Treasurer Jim Chalmers defends $4 billion hit from super tax backdown

A $4 billion budget hole created by an overhaul of the Government’s contentious super tax policy will be filled using other measures, the Treasurer says.

Labor is defending major changes to its planned superannuation tax hike, which will see the wealthiest retirees slugged with a higher tax rate and more relief given to low-income earners.

The Government’s now-dumped plan was to double the concessional tax rate on any earnings - including unrealised or “paper” gains - from account balances above $3 million to 30 per cent.

Instead, the higher rate will only apply to realised earnings and the $3 million threshold will be indexed to inflation if Treasurer Jim Chalmers’ updated model passes parliament.

A second tax rate of 40 per cent will apply for earnings from superannuation account balances above $10 million.

Offsetting the extra revenue from the higher tax band, Australians on lower wages will benefit from changes to the Low Income Super Tax Offset, a measure aimed at ensuring workers aren’t taxed more on their super than they are on their wages.

The overhaul means the Government expects the to raise $2 billion extra over the forward estimates - about $4 billion less than anticipated under the ditched plan.

The lost tax revenue is partly because the reforms have been delayed by a year so Labor can iron out the details.

But Dr Chalmers said the policy shouldn’t be seen in isolation and the Government had been working hard to improve the budget’s position.

“We’ve already found $100 billion in savings, we’ve delivered two surpluses,” he told ABC radio on Tuesday.

“This is not the only action we’re taking ... the budget is in much better nick than what we inherited because of the effort that we’ve put into it,” he said.

Independent economist Saul Eslake said the reduction in tax revenue was a necessary trade-off to improve the policy.

“Introducing indexation means that the tax will raise less revenue over time, but so be it because that was a bad principle,” he told AAP.

“It encourages the Government to look for other ways of raising revenue to bring the budget back into balance, or indeed, to look at things on the spending side.”

Economist Chris Richardson said the 40 per cent tax rate for accounts containing more than $10 million would act as a “quasi-cap” on superannuation.

“Super and housing have been the uncapped bits in Australia, if you were very wealthy, those were the two biggest bolt holes ? super remains a magnificent bargain, but it’s no longer an open-ended board,” he said.

“It’s not quite saying you can’t have more than $10 million in super, but given there are tax loopholes available in Australia, I’d be surprised if many people were leaving too much more than that there.”

The attached change to increase the tax offset for low-earning workers from $310 to $810 “had to happen”, Mr Richardson said.

“It was a ridiculous situation where low-income people ? were actually headed for paying more tax on the money that goes into super and than they were for the money that doesn’t,” he said.