Australian Treasurer Jim Chalmers backing down on his super tax is a bigger deal than you might think because he’s made two crucial changes.

The first is to only tax realized gains rather than unrealized gains, which means he’s no longer setting a terrible precedent for an entirely new type of tax in Australia, which would be a very bad thing to have. But the second change to index the tax threshold to inflation well, that sets an excellent precedent that we can and must use going forward to pressure the government into also indexing the income tax thresholds. Yes, this video is about tax policy, and that means, yeah, okay, it’ll probably cure your insomnia, but honestly, I don’t think most Australians realize just how bad the original form of this superannuation unrealized gains tax was going to be. Nor do most Australians yet realize the opportunity that we now have on our hands regarding indexation and the elimination of income tax bracket creep.

We will get to the boring details in just a second, but first, my name’s Topher Field. This is the Topher Project and I help busy Australians like you to keep up with the world as it changes around us. I’m 100% viewer supported. So please help me to keep the Topher Project going by buying me a coffee via the button at topherfield.net. And if you like my videos, then you will love my books, DVDs, and merch, which is all available at goodpeoplebreakbadlaws.com.

Now, let’s refresh ourselves on what this unrealized gains tax on superannuation accounts above $3 million was going to be and do.

In its original form, it was a 30% tax on gains within the superannuation accounts that were above $3 million, which the government claimed would affect about 0.5% of the population. They probably thought they’d get away with that tax because they could tap into people’s dislike for the filthy rich. It doesn’t affect me. It’s only for those rich people with $3 million in their superannuation.

But there are two key details which made this tax dangerous to all Australians, not just to the filthy rich. The first was the fact that this was a tax on unrealized gains. In other words, even if you hadn’t sold the asset, you still got taxed on the gain. So, for example, a property inside a superannuation account that went up by $100,000 would trigger a tax bill of $30,000 payable that financial year regardless of whether you had sold the property. The trouble is that that superannuation account or its owner, well, they might not have a lazy $30,000 in liquid assets or cash to simply pay that tax bill with. And lots of people were going to be forced into selling their assets in order to pay the tax bill on their assets.

Not only is this terrible for people’s retirement plans, more importantly, it sets a precedent taxing money that we haven’t even made yet. And if they’re going to do that inside superannuation accounts, well, let’s be honest, nothing would be stopping them from doing that everywhere else as well. Capital gains tax already applies to lots of assets that are not inside superannuation accounts. But importantly, capital gains tax doesn’t apply until you sell the asset. You can buy shares and they could double or triple in value, but you don’t get taxed on that until you realize that gain by selling that asset, which means that the tax bill comes when you’ve got the cash from selling the asset.

So any Australian with a brain could see that if the government were permitted to tax unrealized gains inside superannuation accounts, well, once the government has a taste for that kind of easy money, nothing’s going to stop them from changing the rules for capital gains tax outside of superannuation accounts as well. And for that reason, a lot of Australians rightly got pretty mad about this tax that even though it only applied to 0.5% of the population. And it’s a good thing that they did because now the government have had to back down and they are not setting that precedent. And there will be no unrealized gains taxes at a federal level in Australia.

But there’s a second reason why people got upset, which has led to Jim Chalmers’s second backdown.

This one’s actually quite exciting in a boring tax policy way because it’s an opportunity for us going forward. See, in its original form, this unrealized gains tax on balances above $3 million was not going to be indexed to inflation, i.e., the threshold was going to remain at $3 million each and every year going forward. Right now, having $3 million in your superannuation account, well, that’s a lot of money. But thanks to inflation, every year that same $3 million balance is worth a little bit less in terms of its buying power. The comfort of the retirement that you can buy on $3 million diminishes over time, which means that effectively by leaving the tax threshold at $3 million instead of indexing it, raising it with inflation well, in practical terms, that means that the tax threshold is actually declining relative to the purchasing power of that money.

And this happens way faster than most people realize. And according to the AMP deputy chief economist Diana Mousina, this would mean that a typical 22-year-old today would have that tax applied to them by the time they retired. Because fast forward 40 years or so, a $3 million balance in a superannuation account will only be average. Its spending power will have dropped so much that that will only be able to fund an average retirement because inflation is eroding the value of our money that fast.

