Can we talk about the proposed Superannuation tax for a minute?

I know for many people, Super feels a long way away. And also locked away.

And I know that critiquing a tax that applies only for people with more than $3m in Superannuation feels like sticking up for the rich and powerful, and something that you and I needn't worry about.

Plus, whenever you criticise something done by one side of politics or the other, things can get pretty tribal, pretty quickly.

But I'm going to make the case, hopefully successfully, that this is an issue we all should be concerned with, both on principle and because the ramifications are unfortunately more widespread than they immediately appear.

The tax change I'm talking about, of course, is the proposed increase in tax on Superannuation accounts over $3m.

And let me start by saying, very clearly, that I think it's reasonable for people with more than $3m in Super to pay more tax on that Super. Not as a 'punishment for success' as some people claim, but because if you have more than $3m in Super, it's reasonable for you to contribute a little more to the national project, particularly compared to the alternative of slugging workers more, for example.

(There are lots of other ways to raise taxes and/or reduce government spending, by the way, so it's not as binary as the previous paragraph sounds, but my point stands.)

If you have $3m in Super, and you're retired, the returns earned by your first $1.9m worth of assets are completely untaxed, and the remaining $1.1m is taxed at 15%. If you earned 10%, you'd pay no tax on the first $190,000 of earnings and $16,500 on the next $110,000 for a total after-tax income of $283,500, and an average tax rate of 5.5%. A nurse earning $100,000 would pay 50% more tax (almost $23,000) and have an average tax rate of 23%.

I… don't think that's the right balance.

So, I'm okay with large Super balances having higher taxes levied on their earnings.

(One more parenthesis: I'd tax Super very differently, and you can read more about that here if you want, but it's not the main point of this article.)

What I'm very not much okay with is the proposed implementation of such a tax.

For three reasons.

As things stand, the proposal is for the tax to be applied to increases in the balance of a Super account, whether or not a gain is realised or an income earned. To keep it simple, consider a $1m investment property that gained 10%. That's a $100,000 capital gain. Even if you didn't sell it, the government would ask you to pay tax on that gain, if your Super balance was above $3 million. The same would apply to shares, gold… anything in your account, whether or not you had the cash available to pay the tax.

A tax on unrealised gains is a bad tax, primarily because it doesn't care whether the taxpayer has the liquid assets to pay that tax. In contrast, if you sell the house for $1.1m, you get that realised gain in cash, and can set aside a portion of the sale proceeds to pay the tax.

Second, the tax threshold is not going to be indexed. As AMP Ltd (ASX: AMP)'s depute chief economist Diana Mousina told the AFR:

"A $3 million balance in 40 years' time is not the same $3 million balance that you have today. It doesn't affect 0.5 per cent of the population, it impacts a much higher share."

As the Fin says, "Mousina's back-of-the-envelope calculations indicate that if this hypothetical 22-year-old were to work until they were 67, by that age they would have $3.6 million in super."

In other words, the tax that currently only impacts the very wealthy would directly impact the average worker in forty years' time. And it goes without saying, I hope, that not only would more people be impacted, but $3.6m won't be worth anything like as much by that time, thanks to the ravages of inflation. Indeed, at 2.5% inflation per year, that's 130% over four decades, so the then-current $3m should be more like $6.9m just to keep up with rising inflation.

And third, there are reports that the government will legislate this in August, but make it retrospective to July 1, meaning fund members will be taxed retrospectively. The equivalent (though more serious) analogy is a government passing a law to make something you did yesterday illegal, even though it was legal at the time.

So there we have it. A tax change that is addressing the right issue (in my opinion) but that is doing it badly. The wrong solution to the right problem is still the wrong solution (and there are others available).

This change, if legislated, would be bad for those three reasons; because it's retrospective, levied on unrealised gains, and using a threshold that's not indexed. Each, on their own, would be bad policy. Together, it's atrocious.

The other options? Tax Super at marginal rates (above a higher tax-free threshold) when it's withdrawn. Or put an (indexed) cap on Super balances. Or at the very least, index the threshold, only tax realised gains, and tell people what the rules are before the tax change is implemented.

The Treasurer needs to listen, and to take advice on this one. By all means, address the Superannuation system that started as a retirement income scheme and has become a tax shelter. Because it has.

But just don't do it like this.

Fool on!