The Canberra Press Gallery was completely absorbed with the supposed politics of last week’s superannuation changes and completely failed to consider their merits and why the changes were therefore made.

Last week, the treasurer announced some modest changes to his proposed reforms to make the taxation of superannuation fairer.

But with no real consideration of the significance of these changes, the Canberra Press Gallery was obsessed with what it described as a major backflip. The Australian, for example, called Jim Chalmer’s announcement “a dramatic backdown”, and even the esteemed Michelle Grattan called the announcement “a major retreat” driven by Anthony Albanese.

As the gallery sees it, Chalmers was rolled by an ever-timid Albanese, with consequently bad portents for any future reforms by an Albanese-led government.

Rather than analyse the significance and merits of the changes, the gallery’s reports were focused on the politics of the changes. And the gallery is unanimous. It is more important for these commentators to be part of the herd and win each other’s approval, than to ever think for themselves about the significance and impact of these policy changes.

As will be shown below, the changes to the proposed superannuation reforms are of a tidying up nature and tell us nothing about the future relationship between Albanese and his treasurer. Nor do they support the press gallery’s interpretation that these superannuation changes are a warning that Chalmers will find it difficult to get the prime minister to agree to any future ambitious tax reform agenda.

The superannuation tax changes

At present, the income from superannuation is taxed at 15% and the main thrust of the superannuation reforms, as originally announced around two years ago, was to improve equity by introducing a new tax threshold where the taxable income from superannuation balances in excess of $3 million would be taxed at 30%. There has been no change to this most significant reform.

Instead, the two recently announced superannuation tax changes that the gallery has seized on as a backdown are:

• Capital gains will only be taxed when they are realised, and not annually as they accrue, and
• The tax thresholds will be indexed.

In addition, two other important changes were announced last week, that cannot be represented as a backdown, but rather further improve the fairness of the superannuation tax system:

• In addition to the new tax threshold of $3 million above which income will be taxed at 30%, last week the government introduced a second tax threshold so that the income of superannuation balances above $10 million will be taxed at 40%, and
• The low-income super tax offset (the Listo) will be increased from $37,000 to $45,000 to boost the superannuation balances of workers on low incomes.

The significance and impact of each of these changes will now be discussed in a bit more detail below.

Taxation of capital gains

Traditionally, capital gains have always been taxed when realised and not as they accrue annually. Why the Treasury originally wanted to make this change remains unclear.

However, over time it shouldn’t make much difference. When the realised capital gain is eventually taxed, the gain should represent the same amount as the sum of the accrued capital gains over the same time period.

Indexing the tax thresholds

The income tax thresholds are not indexed in Australia. They were for a few years, during the Fraser Government, but politicians found that they got no credit when, at the beginning of each financial year, the tax thresholds were automatically increased and people’s take-home pay consequently also increased.

Instead, the politicians thought it was politically more advantageous for them to announce adjustments to the tax thresholds from time to time. That way the government could reap the political rewards. Thus, it is reasonable to think that the tax thresholds for superannuation would also have been adjusted from time to time, and that this change is not all that significant.

The tax thresholds of $3 million and $10 million

According to the Treasury, the superannuation tax concessions on contributions and fund earnings added up to almost $50 billion in 2024-25. As such, it is the biggest apparent source of lost tax revenue and massively favours the rich. It is, therefore, an obvious source of additional revenue.

However, this estimate of the revenue cost of the superannuation tax concessions depends on the base used to compare the tax that should have been paid.

In all other countries, superannuation is only taxed when the funds are being drawn down and the superannuant is actually receiving their money. In Australia, however, superannuation is taxed as it accumulates, even though the recipient cannot access their money.

Further, most people only receive about 60-70% of their pre-retirement incomes in retirement, so if their superannuation were taxed on receipt, rather than as it accumulates, their superannuation taxation would be much lower.

Indeed, modelling by the Treasury reported back in 2017 showed that most people’s superannuation is not under-taxed. Instead, they are over-taxed compared to what they would pay if their superannuation was taxed as it is drawn down.

It is only those with very large superannuation balances who are under-taxed. There is, therefore, a good case for limiting the additional tax to those with balances of $3 million or more and increasing the tax rate for those with balances of more than $10 million.

The low-income super tax offset (Listo)

The Listo is designed to compensate very low-income people who, when they pay a tax rate of 15% on their superannuation, actually find that they are paying more tax than they would have paid on their income of a similar amount.

For example, someone earning $15,000 a year would not pay income tax on their wages, but would pay 15% tax on their superannuation contributions. To prevent this potential inequity, at present, if someone earns $37,000 or less a year and tax is paid on their superannuation, then the tax office refunds up to $500 to their superannuation account.

The change to the Listo that has just been announced will increase the cap from $37,000 to $45,000. As a result, the maximum refund to superannuation accounts for low-income earners will increase from $500 to up to $810. This is a further improvement to the equity of the superannuation system, which the media mostly ignored.

Conclusion

These latest revisions to superannuation are estimated by the Treasury to cost the budget $4.2 billion over the four years of the forward estimates. However, most of this cost is due to the one-year delay before the changes take effect. In the first full year (2028-29), the package is projected to save $1.6 billion, even after allowing for the cost of the enhanced Listo.

In short, the cost to the budget of the recent changes is not great and is a further indication that the changes represent fine tuning, and are not a major repudiation of the treasurer’s original intent. Further, equity has been improved by the changes to the Listo and the introduction of a 40% tax rate on the income derived from superannuation balances above $10 million.

No wonder Paul Keating, the originator of Australia’s superannuation system, described these changes to Australia’s superannuation arrangements as “a huge policy achievement by the treasurer”. As Keating says, “it is a reform of a kind that shares substance with necessity” (Pearls & Irritations, October 14). And certainly, Keating clearly does not think that Chalmers was bludgeoned into these reforms.

The views expressed in this article may or may not reflect those of Pearls and Irritations.