Now, this might sound familiar to regular viewers because I did do a video on a thing called bracket creep or basically what happens to our income tax brackets because they are not indexed to inflation. I explained in that video how that works and why it amounts to a tax increase every year for all workers and why politicians love it because taxes effectively go up without the politicians having to do a damn thing. Now, Jim Chalmers wanted the same bracket creep to happen to everyone’s superannuation accounts. But and this is why this is so huge he’s been forced to back down. And he has now agreed to index this tax to inflation in order to get it through parliament.

This is what creates an opportunity for the rest of us.

Not only is Treasurer Jim Chalmers not going to set a terrible precedent for taxing unrealized gains, he is now setting a good precedent for indexing tax brackets to inflation. And it’s all because he tried to raid people’s retirement savings. The savings that they had put aside into their superannuation accounts literally because the government said that’s where you should put it. It’ll be safe there. Now, we always knew the government were never going to keep their hands off that sweet honeypot of money. Now they’ve reached into the beehive in search of some of that sweet honey and Treasurer Jim Chalmers has been stung.

A lot of people didn’t use to think very much about bracket creep in relation to their income because when it comes to our incomes, most of us are only thinking in terms of the next 2 or 3 years and the effect of bracket creep. Well, it’s significant but it’s not really that big of a deal when you’re only looking 2 to 3 years ahead. But superannuation well, by its very nature people look at superannuation in terms of decades ahead. And in that context, bracket creep or a failure to index tax brackets to inflation becomes a massive problem. And suddenly people could see it. People could explain it. People could convey just how massive a problem this really was in a way that most people struggle to do with income tax brackets. And suddenly more Australians started to care.

And for me, well, this is the single most significant part of this backdown by Treasurer Jim Chalmers and Prime Minister Anthony Albanese. That not only have they failed to set a precedent for unrealized gains taxes in Australia, which is a relief, more significantly, they have awakened people’s awareness to the issue of indexation of tax thresholds to inflation. And no, I don’t think we’re going to see income tax being indexed to inflation in the current term of the Albanese government. That’s ridiculous. But I do think that given a few more years, there might be enough Australians who understand bracket creep that enough of us will begin to push and that maybe the Liberal Party will start to consider taking indexation of income tax brackets to the next election as part of a tax reform package.

And if that happens at this coming election or perhaps the election after, well, that will be in no small part thanks to Treasurer Jim Chalmers who overplayed his hand and forced Australians to consider the impact of bracket creep over the longer term rather than only over the short term to think about it in terms of decades and not merely years. And so if that happens, if we do actually get the indexation of income tax brackets to inflation, then thank you Treasurer Jim Chalmers his attempt to add an entirely new unrealized gains tax onto the Australian tax code might backfire and become the reason why we not only don’t have that unrealized gains tax, but also why we do end up with indexation of income tax brackets and an end to bracket creep.

We can only hope. We’ll have to wait and see. But my spider senses are tingling, saying that things have now been set in motion that will potentially lead to a pretty big win for the rest of us in the long run. Now, in the meantime, yes, there is now a new tax on large superannuation accounts, and that is not a good thing. Please don’t interpret this video as being supportive of these taxes, even in their new form. I’m not a fan of any taxes, and I’m certainly not a fan of increases to tax. However, with that in mind, I do think that the backdown that Chalmers has been forced into is a really good thing. And I think that if we play our cards right, we may be able to turn this into a win for us all in the long run.

My name’s Topher Field. This is the Topher Project, and I help busy people like you to keep up with the world as it changes around you. I am 100% viewer supported, so please support my work by buying me a coffee via the button at topherfield.net. And if you like my videos, then you will love my books where I discuss politics, law, government, perverse incentives, civil disobedience, and so much more. There’s my first book, Good People Break Bad Laws, which is all about civil disobedience in the modern age. Then there’s my second book, Good Christians Break Bad Laws, which is all about the theology of civil disobedience. Then there’s the DVD of my multi-award-winning documentary Battleground Melbourne, plus my t-shirts and hoodies and a range of designs. And everything you buy helps me to keep the Topher Project going.

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