative(s) of Godfrey Pembroke Group (ABN 38 078 629 973), an Australian Financial Services Licensee, registered office at Level 2, 26 Brisbane Avenue, Barton ACT 2600.
Any advice in this document is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal financial, tax and legal advice prior to acting on this information.
Opinions constitute our judgement at the time of issue and are subject to change. No member of the Godfrey Pembroke Group, nor their employees or directors, gives any warranty of accuracy, nor accepts any responsibility for errors or omissions in this document.
