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A recent Senate Enquiry controlled by Government and Green senators confirmed their support for the introduction of a tax on the unrealised gains accumulated in superannuation funds greater than $3 million in value. The Greens senators upped the ante on the government proposal by suggesting that the tax should apply to funds once they reach a lower threshold of $2 million. The Greens once again showing that they despise self-funded retirees. 

The efficacy, logic, and fairness of establishing an unrealised gains tax regime will hopefully be hotly debated at the next election so I don’t propose to enter into that debate. However, I will dare to look at superannuation from two different vantage points and challenge our politicians and bureaucracy to think in a completely different way to actually utilise the strategic and unique benefits of Australia’s massive superannuation.

My position considers the two basic benefits of Australia’s superannuation.

First, the obvious benefit that directly flows to an individual when they accumulate enough wealth or savings to secure themselves a reasonable standard of living in retirement. Even more important to an individual is to maintain superannuation to address their needs as they enter their closing years, where age, failing health or misfortune may need to be urgently funded. A self-funded pensioner takes this burden away from the taxpayer.

The second, less discussed benefit, is the consideration of the proper utilisation of the great national accumulation of savings. Part of these savings (available investment capital) could fund much of Australia’s growth without the need for accessing foreign capital. Our massive savings pool can and should be accessed by both private and public investment opportunities. Today, Australia has accumulated near $3.7 trillion in superannuation accounts which is approximately 50% bigger than our GDP. This is a truly incredible amount which will continue to grow for at least the next decade. Given this observation the Government (in particular) should not be timid or scared in accessing some of that capital and more so from those who may be claimed to have too much in superannuation.

In presenting this position I refer readers to this indisputable observation. Today’s Australian stock market listings include numerous large companies that were originally government owned and funded by taxpayers. These companies represent large investments of most Australian SMSF and Industry funds. Think Commonwealth Bank, Telstra, CSL, Qantas and the energy companies that originated from State Government enterprises. There is ample evidence that shows that Governments, in the past, appropriately funded and developed businesses. Think about airport assets and parts of toll roads that are now presented on the ASX. A cursory look also shows dozens of successful private companies that have transitioned to listing on the ASX with public funding and which now account for the majority of successful non-financial industrial companies.

This leads to a point that seems lost in the unrealised capital gains debate. Rather than curtailing superannuation investment by creating a tax that will interfere with capital formation and therefore cruel patient investment, why not create a tax regime that actually encourages long-term patient investment? Why not support Government initiatives to create the next generation of successful companies. Why not support initiatives to provide patient public capital or the provision of government debt funding (trade or development finance) to early stage or fast-growing companies? Why not fast track the development of infrastructure assets, housing, health and education assets? Why not build roads which are true toll roads that return income to the taxpayer rather than highly geared public road operators. Why delay a rail connection from Melbourne CBD to the airport?

There is no shortage of capital available inside Australia’s superannuation system. Further, there is no shortage of opportunity or ideas flowing from Australia’s entrepreneurs. However, there is a growing chasm developing between our massive pool of savings capital and its direction to Australian growth opportunities. The proposed unrealised capital gains tax will widen this chasm and directly inhibit risk capital that flows to start-up ventures outside the development of infrastructure bonds.

So, what can be done as a policy change that would be a superior policy to the proposed unrealised gains tax?

The answer lies in the creation of infrastructure bonds that should be mandated to be only available/accessible to Australian superannuation funds. A directive or requirement to invest in government guaranteed infrastructure bonds aligns this with the maintenance of superannuation tax benefits. Simply stated, Australian super funds would only be able to claim the low taxation benefits embedded in super or pension tax rates if they comply with a mandated investment allocation to Australian infrastructure bonds. Rather than change tax rates that discourage superannuation growth, why not create an environment where more capital is actually directed to the benefit of society and for future generations.

As an example, let’s think about an opportunity that sits as a solution to Australia’s energy transition needs. Why not create infrastructure (green) bonds that are designed to own solar batteries that are then leased to households to ensure that solar generated energy is appropriately stored and utilized? A lease liability on a 10-year battery to a householder would surely be cheaper than the conventional energy bills. A householder would not be burdened with large upfront battery costs that inhibit battery take up. A 5% (or higher) return to bond holders with some indexing could easily be structured and the government guarantee would probably not even be needed.

Some thoughts on how it could apply in asset allocation

It is not hard to envisage a ‘scaled and mandated’ asset investment allocation requirement of say 5% into infrastructure bonds for the first $500,000 (or part thereof) of a superannuation account. This could adjust up to a mandated requirement of 30% (say) allocation for funds greater than $3 million. Maybe a 1% yield above a traditional government bond could be a feature of this unique asset noting that foreigners cannot access it? List infrastructure bonds on the ASX so SMSFs can directly access it.

Let's encourage more funding by our super funds towards pure Australian initiatives, opportunities, entrepreneurs, IP, health care, research, education and infrastructure. Scrap the thought bubble of unrealised gains tax that does the opposite.

Let’s think about utilizing our abundant capital as much as possible rather than defaulting it to offshore markets. Let’s think about superannuation assets from a different perspective that meets the challenge of growing income on pension assets from Australian sources. Let’s focus on what is truly important for Australia’s long-term needs.

In closing, I observe that many large Industry Funds seem to have outgrown Australia’s capital markets, more so because there is no bridge built between their managed capital and Australian infrastructure needs. Recently in mainstream press it is reported that 70% of incremental flows into our largest Industry funds are diverted offshore. These investment flows into foreign investments act to depress the AUD (sell AUD and buy USD) and thereby directly add to imported inflation at a time when we are fighting to bring inflation down.

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John Abernethy is Founder and Chairman of Clime Investment Management Limited, a sponsor of Firstlinks. The information contained in this article is of a general nature only. The author has not taken into account the goals, objectives, or personal circumstances of any person (and is current as at the date of publishing).