Tax in Australia: one more piece of sticky tape
Successive governments have been applying layers of policy ‘sticky tape’ such as caps on contributions and balance transfers. This latest policy proposal is yet another attempt to do the same, even as it tries to unwind some of the regressivity in the system.
One of the best-known quotes of English author, philosopher, editor and critic, G.K. Chesterton, is that “if a thing is worth doing, it is worth doing badly”. Such a witticism should not be applied to the taxation of superannuation in Australia.
Indeed, the political fight underway on a proposed change to superannuation taxes has been causing a stir. This proposed change would increase the tax rate on superannuation earnings to 30% (from the current 15%) for balances over $3 million. Earnings would be taxed whether a gain is ‘realised’ or not, though the 30% rate would only apply to the proportion of earnings which relate to superannuation balances above $3 million.
Yes, this is a tax increase and another change to a system that has been regularly tinkered with for decades. But to understand the reasoning behind the policy, it is necessary to understand that the taxation of superannuation in Australia – having been designed to encourage saving for retirement – is flawed and needs to change.
The superannuation system includes generous tax concessions. These are designed to encourage long-term saving for retirement, support retirement incomes, and compensate for a lack of control over the capital held inside superannuation accounts.
However, these concessions are heavily skewed toward the wealthy, who get larger tax breaks for each dollar saved and can afford to put much more money away. Increasingly, some Australians are retiring with more money than they need, turning the superannuation system into a vehicle for taxpayer-supported inheritances. There are also specific flaws in the superannuation tax system that wealthy Australians can exploit.
Or, to put it another way, the design of taxes on superannuation could be much better in this country. Instead of reforming the system, successive governments have been applying layers of policy ‘sticky tape’ such as caps on contributions and balance transfers. This latest policy proposal is yet another attempt to do the same, even as it tries to unwind some of the regressivity in the system.
The proposed tax change aims to do two things:
- Make the superannuation system fairer by modestly reducing earnings tax concessions for the wealthiest Australians.
- Ensure the wealthiest Australians cannot use the superannuation system to avoid paying capital gains tax.
These are worthy goals.
The move to improve fairness is a welcome one. The higher tax rate applies to relatively few people and there is a strong argument to be made that Australians with such large superannuation balances should be subject to higher taxes. Superannuation earnings will remain tax advantaged for those on high incomes, even at the new 30% rate, and taxes will remain unchanged on earnings for the portion of the fund balance under $3 million.
The $3 million threshold is not proposed to be indexed. The effective introduction of ‘bracket creep’ into the superannuation tax system is not great policy design, but it is also not the major flaw in the proposal.
The bigger issue is the move to tax unrealised capital gains. From a tax design standpoint, taxing unrealised gains is problematic. Australia’s tax system should consistently measure and tax capital gains. The appropriate way to apply that tax is when the taxpayer has received the gain.
When the likes of former Treasury Secretary (and author of the 2010 Australia’s Future Tax System Review), Ken Henry, and former Reserve Bank Governor Phillip Lowe are concerned about the design of a policy, the design of the policy should be rethought.
Less well known outside of economics and policy circles is Australian National University tax policy expert, Bob Breunig, who notes that: “Labor’s proposal to tax unrealised gains in some superannuation funds is typical of the kind of bad tax policy that both sides of politics have foisted on Australia in the past 20 years. These proposals are not tax reform. They treat symptoms instead of the disease. They make the system worse by adding complexity. They encourage wasteful game-playing by taxpayers and create costly compliance activities for tax authorities.”
That diagnosis is right on the money. Indeed, what has been largely missed in the debate over this policy is that the proposed inclusion of unrealised gains within the tax net is necessary to counter another suboptimal feature: the fact that superannuation benefits are tax free in the retirement phase for those over 60 years of age.
This feature of the superannuation tax system has given rise to a strategy where individuals set up self-managed superannuation funds with large assets that attract capital gains over time. Capital gains made on assets within a superannuation fund are not (currently) taxed until they are realised, but they are also not taxed at all after retirement.
So, in order to pay zero tax on a lifetime of capital gains that have accrued within a superannuation fund, one simply needs to hold on to the assets until they have retired. That strategy would be undone by a tax on unrealised gains.
At one level, therefore the Government is seeking to close down a tax preferred method of accumulating capital gains. Still, taxing unrealised gains is not a great direction for Australia’s tax system to be headed. It would be better to reconsider and repair the existing flaws in the context of the overall design of the tax system, including the taxation of superannuation, capital and wealth.
The role of the superannuation system should be solely to enable the average Australian to fund an appropriate and dignified retirement. Australians with large superannuation balances should be subject to higher taxes, not using the superannuation system to maximise intergenerational transfers of wealth.
Australians deserve much, much better from policymakers past, present and future. This is an area where reform is worth doing, and it must be done well.
This newsletter was distributed on 16th June 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Doug Ross, Associate Director at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
- Australia’s housing conundrum (11 June)
- Retail Forecasts: Rain check? (04 June)
- Slowing productivity? AI might need to take the wheel. (28 May)
- Reserve Bank cut rates to 3.85% amid global uncertainty (20 May)
