I’m in favour of the Wealth Tax

I’m in favour of the new superannuation tax.?It’s a wealth tax.

Given my financial services career and currently an SMSF professional, one would expect me to hate this tax.?

However, from a purely economic systemic perception, I always take a more critical view of government spending than taxation.?With any new tax, I see beyond the immediate money grab to the implication that budgetary pressure will be eased, which thus results in a reduction of other taxes – provided that spending isn’t affected.

Given that some level of taxation is necessary, then I want taxes that don’t inhibit productivity.?That’s it.?

For those who never reached page 515 of Thomas Piketty’s tome “Capital” (2014), where the chapter “A Global Tax on Wealth” commenced, let me enlighten you.?A wealth tax is the most efficient form of tax because a tax on labour is a disincentive to the engine of productivity.?However, a tax on capital is futile because it will cross borders to tax havens, whereas labour is much less mobile.?

Since the book was published, the US has been successful in mitigating against capital mobility by coercing global governments to conform to its FATCA legislation, ensuring that US citizens’ capital is taxed by the IRS, and now the Australian government is doing likewise by applying a tax on a non-mobile taxable stock of wealth – because superannuation is literally locked up until age 65.???

The Wealth Tax is Targeted at the Top 1%

Unlike Labour’s proposed tax hike on every SMSF pensioner that saw them lose the 2019 election, this hits the hip pocket of very, very few voters.?You wouldn’t think so, with the amount of negativity regarding this new proposal, but those that it does effect are mounting an effective media campaign.?Such is the power of money being held by the few.?

The 2019 study of superannuation balances showed that the top 90 percentile of superannuation balances at age 65 (at which point capital mobility and the tax-free pension phase kicks in) is projected to be around

• $1,000,000 for people born in 2000, and
• $800,000 for people born in 1970,

so at a threshold of $3,000,000 we really are talking about well inside the top 1 percentile of superannuation accounts.?

Accumulation of superannuation across a lifetime | Treasury Research Institute

Unrealised Capital Gains Tax

The main criticism is that this is taxed on unrealised gains.?The group this effectively applies to is only SMSFs, as other superannuation funds have pools of liquidity that this can be applied to, and it will only be a very small rise in their total tax being paid to the ATO.?

– Liquidity??Not a problem.?Complying SMSFs can find the cash to pay the tax.

The potential lack of liquidity to pay the tax is a weak argument against the tax.?A complying SMSF has an investment strategy that is diversified and has consideration for liquidity requirements.?The requirement to pay tax is already a liquidity requirement.?The increase in tax will raise the liquidity requirement, so a superannuation fund must change the investment strategy as required.?

Should there be a single asset that has caused the unrealised profits, with no other liquid assets available to pay the tax then it shows the fund is not as diversified as it is legislated to be.?Normal illiquid assets such as property shouldn’t be such a massive portion of the fund that the tax due would exceed all the liquid assets in the fund.?e.g. even if the property was revalued +100%, then 13% in liquid assets will be enough to pay the tax that year.?

Should another speculative asset suddenly grow this big (e.g. a seed-stage investment in Canva or Atlassian) then to remain compliant with its diversification requirement then it is already compulsory to divest the asset to re-diversify the fund’s investments, thus there is no longer a liquidity problem.?

– Unrefundable? ?That's Big Problem.?A tax credit in a SMSF can be unfair, inefficient, inequitable

Its non-refundability is a strong argument against the tax.?

If the SMSF suffers losses then this is not paid back – it is saved up as a credit against future tax liabilities.?

There are plenty of circumstances where the superannuation fund might suffer losses after having paid tax on the peak valuation, and if the fund is wound up then the tax credit is written off with a value of zero.

1.?????Such a situation is clearly unfair.

2.?????It may result in economic inefficiency where funds which would otherwise be closed down would be kept open due to the disadvantage of winding up a fund with a tax credit asset which then becomes worthless.

3.?????In the case of multiple members of an SMSF, the account balance values would be hard to attribute because it is uncertain whether the tax credit will eventually have any value or not.?As members roll in and out of the fund, the portion of the tax credit being assigned to member balances (or not) will be problematic.?Please Albo, we don’t need another type of actuarial certificate to solve that mess!

Solution: Immediately refund the overpaid tax upon future losses

Instead, the tax would be fairer and less problematic if it was structured more like the PAYG system, where pre-paid tax is paid back in cash when the tax payable amount is finalised.?

Indexation: Just do it

And like every other superannuation threshold, it just makes sense to index it to inflation to future-proof it.? For the sake of simplicity, I suggest the threshold is 1.5x or 2x the Transfer Balance Cap (TBC), which will rise to $1,900,000 on 30 June 2023.?

A Final Word From The Chaser

That's all. A tax article.

My next article will be back to quant and making money.

Here's some light relief on this topic to reward you for reading this far... Retiree may be forced to sell fourth house under ‘brutal’ superannuation shakeup | The Chaser

#SMSF #becomeabetterinvestor #tax #superannuation #assetly