The rich get tax advice; the poor get lectures: super tax saga lays bare a skewed system

A new report on the amount of revenue expected to be raised by the changes to superannuation tax on balances over $3m highlights yet again how the tax system is weighted in favour of the rich and that the government never gets thanks for doing what conservative forces demand.

One of the more striking aspects of media coverage of tax policy is how efforts by wealthy and rich individuals to avoid paying tax are presented as a logical and appropriate.

Thus we see a constant supply of advice columns such as “How to minimise tax for heirs inheriting super” or “Worried by the ATO’s new trust crackdown? Here’s what you can do” or “We have $1.5m in super. Should we use it to help us downsize?” or “We’re buying a bigger home. Can we still use the downsizer perk?”

This last column helpfully points out that people over 55 can put up to $300,000 from the proceeds of the sale (or part sale) of a home into their superannuation fund in what is known as “downsizer contribution”. The purpose of the policy is to encourage older homeowners whose children have left to sell their larger home and buy a smaller one. This will supposedly increase housing supply.

But, as the AFR joyfully column notes, you don’t actually need to buy a smaller house with the proceeds, and you don’t even need to be living in the house that you sell, merely that at some stage you did live in it as your main residence.

These columns are presented with no shame directed towards those who will inevitably be abusing the intent of the tax system.

Oddly though there are no columns explaining how for example those on Jobseeker can manipulate the system to avoid mutual obligations, or can earn more income without it affecting their payments.

What for the rich is proper management of your finances to be applauded, for those on low incomes is abusing the system to be condemned.

Another example from today is the AFR reporting on Parliamentary Budget Office research given to the Liberal Party that suggests the government’s changes to the tax concessions for superannuation will not raise as much as hoped.

The government initially proposed reducing the tax concession on earnings attributed to super balances with more than $3m. This only affects around 80,000 people – or about 0.5% of everyone with a super balance.

To limit the ability to avoid paying tax, the government proposed taxing unrealised capital gains. This meant taxing the value of shares and property held in superannuation balances of more than $3m rather than only taxing them when the assets were sold. If you only tax them when they are sold people can avoid selling their assets until such time as it best minimises the amount of tax they will pay.

The opposition and conservative media, led by the AFR, campaigned loudly against the taxing of unrealised gains – suggesting it would kill investment, and was “stealing children’s inheritance”.

In the end the government backed down so the new tax would only apply to realised capital gains.

Now the AFR reports that the revenue estimate might be lower than initially expected because – shock – people are able to avoid paying the tax!

It reports the PBO stating there is an “incentive for individuals to adopt investment strategies to minimise the realisation of earnings.  Individuals could be incentivised to defer asset sales.”

Gee, ya think?

The bitterly ironic aspect is that the AFR and opposition which both pushed for these changes that would make it possible to avoid paying the tax are now reporting these changes as a failure of the policy.

The AFR even has the chutzpah to comment “Among budget economists and industry experts, there is growing doubt and uncertainty over how much revenue the new tax will raise, in shades of Labor’s watered-down 2010 mining tax, which raised almost no money.”

So to recap.

The government proposed a policy that would reduce tax avoidance, and address the inequality of the superannuation system where the richest 10% get nearly $22bn in tax breaks each year – or around $8bn more than it would cost to provide free dental in Medicare.

The policy was changed in order to assuage those who wanted to ensure tax avoidance would continue.

Those same people who demanded the changes are now criticising the policy because the changes made it easy to avoid paying tax.

All of this was in an article headlined “SMSF members will ‘hold until death’ to avoid super tax”.

Nowhere are these people criticised because the purpose of superannuation is for it to be used during people’s retirements. Nowhere are they criticised for abusing the purpose of tax concessions.

No, it is merely a failure of policy.

It is a good reminder to the government that weakening policy will deliver no thanks, and that given they will be criticised whatever they do, they might as well do the best policy, rather than a watered-down version that pleases nobody and fails to deliver.