Brisbane, Oct 15 (The Conversation) – After significant resistance from the superannuation industry and affluent investors, Treasurer Jim Chalmers has dialed back his proposed super tax reforms in a strategic political compromise. However, this move prompts questions about policy consistency and long-term fairness.

The revised plan encompasses three primary elements:

A boost to the Low-Income Superannuation Tax Offset, ensuring that low-income workers don’t face a higher tax rate on their super contributions than on their wages.
A revamped 30 percent tax on “future realised earnings” for superannuation balances between AUD 3 million and AUD 10 million, with a higher 40 percent tax rate for balances over AUD 10 million.
Indexation of the new AUD 3 million and AUD 10 million thresholds to inflation.

Merits of the Changes

The increment in the low-income super tax offset stands as a definitive win. By elevating the offset from AUD 500 to AUD 810 and widening the eligibility threshold from AUD 37,000 to AUD 45,000, the government offers low-income earners, most of whom are women, a more equitable tax break on retirement savings.

This measure addresses an enduring disparity as super tax concessions have historically favored high-income Australians. At the upper end, the introduction of two new tax brackets renders the system more progressive, ensuring that higher incomes are taxed at a higher rate. Previously, the tax on superannuation earnings was set at 15 percent.

The decision to index these thresholds safeguards wealthier super members from “bracket creep” as asset values appreciate. Most importantly, transitioning the tax base to realized earnings rectifies one of the major design flaws in the original proposal, which targeted unrealized capital gains that might later diminish. This earlier iteration faced considerable backlash from industry and legal experts, who criticized its complexity and perceived unfairness.

Low-Income Payments and Indexation

Broadly, this represents sound policy, albeit with some caveats. Taxing realized earnings is a more defensible method, avoiding situations where super members could incur a tax liability as their investments’ value increases. This change facilitates easier administration for large super funds.

Nevertheless, it introduces a new distortion. When tax is levied only upon the sale of assets, such as businesses, farms, or shares, wealthy investors might opt to retain “winning” assets indefinitely to defer taxes, a phenomenon known as the “lock-in effect.” This can hinder portfolio rebalancing and reduce liquidity.

One significant inconsistency lies in indexation.

While the government will index the AUD 3 million and AUD 10 million thresholds to protect the top 0.5 percent of super balances – approximately 80,000 people – from inflation, the low-income offset, a crucial benefit to many more low-income earners, will not be indexed. As a result, its real value will diminish over time, unlike the inflation-proof benefits at the higher end.

If fairness is indeed the guiding principle, as Chalmers claims, this asymmetry undermines it.

Impact on the Federal Budget

The federal budget impact will be modest but symbolically significant. The government estimates the revised plan will cost AUD 4.2 billion over the four years of the forward estimates, primarily due to a one-year delay. However, in the first full year (2028–29), it is projected to save AUD 1.6 billion, even after accounting for the low-income offset increase.

For context, super tax concessions are projected to cost about AUD 60 billion in 2025–26. These tax breaks are on track to surpass age pension costs by the 2040s.

Although these reforms won’t close that gap, they indicate a modest yet necessary recalibration of super benefits.

Taxation of Future Earnings

This aspect of the announcement is the most consequential and uncertain. Under the revised plan, only “future realised earnings” will be taxed, a fairer and more practical approach than taxing unrealised gains annually. However, the government has yet to clarify how these realised gains will be allocated to individual fund members, especially in large self-managed super funds (SMSFs). This is no minor detail.

If the rules are unclear, members could indefinitely postpone their tax bills by holding assets. To prevent this loophole, the Treasury must define what constitutes a “realisation” – the moment a paper gain becomes taxable. This could mean when an asset is sold, transferred, or converted to cash, or at key milestones like retirement or withdrawal.

Implications for Balances Over AUD 10 Million

Individuals with more than AUD 10 million in super might relocate assets outside superannuations, potentially a favorable outcome. Those holding more than AUD 10 million in super already possess more than necessary for a comfortable retirement. Facing a 40 percent tax on future realised earnings, many may transfer assets to non-concessional investments taxed at regular income or capital gains rates.

Such an outcome would enhance fairness across the broader tax system. Superannuation is meant to support retirement, not serve as a low-tax inheritance vehicle. A modest exit of ultra-wealthy funds would represent a healthy adjustment.

A Fairer Outcome

The revised plan addresses key design flaws, retains much of the intended revenue, and provides a fairer result for low-income earners. Still, it leaves gaps, particularly the absence of indexation for the low-income super tax offset, which will quietly erode its fairness over time.

By opting for political pragmatism instead of policy purity, Chalmers has averted another superannuation dispute.

(Only the headline of this report may have been reworked by Editorji; the rest of the content is auto-generated from a syndicated feed.)