
Why Labor’s tax on unrealised capital gains is good economics
Ray Newland explores why Labor's super tax is good policy
CONFLICTING IDEAS
Ray Newland
5/23/20253 min read
Labor’s proposed tax on unrealised capital gains in super balances over $3 million has sparked a storm of outrage, much of it driven by misinformation and scare tactics. But strip away the noise and the truth is clear: this is good economics. It’s a smart, targeted reform that restores fairness, closes costly loopholes and realigns superannuation with its core purpose of funding dignified retirements.
The superannuation system is designed to help Australians save for a comfortable retirement. To encourage people to invest in their super, contributions and earnings are taxed at the concessional rate of 15%, significantly lower than personal income tax rates that start at 16% and climb to 30%, 37%, and 45% for higher earners. This tax concession is an incentive for Australians to save for retirement, but increasingly it’s being used as a way to avoid tax to build wealth. In 2023, it was revealed that there are 27 Self-Managed Superfunds with more than $100 million is assets in the 2019 financial year. One of those funds had $554 million. If you are earning a high income and redirecting large sums into super to avoid paying the marginal tax rate on that money, you are not engaging in retirement planning. You are engaging in tax minimisation.
And this is where the $3 million threshold comes in. For the vast majority of Australians, $3 million in superannuation is more than adequate for a dignified retirement. In fact, it is exceedingly generous. A person with $3 million in super could withdraw $120,000 per year and still maintain the principal (assuming a modest 4% growth), all while enjoying the tax benefits of the system. In contrast, most Australians retire with balances below $500,000. So the idea that taxing earnings on balances above $3 million is somehow an attack on ordinary Australians is patently false. It is a targeted measure aimed at ensuring the super system is used for its intended purpose: retirement savings, not wealth accumulation and tax avoidance.
Critics have argued it will discourage investment because assets might need to be sold. In fact, the design of the tax is such that the optimal scenario is in the long run no assets are sold and it raises no revenue at all. The point is not to generate tax revenue, but reduce tax concessions by creating a disincentive for parking excessive wealth in the super system purely for tax advantages. What critics overlook is that once the initial adjustment has been made—correcting for those accounts that have already ballooned over the $3 million threshold—the need for any asset sales should largely disappear. After this point, fund managers and financial advisers will guide their clients in keeping balances under the cap by redirecting investments outside the super environment.
Ironically, some commentators have tried to drum up fear by warning of a capital exodus from superannuation into other investment vehicles. But that isn’t a flaw of the policy, it’s the very objective. If people shift their excess wealth into standard investment channels where they pay the normal rate of tax, then the policy is working exactly as intended. Those with more than $3 million can still invest however they like, they will just have pay the standard rate of tax on those investments like everyone else does. This is about fairness and about ensuring that public subsidies are going to those who actually need support to fund their retirement, not those who already have their retirement sorted.
Another common criticism is that the $3 million threshold is not indexed to inflation, leading to speculation that ordinary Australians could eventually be swept into the tax net. But this is an argument that fails basic scrutiny. If non-indexation of tax thresholds automatically meant bracket creep for everyone, then every taxpayer would be in the top marginal tax bracket by now, which was triggered at incomes over just $35,788 in the 1980s. In reality, thresholds are not indexed because governments prefer to give inflation adjustments back as tax cuts. It’s not ideal, but it’s a widely understood feature of the tax system.
This reform is modest, targeted, and fair. It affects a tiny fraction of Australians (less than 0.5%) and it restores integrity to the superannuation system by discouraging its misuse as a tax shelter for the wealthy. It also responds to one of the most consistent calls from economists and policy experts: to reform the tax system in a way that promotes productivity and efficiency. Australia’s tax system is riddled with distortions that favour capital over labour, wealth over work, and age over youth. Fixing those imbalances requires courage, vision, and a willingness to stand up to vested interests.
Economists have long been calling for precisely this kind of reform. It’s clean, it’s rational, and it improves the efficiency of the tax system without hurting those who genuinely rely on super to fund their retirement. Yet when it’s finally put on the table, it’s met with knee-jerk opposition. If we’re serious about lifting productivity and building a fairer, more sustainable economy, we need to support reforms like this one.

mqueconomicssociety@gmail.com

