Treasurer Jim Chalmers‘ crusade to reform super by taxing unrealised gains didn’t die at a press conference, under fire for the poorly drafted new laws. It was strangled by a series of phone calls the Treasurer couldn’t control. Here’s the inside story.
As industry chiefs pored over the plan to tax unrealised gains, their modelling lit up like a Christmas tree: daily revaluations, liquidity squeezes and member fury when paper profits turned into tax bills before the gains were even realised.
Economists had warned just how bad the new rules would be. Accountants and actuaries had warned about its folly, too. Anyone who understands cashflows also issued warnings.
Chalmers just wouldn’t listen. He’d found a moral hill to die on and mistook the echo of his own certainty for applause.
The fact he has no economics qualifications to speak of started to dominate the discussions of those frustrated by his inability to see what was so wrong with his planned changes.
The objections were never ideological – they were mechanical.
Super is built on the difference between movement and money. Balances fluctuate by the hour, portfolios hold assets that are lumpy and illiquid when markets turn. Valuation methods vary. Discount rates are often arguable.
If you tax the rise before it’s realised, you force funds to sell at the worst possible moment or promise refunds when prices inevitably fall. An administrative hall of mirrors masquerading as reform.
‘Chalmers just wouldn’t listen. He’d found a moral hill to die on and mistook the echo of his own certainty for applause,’ writes Daily Mail political editor, Peter van Onselen
Somebody had to stop the Treasurer from making a huge mistake.
According to senior Labor figures briefed on the early warnings, internal advice flagged precisely the above risks: a compliance tangle that would push funds into fire sales and generate statements that ordinary members simply wouldn’t understand.
Yet the Treasurer ploughed on, even after receiving briefings about the design flaws and their impacts.
But then Big Super, usually Labor’s choir, harmonised in a very different key. People in the room say the modelling presented to government left no room for spin. On any serious horizon, taxing volatility as income would make trustees look either incompetent or cruel.
Daily pricing across sprawling portfolios, audit headaches no one could sign off on with a straight face, and a political time bomb when members saw a tax on gains they hadn’t even touched.
One industry source put it with brutal clarity: ‘You’d be taxing the weather.’
When the custodians of the system you claim to be fixing say your fix will blow up the engine room, a sensible Treasurer trims his sails. Chalmers, however, dug in.
That’s when Prime Minister Anthony Albanese began hearing the same message from two directions he doesn’t ignore. First, the industry – speaking unusually with one voice – did something governments cannot afford to wave away: make the problem political as well as technical.
‘Prime Minister Anthony Albanese began hearing the same message from two directions he doesn’t ignore,’ Peter van Onselen writes (Albanese pictured with Chalmers)
Second, the new economic grown-ups on the frontbench weighed in. The Assistant Treasurer and the Cabinet Secretary, both with PhDs in economics from Yale and Oxford respectively, spelled out what should have been obvious from the start: you tax what exists, not what might.
Unrealised gains are weather reports; realised gains are real cash. Align liabilities with cashflows, target concessions with thresholds, avoid turning quarterly noise into an ATO scavenger hunt.
As one official present at those discussions told me, the conversation shifted from ‘How do we sell this when it comes into effect?’ to ‘Why are we pretending this can be administered?’
Senior figures confirm that calls from the super funds and the PhD economists’ interventions hardened the PM’s view against sticking to the policy with its obvious design flaws. The message down the line to colleagues was unmistakable: this won’t fly – not like this.
Cabinet fell in behind that reality, leaving the Treasurer isolated. He was informed that he’d lost the argument, despite so rigidly digging his heels in publicly in support of the idea.
And, in a piece of stagecraft as cold as it was effective, Albo slipped off to the South Pacific for a restorative break while his junior lieutenant fronted the cameras with a bundle of euphemisms.
‘Tinkering’ was his most laughable attempt to downplay the rolling he’d received, as he announced that the entire taxing of unrealised gains was junked and the tax itself left to be imposed would be indexed.
They don’t even do that with income taxes. Chalmers was left humiliated by the extent of the backflip forced on him, and he can thank Big Super for turning his cabinet colleagues against him.
The replacement approach is better – much better.
Thresholds that target the most generous concessions. Taxes levied on actual, realised events that produce cash. Anti-avoidance rules that don’t turn every valuation jiggle into an administrative migraine. It’s less headline-friendly but far more durable. It respects how markets behave and how funds operate, and it won’t invite the perverse incentive of selling good assets at bad times just to pay a bill on a paper profit.
Chalmers’ problem isn’t that he was forced to change course. It’s that he refused to acknowledge why it happened in a bid to downplay his own embarrassment.
He didn’t relent months ago without prompting because he’d finally absorbed the expert warnings. He only relented because the PM and Cabinet made him. Too stubborn, too proud, too invested in the sermon he’d preached, he stranded himself on an island of rhetoric while the tide of reality receded.
‘He’s no future PM and this saga proved it,’ says one Cabinet colleague – admittedly someone who has had plenty of backroom fights with Chalmers over the years.
According to people familiar with the internal discussions, he was still pressing for cosmetic tweaks when the PM’s office had already accepted the fundamental flaws that Big Super pointed out. That says something uncomfortable about the Treasurer’s judgement: he liked the crusade more than the craft of getting the policy right.
When Big Super, with all its Labor and union connections, said stop, the government stopped. You can read that as capture if you like. The more generous reading is competence finally asserting itself. Either way, it exposes a hierarchy of influence the Treasurer cannot pretend doesn’t exist anymore.
Spare a thought for Treasury officials who spent months attempting to square the circle, contorting models to make the unworkable appear merely unpleasant. They’ve been undercut without being named, their craft dismissed with a wave.
Spare another thought for compliance teams across the various funds who were expected to make a mirage pay dividends until someone in the big chair admitted they finally needed to get the government to roll over.
What does it say about power and influence at the top of Labor that it wouldn’t listen to a conga line of experts from a plethora of respected institutions, until Big Super rolled into town? The Opposition should have a field day with this, if it weren’t so hellbent on eating itself.
As for Albo, he will count this as a quiet win. He avoided an all-out brawl with the super industry (not to mention everyone else), kept the party’s power base calm, and ensured the embarrassment splashed over the Treasurer rather than onto his own holiday.
Albo will treat this as a quiet win, but outsourcing the humiliation of your number two is a tactic with a half-life, says PVO
Outsourcing the humiliation to your number two is a tactic with a half-life, however. Colleagues noticed and Jim certainly did. This could well reverberate in unexpected ways sometime down the track.
Will Chalmers recover from this embarrassment? Of course. Australian politics forgets almost everything except hypocrisy and hubris. He can come back with technically sound reforms in other areas, perhaps as part of answering growing concerns about the poor state of the finances he oversees. The latest high-profile voices to come out publicly with their concerns are former WA Premier Mark McGowan and current RBA Governor Michele Bullock.
But Chalmers has to stop treating dissent as disloyalty, expertise as an obstacle, and industry warnings as mere self-interest not worth listening to. Sometimes the people closest to the machinery are the first to smell the burning oil.
The original design of Jim’s super tax was utterly hopeless. The new approach is a significant improvement.
The retreat should have been inevitable even without the intervention of Big Super, but the embarrassment for the Treasurer should have been optional.
